By EILENE ZIMMERMAN
From 2009 to 2010, the commercial real estate market in the United States seemed bottomless. Whether seeking manufacturing, office or retail space, those looking to lease or buy were in the driver’s seat, said Fred Schmidt, president and chief operating officer for Coldwell Banker Commercial in Parsippany, N.J. After the supply of space hit a peak in the fourth quarter of 2010, he said, the market began a slow recovery — “but it’s definitely still a tenant’s and buyer’s market.”
Many small businesses have taken advantage of the market to negotiate more favorable lease terms or lower rents or to move to better space. Some were able to buy a building, a pipe dream for many in the prerecession real estate market. Still, putting together a deal requires timing, cash and market savvy. The best deals take time and tenacity, so start looking long before your lease expires, said Brian Netzky, president of Interstate Tenant Advisors in Lincolnwood, Ill. “Don’t be reactive, because then no matter what the economy is like, you’re in the worst position.”
Below are several examples of small-business owners who have taken advantage of one bright spot in a dark economy.
PAYING CASH UPFRONT Tired of paying rent for office space, Andrew E. Samalin called a broker last year and started looking for a building to buy. At the time, Mr. Samalin, a principal in an investment firm, Samalin Investment Counsel, was paying a high $4,500 a month for 700 square feet in suburban Mount Kisco, N.Y. In March 2010, he found a building in nearby Chappaqua that had been built in 1865 and needed work. The previous time it had been up for sale — at the height of the market — the asking price was $1.3 million. This time, Mr. Samalin saw an opportunity.
The seller would take only cash, so Mr. Samalin offered $600,000. After his offer was accepted, he put up $250,000 in cash for renovations. “I knew I could get the mortgage financing in place later,” he said, “but if I offered the cash upfront, I could get a really good price for the building.” The mortgage came after renovations were complete, because then it was less risky for the bank.
Mr. Samalin’s mortgage payment is now $3,500 a month. But he had enough extra room to take in a tenant, who pays $2,400 a month, reducing Mr. Samalin’s portion to $1,100. Because of the Small Business Jobs Act of 2010, the entire cost of the renovations was tax deductible. Mr. Samalin said he feels pride in owning a restored historical building, and his staff and clients love the space. “I consider this one of the greatest deals of my life,” he said.
NEGOTIATING AGGRESSIVELY Mark Censits, owner of an upscale wine, beer and spirits shop, CoolVines, wanted to move his Princeton, N.J., location — 350 square feet on the outskirts of town — to a bigger, better location. In 2007, when the market was still strong, he found 1,500 square feet in the center of town. The building’s opening was delayed for three years and by the time it was ready for tenants last fall, the market was tanking. “I was able to reopen discussions twice, each time negotiating more aggressively,” he said.
Because there were few creditworthy tenants bidding, Mr. Censits used CoolVines’ record of success — and the expectation that it would bring foot traffic — to persuade the landlord to lower the price from about $41 a square foot to $35.
The soft market also prompted Mr. Censits to move another location, this one in Westfield, N.J. “I knew if we were ever going to expand, this was the time to do it,” he said. The original Westfield store was 750 square feet and cost about $54 a square foot. Mr. Censits found a new location that offered 2,400 square feet downtown with parking, and is located between Williams-Sonoma and Banana Republic stores.
Feeling confident after the success of his Princeton negotiations, Mr. Censits started with a lowball offer of $33 a square foot; he got the space for $37, and the landlord agreed to freeze the rent for three years. After that, increases are limited to 2 percent annually for the seven years. “I also got him to do a significant amount of demolition to the place — probably $50,000 worth — so we could build it out the way we wanted,” Mr. Censits said.
PAYING LESS FOR MORE Three years ago, when the lease on his manufacturing facility was ending, Scott Pievac thought he was ready to buy new space for the Sam Pievac Company, which makes retail displays and fixtures and was founded by Mr. Pievac’s father. At the time, however, prices were high and inventory low, so he continued to rent in Santa Fe Springs, Calif.
This year, when he started shopping around again, he found few people wanted to sell in the middle of a downturn. But with the help of a broker, he located an old Firestone tire storage plant for sale in Chino, about 25 miles away. The price was $65 a square foot, a great deal, he said. “That building would have been $100 a square foot five years ago. It had been on the market a week, and they had five offers.”
