One out of every 150 Monterey County residents has filed bankruptcy. For many, this last resort has become the best resort to get out from under crushing debt.
Thursday, April 28, 2011
Bankruptcy court in Salinas is a decidedly unceremonious place, with none of the customary metal detectors or security fanfare normally found in a federal courthouse. The courtroom, located in the Quadrangle Building on South Main Street, offers no indication from the outside that it’s federal space. The windowless room is bedecked with paintings depicting slices of life in the valley, harvest crews cutting lettuce or planes spraying verdant fields.
But even for its informal nature, the courtroom is tense. Debtors who have filed for bankruptcy appear unsure whether to dress up or down, mixing casual attire with a pair of heels or a button-down shirt. The room is hushed but for the chatter of familiar attorneys sharing new bankruptcy statistics, or those who advise their clients in whispers about what to say when they are called up to the stand by the bankruptcy trustee.
Marc Del Piero, one of three Chapter 7 trustees assigned to Monterey County residents, is disarmingly warm as nervous debtors are called to the stand – which is more of a conference table, where they face each other in large swivel chairs. In Chapter 7, also called liquidation, trustees take possession of the filer’s assets, sell those assets off (sometimes for far less than they’re worth) and distribute the cash among unpaid creditors.
Del Piero keeps the dialogue personable, though hard financials and probing questions about truthfulness while debtors are under oath dominate the conversation. “You could throw a rock from where you grew up to where I grew up,” he tells one Pajaro man. To a struggling mechanic with a collection of old Studebakers that don’t have enough equity to make them worth liquidating, “I just thought of an old Johnny Cash song about an old Cadillac,” Del Piero says. His assistant (also his sister-in-law) Lynn Tomlinson passes out chocolates from a Ziploc baggie to those debtors who appear on the brink of tears.
“It’s the bottom, when they’re in front of me. They perceive this as the worst,” Del Piero says. “In truth, it’s the beginning of the rest of their lives. The opportunity to have their financial obligations absolved is the opportunity to restore hope to people who have lost all hope.”
That people are still losing financial hope more than three years after the recession struck in late 2007 shows lingering effects on the local economy. The National Bureau of Economic Research announced the recession ended in June 2009, when economists determined economic activity had hit its trough. At that time, unemployment in Monterey County was 9.8 percent.
A year later, it had swelled to 10.3 percent.
“People are struggling with being able to hold on, exhausting their savings and having unemployment benefits running out,” says Dr. Marylou Shockley, chair of the business school at California State University Monterey Bay. Coupled with “the fact that it’s very difficult to get a refinance on their homes,” economic recovery is happening slowly in the area, if at all.
That the effects of the recession have gone on for so long means even some people with savings and what they view as smart financial planning are struggling to make ends meet. “That’s the tragedy of what’s going on,” Del Piero says.
After Shannon and Steve couldn’t find a buyer for their Seaside home in late 2007, they declared bankruptcy in 2008 to stay up to date on mortgage payments, planning to wait out the recession. This month, they received foreclosure notification after the bank denied a modification to lower their monthly payments on their second mortgage. (Bankruptcy filings are public record, but the Weekly agreed to use only first names for some who shared their stories.)
The couple shed some $60,000 of credit card debt in their Chapter 13 bankruptcy, which allows debtors to pay back part of what they owe to keep some property. They used that credit card for a major addition to the house they bought for $300,000 in 2003. Steve, a carpenter, spent weekends adding a second floor and backyard, doing what he says is $170,000 worth of labor himself. They planned to sell the house, hoping to make $300,000 for themselves and their adopted infant daughter. The adoption cost them $18,000 – and despite their financial plight, they hope to start the process anew this year to adopt a second child.
But even bankruptcy didn’t save their house, despite what they describe as conservative spending habits. “With the equity we pulled out, we didn’t buy a Hummer. We adopted a baby,” says Steve, 31. “We bought a home that we could comfortably afford. Our mistake was the addition, but we didn’t know it was a mistake at the time.”
“IF IT’S GOOD ENOUGH FOR PG&E, MACY’S, UNITED AIRLINES, IT’S GOOD ENOUGH FOR YOU. WHEN PG&E FILES BANKRUPTCY, 12 WHITE MEN DON’T SIT AROUND THE TABLE AND WEEP.”
