Bankruptcies surge in Sonoma County

<p>Robert Campbell never imagined that after a 46-year career as a professional photographer, he'd find himself broke and on the verge of losing his home.</p><p>Just a few years ago the 66-year-old Agua Caliente resident was earning more than $150,000 a year, plenty to cover his modest lifestyle. </p><p>But when demand for his aerial photographs of Northern California landmarks began to slacken during the recession, Campbell's financial future began to spiral out of his control. </p><p>When efforts to get his mortgage modified failed and the interest rate on his credit card ballooned to 30 percent, Campbell knew he needed to bail out. </p><p>“It came down to, ‘Are we going to eat, or are we going to pay the bank this usurious rate?'” Campbell said. </p><p>He and his wife, Jennifer, a disabled cellist, declared bankruptcy, filing a Chapter13 debt reorganization petition in February. They're hoping to eliminate the second mortgage on their home, gradually repay some of their credit card debt and buy some time to get their first mortgage modified. </p><p>Sonoma County residents like Campbell are filing bankruptcies at record rates.</p><p>Beaten down by a relentless recession, desperate debtors are turning to bankruptcy court more than ever before as they seek relief from crushing credit card bills and underwater mortgages.</p><p>Last year, the number of Sonoma County residents and businesses filing bankruptcy soared 46 percent, to a record high of 2,264 cases, according to statistics from the U.S. Bankruptcy Court, Northern District of California. </p><p>While business bankruptcies are on the rise as well, the vast majority of the new Sonoma County cases filed last year — 95percent — were personal bankruptcies. </p><p>The surge has stunned bankruptcy attorneys and court officials alike, who say they see no end in sight. </p><p>“I've never seen anything like this before,” said bankruptcy Judge Alan Jaroslovsky, who has presided over the Santa Rosa-based court for 23 years. “I keep thinking it's got to slack off because everyone who is going to file has already filed.”</p><p>Instead, even as a nascent national recovery appears to be under way, there are signs the weak local economy is undermining the footing of people who previously considered themselves financially secure.</p><p>“The demographics of bankruptcy are moving up,” said Santa Rosa bankruptcy attorney David Chandler Sr. “It's starting to affect people with higher and higher incomes. Instead of the Hyundai getting repossessed, we're looking at the Mercedes getting repossessed.”</p><p>Hard-fought battles</p><p>Unlike those filing bankruptcies early in the recession, the latest debtors often are arriving in court with massive debts accumulated over a long, hard-fought battle to save their homes. </p><p>“The credit card balances make me wince,” Chandler said. “They are much higher than we've seen in the past.”</p><p>The higher total debts don't mean people have been more reckless — in fact, the opposite may be true, said Santa Rosa bankruptcy attorney Craig Burnett. </p><p>He's seeing far fewer people in financial trouble because of unwise purchases of “toys” they couldn't afford, such as boats, cars and flat-screen TVs.</p><p>“There's way less of that,” Burnett said. “People are just in survival mode.” </p><p>New filings bottomed out in 2006 at 461, the lowest level in decades. They've risen sharply ever since. </p><p>In 2007, they nearly doubled, to 877. In 2008, as the financial crisis blossomed, they soared 77 percent, to 1,550</p><p>cases. And in 2009, the 2,264 cases topped the previous high mark set in 1998, when 2,173 Sonoma County bankruptcies were filed. </p><p>Sonoma County is by no means alone in its higher bankruptcy rates. Filings were up 57 percent across the seven-county North Coast region covered by the Santa Rosa court. Nationally, filings were up 32percent, to nearly 1.5 million.</p><p>Pace picks up in 2010</p><p>The pace of new filings only accelerated in the first three months of 2010. The court saw 1,185 new cases filed division-wide in the first quarter, a 33percent increase over the same period in 2009, according to court statistics.