Several factors converged in Mr. Pievac’s favor. His broker introduced him to the broker representing the sellers, and they found they had mutual friends. The Sam Pievac Company had been in business 50 years and was financially stable, making it an attractive candidate.
In addition, the Small Business Administration increased its lending limit on loans for the acquisition of fixed assets in 2011 to $5 million, which helped Mr. Pievac arrange the financing he needed. The total cost of the building with improvements was $7.2 million. The company moved into the new warehouse space in April, and the office space will be ready this week.
Mr. Pievac’s rent used to be $42,000 a month; now, he has more space, owns the building and pays $40,000 a month.
FINDING COMFORTABLE SPACE In early 2010, the employees of M. Studio, a design and branding agency, were spilling out of their northern New Jersey offices. Jenna Zilincar, a founder and creative director, said four people were crammed into 800 square feet that they called “the hamster cage.”
Ms. Zilincar wanted to move closer to her clients and was able to find several affordable options in Asbury Park that had not been available a year earlier. One space was triple the size of M Studio’s previous office. The space needed modifying, Ms. Zilincar said, but she got the landlord to put up walls and take out doors, creating offices and a conference room. Ms. Zilincar was also able to sublease two small offices she did not need, substantially reducing her monthly costs.
Now, M Studio has five people working full-time in an open space. The office has a waiting area, a conference room and a kitchen. Ms. Zilincar also got the landlord to put in hardwood floors, outside lighting, air-conditioning and baseboard heating. She and her broker negotiated a slightly lower rent than the asking price, no increases for a year and a half and a $50 increase for the 18 months after that. If she renews for another three years, the increase will be 5 percent.
Ms. Zilincar believes the new space has helped her close deals. “People’s level of comfort went up because this space is more legitimate,” she said. “We don’t have to meet clients in coffee shops anymore.”
Copyright 2011 The New York Times Company. All rights reserved.
Thursday, July 28, 2011
Wednesday, July 27, 2011
Same-sex marriage, real estate and bankruptcy
Here at Shenwick & Associates, we have been following last month's passage by the New York Legislature and signing into law by Governor Cuomo of the Marriage Equality Act ("the Act"), which became effective on July 24, 2011. This law formally recognizes otherwise-valid marriages without regard to whether the parties to the marriage are of the same or different sex.
Besides simply allowing same-sex couples to marry, we are studying the impact of the Act on our twin practices of real estate and bankruptcy:
1. Under New York law, married couples are allowed to own real property as tenants by the entirety. Tenants by the entirety is a special type of joint tenancy with rights of survivorship (which means that when one owner dies, then the surviving owner or owners will continue to own the asset and the estate and heirs of the deceased owner will receive nothing). Real property owned as tenants by the entirety receives extra protection from creditors. As a leading case describes it:
"[t]he law in New York clearly permits a [spouse]'s interest in a
tenancy by the entirety to be sold under execution upon a judgment against him [or her]. The purchaser at such sale becomes a tenant in common with the debtor's [spouse], subject to [his or] her right of survivorship and is entitled to share in the rents and profits, but not the occupancy." In re Weiss, 4 B.R. 327, 330 (S.D.N.Y. 1980) (citations omitted).
So a creditor can execute a judgment against a debtor spouse's interest in real property, but cannot foreclose on or take occupancy of that debtor spouse's interest.
Presumably same-sex couples who wed in New York (or who have already entered into same-sex marriages in other states that allow it) after the Act becomes effective and take ownership to property will be able to take ownership as tenants by the entirety rather than as tenants in common. Also, same-sex couples who had acquired property as tenants in common could then convey the property to each other as tenants by the entirety after their marriage. Although there is no specific language to this effect, Section 2 of the Act clearly states:
"It is the intent of the legislature that the marriages of same-sex and different-sex couples be treated equally in all respects under the law. The omission from this act of changes to other provisions of law shall not be construed as a legislative intent to preserve any legal distinction between same-sex couples and different-sex couples with respect to marriage."
2. Under federal bankruptcy law and the New York Civil Practice Law and Rules and Debtor and Creditor Law, married debtors can file a joint bankruptcy petition.
Section 302(a) of the Bankruptcy Code provides that "[a} joint case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter and such individual's spouse." And although New York law does not specifically mention joint debts, all exemptions in personal bankruptcy and from money judgments are "per person."
