Personal bankruptcies rise in Hampton Roads

Under pressure from mounting debts and a faltering economy, Hampton Roads residents are seeking relief in bankruptcy court in greater numbers.

The volume of personal bankruptcies filed during January, February and March climbed 23 percent from the same months last year, according to the U.S. Bankruptcy Court for the Eastern District of Virginia.

"It's a reflection of the number of households that are cash-strapped and debt-burdened," said Larry Filer, an Old Dominion University economist who monitors personal bankruptcies. "That's not a good thing for the local economy."

More businesses also are filing for bankruptcy.

Filer, along with bankruptcy lawyers in the region, attributed the sharp rise in personal filings to the pressure of unaffordable mortgages adding to the traditional causes of bankruptcy, such as a job loss, medical bills and credit card debt. An increasing number of consumers are using bankruptcy to forestall foreclosure, Filer said.

Some cash-strapped consumers are trying to get the terms of their home loans modified before resorting to bankruptcy, said James L. Pedigo Jr., a Norfolk bankruptcy lawyer.

However, the rising job losses in Hampton Roads and number of households wrestling with mortgage payments have set off a tidal wave of bankruptcies that "has just started to come in," said Robert Roussos, a Norfolk bankruptcy lawyer. "Many people are one paycheck away from a disaster."

The volume of consumer bankruptcies might be blunted in coming months by the Obama administration's effort to prevent home foreclosures, Filer said.

The administration's program, announced in February, provides incentives to mortgage lenders and servicers for loan modifications and makes interest-rate reductions available to borrowers attempting to refinance their mortgages.

Despite predictions of a possible upturn in the U.S. economy later in the year, it's likely that the volume of bankruptcies will continue climbing through the remainder of 2009, predicted Filer and local bankruptcy lawyers. That's partly because a recovery in the job market - a major influence on the pace of bankruptcy filings - tends to lag a rebound in the economy.

In Hampton Roads, the number of consumers using a Chapter 7 bankruptcy, which enables individuals to liquidate most of their debt, jumped 31 percent in the first quarter to 1,134, according to court data.

Meanwhile, the number using a Chapter 13 filing rose 11 percent to 625. A Chapter 13 bankruptcy, which allows individuals to devise a plan for repaying at least part of what they owe, is often used by individuals hoping to hold onto their home.

Nationwide, the number of personal bankruptcies filed during the first quarter rose 30 percent from the year-earlier period to 308,530, according to the American Bankruptcy Institute.

The numbers of filings in Hampton Roads and nationwide have not yet approached the record levels of 2005 when Congress imposed tougher standards, especially for users of Chapter 7 bankruptcy. New requirements spurred many individuals to file before the changes took effect in October 2005.

Businesses, too, are resorting to bankruptcy court as the economy loses steam. In Hampton Roads, the number that filed during the January-through-March quarter jumped 47 percent from the year-earlier period to 53, partly because of a tougher environment for small retailers, bankruptcy lawyers said.

Before turning to bankruptcy, some retailers have tried to negotiate with their landlords for a break on the rent, Roussos said. Their message to mall owners, he said, is, "If you don't reduce the rent, you'll have a vacant space."

It doesn't always work. More cash-strapped businesses are choosing to liquidate in Chapter 7 rather than trying to restructure their debts under a Chapter 11 bankruptcy and continue operating. That's partly because the administrative fees are significant and financing for a business in Chapter 11 is scarce, Roussos said.

Pedigo said one question he routinely gets from retailers pursuing a bankruptcy, is, "When can I close my doors?"

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com