Spurred by housing sector woes and the ensuing credit crunch, bankruptcies around Richmond are spiking to the highest levels in a decade.
Most filers in the area are individuals who can no longer tap equity in their homes to pay off credit cards. But the enormous rise in bankruptcies is also spilling over to the private sector – a sign that the economy is likely far from recovery.
So far this month, 465 people and businesses have filed for bankruptcy in the Eastern District of Virginia’s Richmond court. And the month isn’t over yet. That number is almost twice the previous high for any month of August since 2000. Around 570 people and businesses filed in July, and 551 filed in June.
So far this year, 4,208 parties have filed for bankruptcy protection. Twenty-two businesses have filed for Chapter 11 in the Richmond District. That’s up from nine at the same time last year and seven for the same period of 2006.
“The housing market has dried up and that’s trickled down and affected nearly every business sector. The restaurants don’t have customers, and the retailers don’t have business,” said Lynn Tavenner, a bankruptcy lawyer with the firm Tavenner & Beran who specializes in structuring corporate reorganizations. She’s also a trustee who works on behalf of the U.S. Trustee’s Office to sell personal property and distribute proceeds to creditors during the bankruptcy process
Tavenner has recently filed Chapter 7 – which liquidates a business’ assets to pay creditors – on behalf of a cabinet maker and an architectural mill work company.
But Tavenner is not the only one witnessing the up-tick in bankruptcies. Sally Feltner, a business counselor at the Great Richmond Chamber of Commerce’s Small Business Development Center, says she’s seeing a spike in the number of distressed businesses seeking advice.
In a typical year, Feltner fields one or two calls from a distressed business. She’s getting two or three a month lately, primarily in businesses related to the housing sector.
“They are in such bad straights they are coming to us to keep them from filing for bankruptcy. They are on the verge of going out of business,” Feltner said.
The vast majority of the bankruptcy filings are individuals, not businesses. But the plight of the local consumer directly affects businesses starting with a slow-down in construction – a slow-down that is bleeding into retail. Carytown Seafood filed for bankruptcy earlier this year. Glass & Powder, a snowboard retailer in Carytown, is going out of business after filing for bankruptcy in 2006. And two Liberty Fitness health clubs closed in Henrico County after the company filed for Chapter 7 bankruptcy protection earlier in August.
Liberty’s owner, Mark Schneider, also filed for personal bankruptcy in July. He told the Times-Dispatch, “When you’re an entrepreneur, sometimes you take chances. I took a chance. It didn’t work out. Now I need to refocus and start the next chapter of my life.”
Businesses that fall behind with creditors typically have three options. They can negotiate directly with the creditors, which can save legal thousands in legal fees, or they can file for Chapter 7 bankruptcy and liquidate their assets.
Chapter 11 bankruptcy, meanwhile, pertains to financial and company reorganization. In that case, a court-appointed trustee files monthly operating reports about the business and sets up conferences with debtors to make sure recommendations are implemented. Under Chapter 11 bankruptcy protection, a court may grant complete or partial relief for most of the company’s debts and contracts. That allows the company to make a fresh stab at the business.
On the personal side of bankruptcy, many of the filers are facing foreclosures, experts say. Filing Chapter 13 can delay a foreclosure, but homeowners (a relative term in this case) now owe more than the home is worth.
One reason the bankruptcy statistics are higher is that people who would normally have filed for bankruptcy in 2006 and 2007 tapped their homes as virtual ATMs to pay off credit cards. That’s no longer possible, as the value of the homes is not rising anymore.
“For a long time there was an artificial inflation of real estate. Consumers were able to – instead of filing for bankruptcy – get a second mortgage and use that cash to pay off credit cards,” Tavenner said.
“Now that artificial inflation is gone, and the value in homes is not there.”
In her role as trustee, Tavenner is seeing people with two or three mortgages who owe far more than their homes are even worth – sometimes by hundreds of thousands of dollars.
Aaron Kremer is the BizSense Editor. Please email story tips to [email protected]