However, the federal Defense of Marriage Act ("DOMA"), enacted in 1996, defines marriage as a legal union between one man and one woman. Section 3 of DOMA prevents the federal government from recognizing the validity of same-sex marriages.
Although the constitutionality of DOMA is being challenged in federal court and President Obama is supporting a bill to repeal DOMA, for now it is still valid law. But last month, in In re Balas, the Bankruptcy Court for the Central District of California denied the United States Trustee ("UST")'s motion to dismiss the joint Chapter 13 petition of two males who were lawfully married under California law when they filed their joint petition. In denying the UST's motion to dismiss, the Court stated "[i]n this court's judgment, no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple."
Although this holding is specific to the parties to the case, it's significant that the House Bipartisan Legal Advisory Group, which is leading Congressional efforts to defend DOMA, stated that they would not appeal the ruling to the 9th Circuit Court of Appeals. While it cannot be used as mandatory authority by same-sex couples who are lawfully wed under state law and seeking to file joint bankruptcy petitions, it can certainly be used as persuasive authority to do so.
For more information about the complex intersection of bankruptcy, real estate and same-sex marriage rights, please contact Jim Shenwick.
Besides simply allowing same-sex couples to marry, we are studying the impact of the Act on our twin practices of real estate and bankruptcy:
1. Under New York law, married couples are allowed to own real property as tenants by the entirety. Tenants by the entirety is a special type of joint tenancy with rights of survivorship (which means that when one owner dies, then the surviving owner or owners will continue to own the asset and the estate and heirs of the deceased owner will receive nothing). Real property owned as tenants by the entirety receives extra protection from creditors. As a leading case describes it:
"[t]he law in New York clearly permits a [spouse]'s interest in a
tenancy by the entirety to be sold under execution upon a judgment against him [or her]. The purchaser at such sale becomes a tenant in common with the debtor's [spouse], subject to [his or] her right of survivorship and is entitled to share in the rents and profits, but not the occupancy." In re Weiss, 4 B.R. 327, 330 (S.D.N.Y. 1980) (citations omitted).
So a creditor can execute a judgment against a debtor spouse's interest in real property, but cannot foreclose on or take occupancy of that debtor spouse's interest.
Presumably same-sex couples who wed in New York (or who have already entered into same-sex marriages in other states that allow it) after the Act becomes effective and take ownership to property will be able to take ownership as tenants by the entirety rather than as tenants in common. Also, same-sex couples who had acquired property as tenants in common could then convey the property to each other as tenants by the entirety after their marriage. Although there is no specific language to this effect, Section 2 of the Act clearly states:
"It is the intent of the legislature that the marriages of same-sex and different-sex couples be treated equally in all respects under the law. The omission from this act of changes to other provisions of law shall not be construed as a legislative intent to preserve any legal distinction between same-sex couples and different-sex couples with respect to marriage."
2. Under federal bankruptcy law and the New York Civil Practice Law and Rules and Debtor and Creditor Law, married debtors can file a joint bankruptcy petition.
Section 302(a) of the Bankruptcy Code provides that "[a} joint case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter and such individual's spouse." And although New York law does not specifically mention joint debts, all exemptions in personal bankruptcy and from money judgments are "per person."
However, the federal Defense of Marriage Act ("DOMA"), enacted in 1996, defines marriage as a legal union between one man and one woman. Section 3 of DOMA prevents the federal government from recognizing the validity of same-sex marriages.
Although the constitutionality of DOMA is being challenged in federal court and President Obama is supporting a bill to repeal DOMA, for now it is still valid law. But last month, in In re Balas, the Bankruptcy Court for the Central District of California denied the United States Trustee ("UST")'s motion to dismiss the joint Chapter 13 petition of two males who were lawfully married under California law when they filed their joint petition. In denying the UST's motion to dismiss, the Court stated "[i]n this court's judgment, no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple."
Although this holding is specific to the parties to the case, it's significant that the House Bipartisan Legal Advisory Group, which is leading Congressional efforts to defend DOMA, stated that they would not appeal the ruling to the 9th Circuit Court of Appeals. While it cannot be used as mandatory authority by same-sex couples who are lawfully wed under state law and seeking to file joint bankruptcy petitions, it can certainly be used as persuasive authority to do so.
For more information about the complex intersection of bankruptcy, real estate and same-sex marriage rights, please contact Jim Shenwick.
