by David G. Weil, Esq., CEO Golden State Law Group, PC
As I watched the closing ceremonies of the London Olympics on Sunday evening my thoughts soon turned to the coming work week as a bankruptcy practitioner…and when and from where the next client(s) will come.
Bankruptcy practitioners from coast to coast have been pondering this dilemma as Chapter 7 and Chapter 13 filings continue to slide. I will admit our business is off somewhere between 15% and 20%. This seems to mirror the national statistics as of June 30th of this year which shows a 14% drop in Chapter 7 filings and a 29% drop in Chapter 13s.
I have been, almost exclusively, a bankruptcy attorney for the past 37 years. I have been through several other ‘recessions’ as they call them, but nothing as unusual or unpredictable as this one.
We have all heard rumors and arguments that the economy is recovering or that the remaining debtors out there cannot afford their attorneys fees. While I do believe some clients are finding it near impossible to save for attorney fees I put absolutely no credence to the argument that economy is turning around. After all we see the economy at the grass-roots level!
Here is what I believe has really been happening and why we will all be very busy very soon:
- In 2007, 2008, and 2009, banks and other real estate lenders went straight to foreclosure once you were in default on your loan. Foreclosures, at least in non-judicial states were over and done in 4 to 6 months! Few lenders considered loan modifications or other work-outs. Boom, we saw a lot of Chapter 13 growth as well as Chapter 7s.
- Much has changed since then. We saw all of the loan mods. More recently, we are seeing a rash of short sales. In any event, foreclosures are now taking forever. Plus, last year lenders placed a moratorium on foreclosures due to the ‘robo-signing’ fiasco associated with foreclosures. In judicial foreclosure states the average current wait time to a foreclosure sale date is 631 days and it’s 375 days in non-judicial states. There is a huge bottleneck of foreclosures! Foreclosures drive bankruptcy! So why are the numbers down?
- Here’s why. Home owners who are in the bottleneck see no immediate reason to file for bankruptcy relief. Either their loan mod will be approved or they will short sale the property. In the meantime they are living ‘rent free’ in their homes for up to 2 years or more. In fact, delinquency rates on credit cards are also way down. Why? Simply put, if you have a $1800 per month mortgage payment, and you haven’t made a mortgage payment in a year or more you have the mortgage money in your wallet. This allows the debtor to live fairly well and to even pay down their credit cards!
- Free rent is coming to an end. The foreclosure rate in California increased 18% in June and California now leads the states in pending foreclosure actions for the first time since 2005! With foreclosures and short sales picking up those debtors will now have to live somewhere else and will now have to pay rent! Once those facts gain momentum bankruptcy lawyers will see a huge tidal wave of new cases coming their way. Debtors will no longer be living off their mortgage funds! In addition to debtors with the usual credit card debt there will be a glut of people filing who need to discharge their first and second mortgages in recourse states.
Tsunamis can be dangerous for the ill-informed, misinformed and the seemingly arrogant. But, bankruptcy lawyers will be ready because the warning signs are there and they see it coming!