Amid a severe economic crisis and a credit squeeze leaving people with fewer options, bankruptcy filings in Chicago soared in October and increased significantly for the first 10 months of 2008, reflecting a broad national trend.
Total personal and business bankruptcy filings at the U.S. Bankruptcy Court for the Northern District of Illinois surged 39.6 percent in October to 3,483 from 2,495 a year ago. Filings jumped 65.7 percent in September to 3,121 from 1,884 a year ago. The figures were reported in the bankruptcy court’s most recent statistical release.
In all of 2007 the Northern District filings totaled 24,619, a figure already surpassed in 2008 with the 10-month count at 29,771.
“In a large metropolis like Chicago, people normally come in because of consumer debt, but with the layoffs and pay cuts this year, it’s been the bottom line for people for many reasons,” said Terrance Leeders, a bankruptcy attorney with Leeders & Associates Ltd., in Chicago. “The mortgage market is another cause, because people got in over their heads with properties that they can’t afford now.”
According to national statistics compiled by Automated Access to Court Electronic Records, a bankruptcy data company based in Oklahoma City, the number of personal bankruptcy filings in the U.S. totaled 108,813 in October, a figure greater than 100,000 for the first time since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act, signed by President George W. Bush in 2005, which made the filing process more difficult and expensive.In November, the national figure dipped slightly to 91,355 filings, but Mike Bickford, president of AACER, noted that November was the shortest month of the year, with only 18 official filing dates but just 17 in most districts, since many courts were closed the Friday after Thanksgiving.
Nationwide, the average number of filings per filing day increased to 5,075 for the 18 filing days in November, compared with 4,946 daily filings in the 22 filings days in October. The Bankruptcy Court for the Northern District of Illinois has not yet released the November figures for Chicago.
“Since the changes in the bankruptcy laws in 2005, the numbers have been ramping up each year,” Leeders noted. The distressed housing market and the huge layoffs seen on the national level have hit Chicago’s economy as well, bringing an influx of clients to Leeders’ office, he said.
Chapter 7 filings, or filings by individuals and companies liquidating their assets in order to get a fresh start, increased to 2,360 in October, compared with 2,101 filings in September and 1,472 filings in the year-ago period.
Leeders said the number of bankruptcy filings tends to rise at the end of the year, as people’s expenses hike up, holiday bills trickle in and tax returns loom.
Chapter 11 filings, or filings by companies trying to reorganize their businesses to stay afloat, remained flat in October compared with the same period last year. But the total number of filings in 2008 so far is at 138, already on the verge of surpassing last year’s total of 142 filings.
PCS Financial Corp., a Chicago-based commercial lender, filed for Chapter 11 bankruptcy protection in November. Since 1953, the company has provided loans to primarily retailers, who then extend credit to third-party customers.
“The economy’s been bad and the financial sector’s been hit the worst,” Vice President of PCS Chris Ward said. “Our biggest drawback has been foreclosures and the ripple effects of higher unemployment. People now pay less or don’t pay at all.”
In court filings, PCS stated that it is owed $132 million by customers. Ward said the company starting noticing the effects of the deteriorating economy two years ago.
While financial companies and banks have been impacted by the economic slowdown, the housing industry has been at the center of the crisis.
Brook Architecture Inc., a full-service Chicago architecture firm, filed for bankruptcy in September. The firm started in 1996 and has worked in constructing and upgrading housing projects in the city. In 2006 its employee number was 15 but it's now down to four.
“When the housing crisis started, we started to feel the effects of that two years ago,” RaMona Westbrook, the founder and owner of Brook Architecture, said. “What’s being talked about now in the news, those things we felt in our office since two years ago.”
Westbrook said she had to change her main source of business from housing to other type of developments. Brook Architecture is currently working for a University of Chicago hospital and designing projects for the Chicago Park District.
Steve Jakubowski, an attorney with Chicago-based Coleman Law Firm, said the tightening of lending standards by banks is the driving force behind the increasing number of company filings.
Whitehall Jewelers Inc., Wickes Furniture Co. and the homebuilder Kimball Hill Inc. are Chicago-area businesses that filed for Chapter 11 reorganization earlier this year. Kimball Hill announced Wednesday that it will cease operations and completely shut down the company within 15 months.
In the past week, Chicago-based Bally Total Fitness Corp. and the Loves Park-based auto parts manufacturer Modern Metal Products Co. have filed. In addition, Chicago-based General Growth Properties Inc., the nation’s second largest owner of shopping malls, was granted loan extensions after announcing in November it was in danger on defaulting on mortgages debts and sinking into bankruptcy.
“One is the credit availability,” Jakubowski said. “Banks are just much more risk-averse.”
Another key factor in company bankruptcies is the shift in consumer demand, he said. A “ripple effect” occurs when retail sales slow down. As consumers feel the squeeze and become cash-strapped, they spend much less.
Bankruptcy experts said it was an interesting time to observe how the 2005 bankruptcy law has altered trends in the process, as the economic downturn persists.
Jakubowski said that though the law was intended to affect personal filings, it has affected corporations as well: “Now it’s harder for individuals and for corporations to file for bankruptcy,” he said.
One of the reasons why the number of filings hasn’t climbed steeply is that some companies could not afford to file because of fees and legal costs that mount up, he said.
Charles Tabb, a professor at the University of Illinois College of Law, said the sweeping changes made under the new bankruptcy law may have been a mistake and is now having damaging effects on people already in difficult financial situations.
“The whole argument behind the 2005 law was that many consumers were abusing the system, but lots of experts argued that really was not true and that people were actually very troubled,” he said. “Now we’re seeing the numbers coming in reflect that.”
Chapter 13 filings, or "wage-earner" debt reorganization plans used by individuals to keep certain assets like homes and cars, went up slightly to 1,107 filings in October, from 1,052 in September and 1,007 in the year-ago period.
Tabb said he is interested to see if the bankruptcy procedure will be reshaped in the coming year under the new administration of President-elect Barack Obama, who campaigned to empower bankruptcy court judges to modify mortgage debts.
“It will be interesting to see whether the Obama administration will be able to follow through with their campaign promises of letting bankruptcy judges help with home mortgages,” Tabb said.
“But apart from that, filings are going to remain high, because debt is high,” he said.