Tuesday, July 12, 2011
NYT: Bank's Deal Means More Will Lose Their Homes
By NELSON D. SCHWARTZ
Tens of thousands of Bank of America’s most distressed borrowers could be evicted and lose their homes more quickly as a result of a proposed settlement between the bank, which is the country’s largest mortgage servicer, and investors in its troubled mortgage securities.
For struggling borrowers in better financial shape, the outcome could be more positive: the deal would include incentives for mortgage servicers to help homeowners who have fallen behind on their payments and whose homes are worth less than they borrowed.
“The goal is to reinstate as many borrowers in a modification that performs well,” said Tony Meola, a servicing executive with Bank of America. “It also is likely to lead to faster resolution in those unfortunate situations where foreclosure is inevitable. While not a desirable outcome, the recovery of the housing markets depends on moving through the foreclosure process as quickly and fairly as possible.”
While powerful investors stand to benefit from the $8.5 billion settlement over the bank’s bundling of shoddy mortgages as securities, the fallout for the nearly 275,000 borrowers who took out those loans depends greatly on how deep they are in the foreclosure process and whether they earn enough money to dig themselves out.
While no exact income qualification has been set as part of the agreement, which was announced last month, many servicers use a formula in which borrowers can qualify for a modification as long as the new monthly payment does not exceed 31 percent of their monthly gross income. For borrowers who are unemployed or lack the income to cover even reduced mortgage payments, foreclosure and eviction could be much more immediate.
With 1.3 million borrowers at risk of foreclosure, Bank of America has been overwhelmed by the surge in defaults, and the accord has raised hopes that this logjam will finally begin to ease. But skeptics say that previous arrangements, like another multibillion-dollar settlement by Bank of America in 2008, have barely made a dent in the problem.
“The mortgage servicers have repeatedly promised to do things and then not done them,” said Michael S. Barr, a former assistant Treasury secretary who now teaches law at the University of Michigan. “I think it’s positive in general, but I don’t expect it to be transformative of what we’ve witnessed from the mortgage servicers over the last four years.”
Matthew Weidner, a Florida lawyer who represents borrowers facing foreclosure, said he was skeptical of promises by the deal’s architects that lower monthly payments would be easier to obtain.
“It’s like giving aspirin to someone with cancer,” he said of the proposed assistance. “You had all the big players at the top of the pyramid negotiating but nobody was speaking for the homeowners who have far more at stake at the ground level.”
Still, for some of the homeowners now facing foreclosure who took out loans with Countrywide, the subprime specialist bought by Bank of America in 2008, the deal could bring a few quick improvements.
Under the terms of the agreement, Bank of America must now start transferring these borrowers to 10 smaller outside servicers, even without the deal being approved in court, which is not expected before November. The architects of the settlement say these subservicers will be far more efficient than Bank of America’s giant payment processing operation.
For example, an analysis of data by RBS prepared as part of the settlement found that Bank of America provided fewer modifications as a percentage of unpaid principal than JPMorgan Chase, Wells Fargo, Litton and other servicers. In addition, borrowers defaulted again within six months in nearly one in five cases when modifications were made by Bank of America, a higher rate than other servicers that were studied.
Officials at Bank of America contend the company has made nearly 875,000 modifications since 2008, more than any other servicer.
Under the new proposal, subservicers will have to provide an answer to homeowner modification requests within 60 days of receiving paperwork, and will get up to 1.5 percent of the unpaid principal balance as an incentive fee for each successful permanent modification.
“We wanted smaller, high-touch servicers who would consider every modification option at once, not try this and that,” said Kathy D. Patrick, a Houston lawyer who represented the 22 private investors in the settlement. “Servicers get more in fees for successful modifications than for any other kind of workout, including foreclosure.”
The first homeowners should be transferred out of Bank of America by early fall, with each of the 10 subservicers taking up to 30,000 cases. Borrowers with mortgages 60 days past due who have been delinquent more than once in the last 12 months will receive priority in the switch, followed by homeowners who are 90 days past due but not in foreclosure.
Homeowners already in foreclosure or who have been declared bankrupt will go to the back of the line, although they will also eventually be transferred, Ms. Patrick said. More than 75 percent of the nearly 275,000 delinquent homeowners have not made a payment in more than 120 days or are already in foreclosure.
One unintended consequence of the problems at Bank of America and other large servicers is that many borrowers have managed to remain in their homes despite being in default, and without the income to qualify for a modification. At the time of foreclosure, the typical Bank of America borrower has not made a payment in 18 months.