</p><p>One noteworthy shift is the sharp increase in Chapter 13 filings, Jaroslovsky said. </p><p>While nearly 80 percent of the cases remain Chapter 7 liquidations, the Chapter 13 reorganization cases are on the rise because they have higher asset limits, Jaroslovsky said. </p><p>While total filings increased 46 percent, Chapter 13 filings soared by 80 percent, to 438. </p><p>A key reason Chapter 13 filings are rising so fast is because they allow homeowners to strip away second mortgages that are no longer secured because the value of the home has dropped below the amount of the first mortgage, Jaroslovsky said. </p><p>Burnett provided a typical example. A couple purchases a home in 2006 for $500,000 with no money down. The loan was actually two loans, one for $400,000 from a bank secured by a first deed of trust, plus another $100,000 loan funded by another bank taking a second position on the deed. </p><p>Value plummets</p><p>The property has since fallen in value to $350,000, leaving the second mortgage holder with no security in the property. But in Chapter 13, this second mortgage can be stripped away on the theory that the loan is now unsecured by real estate, falling into the same unsecured pot with credit cards and medical bills.</p><p>Removing this second mortgage can be a tremendous relief to homeowners, often lowering their monthly payments by several hundred dollars. </p><p>“If you're in a stable job with a steady income, then this could work for you, and that's what I'm seeing a lot of,” Burnett said. </p><p>Campbell chose the Chapter13 route for just this reason. </p><p>In 2005, he refinanced his home to lower the interest rate and take out some equity. At the time, the broker told him his house, an aging 1,100-square-foot structure built in 1923 on a narrow, steep lot, was worth $650,000. </p><p>“He just made it up,” he said of the broker's estimate.</p><p>In 1988, Campbell purchased the home on less than a third of an acre for $155,000.</p><p>But by 2005, he was able to take out a $500,000 mortgage on the property, at the same time securing a $64,000 line of credit from Bank of America on the home.</p><p>At first he used the line of credit for business expenses, such as switching from film to digital photo equipment. He used it more and more as the recession caused sales to stall.</p><p>Decline in tourists</p><p>Fewer tourists meant lower sales of his Alcatraz postcards. Real estate developers stopped hiring him to make images of project sites. And once-brisk sales of his Point Reyes book dropped off.</p><p>First, he tapped his savings to keep current on his $2,500 mortgage. When that was gone, he leaned hard on his credit lines and credit cards, racking up tens of thousands of dollars in charges while he waited for business to rebound.</p><p>Maxing out the credit line left Campbell owing Bank of America $68,000, putting his home at risk. </p><p>Debt becomes unsecured</p><p>But because the value of the home has now fallen to an estimated $440,000, below the value of the first mortgage, Chapter13 allows his second mortgage to be declared unsecured debt and lumped in with the couple's credit card bills. The couple owes about another $80,000 in credit card debt to Wells Fargo Bank, most of which was used for business expenses, he said. </p><p>The removal of the $68,000 line of credit will reduce Campbell's monthly mortgage payment by several hundred dollars, but the $500,000 first remains a formidable obstacle for him. </p><p>Between his business income and Jennifer's disability payments, the couple makes about $62,000 per year. </p><p>The Chapter 13 option also gives him a shot at saving his largest business asset, a 1969 Helio Courier airplane, which he values at $25,000. </p><p>If he were to file Chapter 7, the plane, since it's not an exempt item like a car, jewelry or clothing, would be sold to pay creditors, said his attorney David Chandler Jr., who is in practice with his father. Saving the plane is a key goal because he needs it to make a living, Chandler said. </p><p>Saving the house will be tougher, in part because they'll need to continue making the $2,500 monthly payments, which is questionable given their current income. </p><p>Modification denied</p><p>Chandler hopes to get the mortgage modified, but the delays and confusion with the federal Home Affordable Modification Program make that path unclear. Campbell was previously denied for a modification after a trial period, one of the events he says “pushed me over the edge” to file bankruptcy. </p><p>The bank's refusal to modify his mortgage galls Campbell because he sees the nation's banks' collective reluctance to lend money after accepting taxpayer bailouts as one reason the economy, and therefore his business, remains crippled. </p><p>“I feel really betrayed because they really put me in this position,” he said.</p><p>Jaroslovsky noted that some people assume that ignorance or risky behavior landed debtors in bankruptcy. But after years on the bench, the judge says his attitude remains one of sympathy. </p><p>“There but for the grace of God go I,” he said. </p><p>You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com.</p>