Local bankruptcy attorneys say business is booming 

Posted: 1:00 am Mon, February 9, 2009
By Michelle Lore

When John and Jane Doe — two professional, white collar workers with several young children — lost their jobs, they took temporary positions to try to make ends meet. But the pay wasn’t enough and they fell behind on their mortgage and car payments. Finally, faced with losing their home or filing bankruptcy, they chose the latter.

That may not be their real names, but it’s a real situation faced by two of Edina bankruptcy attorney Barbara Nevin’s clients.

“They would have been out on the street with their kids,” said Nevin. “The Chapter 13 was good for them. It gave them time to find work.”

Clients like this make up a large number of those filing bankruptcy these days — and those numbers just keep going up. Nevin said that since Christmas her firm has been fielding several bankruptcy-related calls every day.

“It’s just about all I’ve been doing. We’ve really been swamped,” she said. “And I don’t see things getting better with this economy.”

St. Louis Park bankruptcy attorney Chad Bolinske, who handles corporate and consumer bankruptcies, said the number of Chapter 11 business reorganizations is also increasing.

“[Bankruptcy work] is definitely picking up,” he said. “I think until the housing market stabilizes and until the job market stabilizes, it’s going to stay pretty busy.”

Who’s filing?

The total number of bankruptcies filed in Minnesota last year was 16,473, a 28 percent jump from 2007. The vast majority of those are consumer bankruptcies.

The numbers are rising nationally as well. Data from the National Bankruptcy Research Center show that the total number of consumer bankruptcy filings for 2008 was 1,064,927, nearly a 33 percent jump from the previous year.

So who’s filing all of these consumer bankruptcies?

According to local practitioners, the bulk of them are people caught up in the housing crisis, often because they’ve lost their jobs.

“Once that happens, that tends to cause quite a few bankruptcies,” said St. Paul attorney Mary Jo Jensen-Carter, chair of the Minnesota State Bar Association’s Bankruptcy Section.

Bloomington bankruptcy lawyer Craig Andresen explained that people who are out of work or even those who’ve been able to find new jobs after being unemployed for a period of time often find themselves falling behind on their house payments. Some file bankruptcy to stop the foreclosure and give them time to catch up.

“There are a lot of people calling because of foreclosures and that’s something that wasn’t really present a couple of years ago,” said Andresen. “That is becoming very common.”

Another aspect of the foreclosure crisis that’s causing a spike in bankruptcies is the loss of home equity.

People used to take out home equity loans to pay off credit card bills, Bolinske explained. But now, without their home equity, a lot of people are forced into bankruptcy. “Before they had another way out of it,” he said.

Others filing for bankruptcy include the elderly, the injured, veterans and people with student loans weighing them down.

“Mostly it’s the downtrodden part of society,” said Nevin.

Practitioners agree that the reasons people are filing for bankruptcy these days are pretty compelling.

“People who file now basically have no choice,” said Andresen. “Before this economic crisis began one or two years ago, [it was often] people who had credit card debt that arose over time.”

Cost concerns

Practitioners are so busy right now that some people who need to file bankruptcy may not be able to do so, at least not right away.

“Bankruptcy attorneys are working about as hard [as they can] and their staff is at their limit,” said Andresen. “So there may be a cap on the number of people that can file because there’s not a big enough attorney pipeline to handle the demand.”

In addition, some people who want or need to file bankruptcy may not be doing so simply because they can’t afford it.

Most consumer bankruptcy attorneys charge a flat rate based on the number of hours they estimate it will take them to gather and file the necessary paperwork — from $1,250 to $1,500 for a Chapter 7 and between $2,500 and $3,000 for a Chapter 13.

That cost is a significant increase from several years ago, before the Bankruptcy Abuse and Consumer Protection Act of 2005 mandated that attorneys verify their clients’ incomes and conduct a means test to determine their eligibility. The additional requirements have forced attorneys to spend more time, and therefore charge more money, to file a case.

“Its triple the work for attorneys now,” said Jensen-Carter.

A typhoon of difficulties

As with consumer bankruptcies, the increasing number of corporate bankruptcies is also due in large part to poor economic conditions.

“It’s definitely far busier than it has been in the last few years,” said Minneapolis bankruptcy attorney Robert Kugler. “It’s almost a typhoon of business difficulties as a result of the economy.”

The reasons, Kugler explained, range from unprecedented levels of fraud being discovered in the business community to the more typical financial issues plaguing businesses today — loss of a big contract or client, loss of a lease or loss of customers.

“It’s any number of things,” he said. “It’s kind of turned into a domino effect and we’re seeing it around the country.”

The cost for some of the bigger corporate bankruptcies has skyrocketed, at least in some parts of the country, with firms on the east and west coasts charging as much as $1,100 an hour.

Local practitioners question whether such a fee can be justified.

“To me it seems extraordinarily high,” said Kugler. “You’re not going to see fees in that range in the Midwest now or anytime in the near future.”

Moreover, said Kugler, at that rate, there are only certain categories of cases in which the attorneys can participate. “Your average case just can’t support that kind of an administrative cost. It just kills the case.”

Bolinske said that some cases may justify a high fee, however, because of their complexity. “You tend to get a lot more creditors who are fighting about the bankruptcy,” he pointed out.

In addition, only a limited number of attorneys in the country have the necessary knowledge and skill to handle large scale bankruptcies, Bolinske said. “It’s a lot of money … but those guys have a lot of expertise as well.”

Practitioners pointed out that apparently the courts are finding the fees justifiable as well.

“Courts somewhere are approving fees at that level,” said Kugler.

While they are busier than they have ever been, most bankruptcy practitioners are glad to be doing what they are doing.

“It’s gratifying to help people get through this process,” said Nevin. “Nobody ever complains to us after they file a bankruptcy. They are us
ually very relieved to get it over with.”