What is more, according to the analysis of RBS data, it takes 30 months on average for a subprime borrower’s property to move from foreclosure to a final sale with Bank of America, nearly a year longer than Wells Fargo, and 10 months longer than SPS, a smaller subservicer likely to be among the 10 selected to take over the former Countrywide loans.
“Countrywide made a lot of bad loans and borrowers with no money can’t afford a modification,” said Peter Swire, a former special assistant for housing policy in the Obama administration who helped oversee earlier federal efforts to promote modifications. He is now a professor at Ohio State University. “One discouraging problem is that only a small fraction of Countrywide borrowers will likely qualify,” Professor Swire said.
Delores Gosha hopes she will be one of the lucky ones.
It has been more than a year since she last made a mortgage payment to Bank of America, raising the risk that her bungalow in the Cleveland suburbs will end up in foreclosure. The bank, she says, has given varying answers as to whether she qualifies for a modification, telling her she did not at one point last week only to reverse course days later and say it was still under consideration. Ms. Gosha said she had had to deal with a multitude of representatives and submit the same documents over and over.
While a new servicer might not give her the answer she has been praying for, she said, at least she will get an answer.
“I’ve been up and down,” said Ms. Gosha, who is a clerk at a Cleveland hospital. “Can’t somebody tell me something?”
Copyright 2011 The New York Times Company. All rights reserved.
Tens of thousands of Bank of America’s most distressed borrowers could be evicted and lose their homes more quickly as a result of a proposed settlement between the bank, which is the country’s largest mortgage servicer, and investors in its troubled mortgage securities.
For struggling borrowers in better financial shape, the outcome could be more positive: the deal would include incentives for mortgage servicers to help homeowners who have fallen behind on their payments and whose homes are worth less than they borrowed.
“The goal is to reinstate as many borrowers in a modification that performs well,” said Tony Meola, a servicing executive with Bank of America. “It also is likely to lead to faster resolution in those unfortunate situations where foreclosure is inevitable. While not a desirable outcome, the recovery of the housing markets depends on moving through the foreclosure process as quickly and fairly as possible.”
While powerful investors stand to benefit from the $8.5 billion settlement over the bank’s bundling of shoddy mortgages as securities, the fallout for the nearly 275,000 borrowers who took out those loans depends greatly on how deep they are in the foreclosure process and whether they earn enough money to dig themselves out.
While no exact income qualification has been set as part of the agreement, which was announced last month, many servicers use a formula in which borrowers can qualify for a modification as long as the new monthly payment does not exceed 31 percent of their monthly gross income. For borrowers who are unemployed or lack the income to cover even reduced mortgage payments, foreclosure and eviction could be much more immediate.
With 1.3 million borrowers at risk of foreclosure, Bank of America has been overwhelmed by the surge in defaults, and the accord has raised hopes that this logjam will finally begin to ease. But skeptics say that previous arrangements, like another multibillion-dollar settlement by Bank of America in 2008, have barely made a dent in the problem.
“The mortgage servicers have repeatedly promised to do things and then not done them,” said Michael S. Barr, a former assistant Treasury secretary who now teaches law at the University of Michigan. “I think it’s positive in general, but I don’t expect it to be transformative of what we’ve witnessed from the mortgage servicers over the last four years.”
Matthew Weidner, a Florida lawyer who represents borrowers facing foreclosure, said he was skeptical of promises by the deal’s architects that lower monthly payments would be easier to obtain.
“It’s like giving aspirin to someone with cancer,” he said of the proposed assistance. “You had all the big players at the top of the pyramid negotiating but nobody was speaking for the homeowners who have far more at stake at the ground level.”
Still, for some of the homeowners now facing foreclosure who took out loans with Countrywide, the subprime specialist bought by Bank of America in 2008, the deal could bring a few quick improvements.
Under the terms of the agreement, Bank of America must now start transferring these borrowers to 10 smaller outside servicers, even without the deal being approved in court, which is not expected before November. The architects of the settlement say these subservicers will be far more efficient than Bank of America’s giant payment processing operation.
For example, an analysis of data by RBS prepared as part of the settlement found that Bank of America provided fewer modifications as a percentage of unpaid principal than JPMorgan Chase, Wells Fargo, Litton and other servicers. In addition, borrowers defaulted again within six months in nearly one in five cases when modifications were made by Bank of America, a higher rate than other servicers that were studied.
