Bankruptcy: What Goes Up Must Come Down

Just a few years ago I did a presentation to a group of realtors entitled “Bankruptcy, Foreclosures and Shorts Sales: the New Fad.” That would have been about 2008 when the economy started to stutter and the financial markets seized up. Contra Costa County was at the forefront of the volatile real estate market as we witnessed prices rise sky high and then crash back down to earth. For sale signs littered corners, especially in Eastern Contra Costa County. Lawns went dry and houses stood empty. People stopped paying their mortgages and filed bankruptcy. People would come into my office and plan to walk away from multiple rental properties. We all witnessed the effects as foreclosures skyrocketed.  Instead of selling houses in the normal fashion, realtors had to learn how to do a “short sale.”

A look at the bankruptcy filings gives us a snapshot of what happened.  In 2007, a total of 12,448 bankruptcies were filed in the Bankruptcy Courts for the Northern District of California1. By 2008, those filings increased to 21,011.  Filings peaked in 2010 when 38,586 individuals and businesses filed for bankruptcy relief. The “what goes up must come down” theory applies to real estate and stock markets and it certainly applies to bankruptcy filings. Starting with 2011 and each year since, we have witnessed a dramatic drop off in bankruptcy filings. In 2001, filings dropped 11%; in 2012, filings dropped 32%. Even this last year, filings dropped another 11%. In 2016, a total of only 9,724 bankruptcies were filed in the entire Northern District, which in the last 15 years was only eclipsed by 2006. The year 2006 was an anomaly as it was the year after the passage of BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act). A surge in bankruptcies occurred before the effective date of the law in late 2005. A stronger economy, continued low interest rates and low unemployment are some of the reasons for our current down cycle. I personally think that the real estate crisis flushed out everyone who was going to file bankruptcy or was thinking of filing bankruptcy. The prediction is that number of filings is finally bottoming out.

You must understand that bankruptcy practitioners are optimists.  What comes around goes around. Ads are appearing again on the radio about taking equity out of your house to consolidate credit card bills. High interest unsecured loans are touted as the remedy of all ills. Refinance companies beg Americans to refinance before rates go up further. Student loan debt and credit card debt are at all time highs. Time is tempering the Great Recession. As we wait for the time when bankruptcies will be fashionable again enjoy the articles we have collected for you.

We are fortunate to have some of the best local bankruptcy attorneys contribute to this month’s edition. First, Mary Ellmann Tang interviews the Honorable Roger L. Efremsky, Chief Judge of the Bankruptcy Courts for the Northern District of California. Next, Matthew D. Metzger compares bankruptcy filings to private workouts. Reno F.R. Fernandez III highlights the Ninth Circuit’s views on capping commercial lease claims in bankruptcy.  Corrine Bielejeski looks at the recent litigation over how spendthrift trusts are treated when a bankruptcy is filed. Carl Gustafson addresses how the automatic stay impacts personal injury claims. Jen Lee provides some guidance on dealing with debt after a bankruptcy filing. Steven T. Knuppel revisits an article he presented a few years ago and gives us the current caselaw on stripping liens in bankruptcy. Nathan L. Scheg and Robert B. Jacobs teamed up to give us a thorough analysis of the Mortgage Modification Mediation program. Lastly, I address eligibility issues for those contemplating filing for bankruptcy.

[1]. The Northern District of California Bankruptcy Courts include the following divisions:  San Francisco, Santa Rosa, San Jose, and Oakland.  The filings include all consumer and business filings in all chapters of bankruptcy.