Officials at Bank of America contend the company has made nearly 875,000 modifications since 2008, more than any other servicer.
Under the new proposal, subservicers will have to provide an answer to homeowner modification requests within 60 days of receiving paperwork, and will get up to 1.5 percent of the unpaid principal balance as an incentive fee for each successful permanent modification.
“We wanted smaller, high-touch servicers who would consider every modification option at once, not try this and that,” said Kathy D. Patrick, a Houston lawyer who represented the 22 private investors in the settlement. “Servicers get more in fees for successful modifications than for any other kind of workout, including foreclosure.”
The first homeowners should be transferred out of Bank of America by early fall, with each of the 10 subservicers taking up to 30,000 cases. Borrowers with mortgages 60 days past due who have been delinquent more than once in the last 12 months will receive priority in the switch, followed by homeowners who are 90 days past due but not in foreclosure.
Homeowners already in foreclosure or who have been declared bankrupt will go to the back of the line, although they will also eventually be transferred, Ms. Patrick said. More than 75 percent of the nearly 275,000 delinquent homeowners have not made a payment in more than 120 days or are already in foreclosure.
One unintended consequence of the problems at Bank of America and other large servicers is that many borrowers have managed to remain in their homes despite being in default, and without the income to qualify for a modification. At the time of foreclosure, the typical Bank of America borrower has not made a payment in 18 months.
What is more, according to the analysis of RBS data, it takes 30 months on average for a subprime borrower’s property to move from foreclosure to a final sale with Bank of America, nearly a year longer than Wells Fargo, and 10 months longer than SPS, a smaller subservicer likely to be among the 10 selected to take over the former Countrywide loans.
“Countrywide made a lot of bad loans and borrowers with no money can’t afford a modification,” said Peter Swire, a former special assistant for housing policy in the Obama administration who helped oversee earlier federal efforts to promote modifications. He is now a professor at Ohio State University. “One discouraging problem is that only a small fraction of Countrywide borrowers will likely qualify,” Professor Swire said.
Delores Gosha hopes she will be one of the lucky ones.
It has been more than a year since she last made a mortgage payment to Bank of America, raising the risk that her bungalow in the Cleveland suburbs will end up in foreclosure. The bank, she says, has given varying answers as to whether she qualifies for a modification, telling her she did not at one point last week only to reverse course days later and say it was still under consideration. Ms. Gosha said she had had to deal with a multitude of representatives and submit the same documents over and over.
While a new servicer might not give her the answer she has been praying for, she said, at least she will get an answer.
“I’ve been up and down,” said Ms. Gosha, who is a clerk at a Cleveland hospital. “Can’t somebody tell me something?”
Copyright 2011 The New York Times Company. All rights reserved.
Thursday, July 07, 2011
NYT: Fewer Americans File for Bankruptcy as Debt Woes Ease
By TARA SIEGEL BERNARD
After steadily climbing for several years, the number of Americans filing for bankruptcy is on the decline, though that is not necessarily an indicator of an improving economy.
The number of bankruptcy filings in June was 120,623, or an average of 5,483 a day, a drop of 6.2 percent from May, when filings totaled 122,775, or 5,846 a day, according to a report from Epiq Systems, which tracks bankruptcy filings. There was one additional day to file in June compared with May. Average daily filings are down nearly 10 percent from June of last year.
Though economic factors like foreclosures and unemployment play a role in bankruptcy, over the long run, the filing rate tends to be more closely tethered to the amount of outstanding consumer debt.
Access to credit, however, can influence the bankruptcy rate over the shorter term: as lenders tighten their standards, filings tend to rise because struggling consumers can no longer rely on credit cards or other loans to get them through a rough period. But when more new loans are being made, filings tend to fall — at least for a while.
“There is a lot of mythology about what drives bankruptcy rates,” said Robert M. Lawless, a professor at the University of Illinois College of Law who specializes in bankruptcy. “But consumer credit appears to be the most significant indicator.”
Over all, he said he expected filings to decline 5 to 10 percent this year, leveling off at about 1.46 million, largely because consumers have slightly more access to credit now than in recent years. But he also said that consumers had taken on less debt in the past three years, which means there is less debt to discharge and fewer incentives to file bankruptcy.
That estimate compares with about 1.56 million bankruptcy filings in 2010 and nearly 1.45 million in 2009. Filings surpassed two million in 2005, when many people rushed to declare bankruptcy before a new law went into effect that made it more difficult, and significantly more expensive, to file.
There have been 731,237 filings this year. “If they keep going the way they were,” Professor Lawless said, “bankruptcy filings will keep going down a little bit.”
So far this year, the vast majority of the bankruptcy cases — nearly 70 percent — were Chapter 7 filings, which provide individuals with the proverbial “fresh start” because their debts are forgiven. (To qualify, filers need to pass a means test to determine whether they are unable to repay their debts.)
In contrast, a Chapter 13 filing requires individuals to use their disposable income to pay back a portion of their debts through a three- or five-year repayment plan. Some people choose Chapter 13 because it allows them to save their primary homes from foreclosure, though they are required to catch up on their mortgage payments. Slightly more than 27 percent were Chapter 13 filings. (The remainder were mostly commercial filings.) The overall split between Chapter 7 and Chapter 13 filings is consistent with last year’s ratio.
While the overall number of bankruptcy filings was down last month, there were variations from state to state. For instance, filings in Georgia rose 13 percent and were up 33 percent in Delaware, compared with May. But filings in Wyoming fell 30 percent, in South Dakota 21 percent, in West Virginia 18 percent and in Wisconsin 17 percent.
In both New York and New Jersey, the number of bankruptcy cases dropped by 5 percent.
Copyright 2011 The New York Times Company. All rights reserved.
After steadily climbing for several years, the number of Americans filing for bankruptcy is on the decline, though that is not necessarily an indicator of an improving economy.
The number of bankruptcy filings in June was 120,623, or an average of 5,483 a day, a drop of 6.2 percent from May, when filings totaled 122,775, or 5,846 a day, according to a report from Epiq Systems, which tracks bankruptcy filings. There was one additional day to file in June compared with May. Average daily filings are down nearly 10 percent from June of last year.
Though economic factors like foreclosures and unemployment play a role in bankruptcy, over the long run, the filing rate tends to be more closely tethered to the amount of outstanding consumer debt.
Access to credit, however, can influence the bankruptcy rate over the shorter term: as lenders tighten their standards, filings tend to rise because struggling consumers can no longer rely on credit cards or other loans to get them through a rough period. But when more new loans are being made, filings tend to fall — at least for a while.
“There is a lot of mythology about what drives bankruptcy rates,” said Robert M. Lawless, a professor at the University of Illinois College of Law who specializes in bankruptcy. “But consumer credit appears to be the most significant indicator.”
Over all, he said he expected filings to decline 5 to 10 percent this year, leveling off at about 1.46 million, largely because consumers have slightly more access to credit now than in recent years. But he also said that consumers had taken on less debt in the past three years, which means there is less debt to discharge and fewer incentives to file bankruptcy.
That estimate compares with about 1.56 million bankruptcy filings in 2010 and nearly 1.45 million in 2009. Filings surpassed two million in 2005, when many people rushed to declare bankruptcy before a new law went into effect that made it more difficult, and significantly more expensive, to file.
There have been 731,237 filings this year. “If they keep going the way they were,” Professor Lawless said, “bankruptcy filings will keep going down a little bit.”
So far this year, the vast majority of the bankruptcy cases — nearly 70 percent — were Chapter 7 filings, which provide individuals with the proverbial “fresh start” because their debts are forgiven. (To qualify, filers need to pass a means test to determine whether they are unable to repay their debts.)
In contrast, a Chapter 13 filing requires individuals to use their disposable income to pay back a portion of their debts through a three- or five-year repayment plan. Some people choose Chapter 13 because it allows them to save their primary homes from foreclosure, though they are required to catch up on their mortgage payments. Slightly more than 27 percent were Chapter 13 filings. (The remainder were mostly commercial filings.) The overall split between Chapter 7 and Chapter 13 filings is consistent with last year’s ratio.
While the overall number of bankruptcy filings was down last month, there were variations from state to state. For instance, filings in Georgia rose 13 percent and were up 33 percent in Delaware, compared with May. But filings in Wyoming fell 30 percent, in South Dakota 21 percent, in West Virginia 18 percent and in Wisconsin 17 percent.
In both New York and New Jersey, the number of bankruptcy cases dropped by 5 percent.
Copyright 2011 The New York Times Company. All rights reserved.
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