Bankruptcy can provide a fresh start, and Chapter 13 can help homeowners keep their homes, but it doesn’t always work out. School loans, which are easily six figures, can’t be discharged. Some people, referred to as “frequent filers,” return every eight years (as often as they’re allowed) to file.
Bankruptcies also offer a chance to recover from medical debt or chronic underemployment. Hospitality, real estate and construction have been hit particularly hard with sustained job shortages. Medical debt and job loss used to be the primary drivers of bankruptcies, say attorneys in Salinas and Monterey. Today, it’s foreclosures.
It used to be a source of shame, but now bankruptcies have become a reality for many – from contstruction workers to physicians – looking to get out from under unimaginable debt and make a fresh start.
“It’s just everybody,” says Audrey Barris, a Chapter 7 trustee for the Northern District of California, which includes Monterey County. “That’s what’s so scary.”
Half of the county’s construction workers have lost their jobs entirely since 2007. There’s also significant underemployment, according to Ron Chesshire, president of the Monterey-Santa Cruz Building and Construction Trades Councils. “A lot of people are not getting in full weeks,” he says. “[The recession] didn’t hit us right away because of projects in progress, but we’ve had tremendous downturn.”
Bob, a general contractor who used to hire about five employees per job, watched his annual income fall from $100,000 to $30,000 in 2008. Then, after an oral surgery in 2009 caused a nerve injury and led to an additional surgery and litigation, he found himself with $180,000 in debt and not enough work to cover his bills.
With his income down by two-thirds, Bob says he tried a half dozen times to get a loan modification, each time hiring an accountant and compiling the necessary paperwork, like tax returns, bank statements and a letter of hardship. Each time, the lender, Homecomings Financial, was unresponsive. Finally, in the “11th hour,” he hired a loan modification company and received a modification the day before the sale date. His bankruptcy meant he didn’t have to pay a second mortgage with Washington Mutual, allowing him to keep his south Salinas house.
For homeowners trying to keep their homes, Chapter 13 is a more expensive bankruptcy option through which they pay back part of what they owe over a three – to five-year period. Battling with banks and maneuvering to help homeowners keep their homes is a big part of the bankruptcy business today.
Banks are beginning to respond to dogged attorneys, who say stripping liens and second mortgages is a fast-growing need among clients. “That’s bread and butter these days for practitioners,” says Jim Lauderdale, who served as a federal bankruptcy trustee in Monterey County from 1978-83, and has practiced bankruptcy law in Monterey for 35 years.
If business is good for anyone these days, it’s bankruptcy attorneys. Straightforward liquidation bankruptcies cost about $2,000, and it’s a volume business. “Clients are more like commodities in bankruptcy [than other law]. Our firm is a lot like McDonald’s. They come in, they buy a bankruptcy, they leave with a bankruptcy,” says Sam Maverick, of the Rodney M. Kleman law firm in Salinas.
Bankruptcies had been steadily climbing until 2005 (growing fivefold nationally since 1980), when The Bankruptcy Abuse Prevention and Consumer Protection Act took effect, making it harder for asset-holders to file for Chapter 7, or liquidation. From 2005 to 2006, the number of bankruptcies in Northern California fell by 62 percent as new requirements – like a debtor education class, which costs about $100 – took effect.
But since the recession began, filings have been steadily rising again. The Department of Justice hired an additional trustee in 2008 to cover a growing workload in the San Jose district, which includes Monterey County.
Bankruptcies in the county doubled from 2007 to 2009, and though the data isn’t in yet for 2010, it’s “much higher,” says Eliza Ng, a statistician for the Northern District of California Bankruptcy Court. About one in every 150 people in the county filed bankruptcy last year.
Look down your block. There’s a good chance one of your neighbors has filed.
Monterey County’s unemployment rate is higher than California’s average, which is higher than the national average. Unemployment reached 16.5 percent in March, compared to 12.6 percent in the state and 8.8 percent for the country. Unemployment in the county has nearly doubled since 2005, when the annual average rate was 7 percent; last year, it was 13 percent.
Other economic indicators look less than rosy, too. From 2007 to 2010, the number of households receiving food stamps, called CalFresh, rose by 90 percent. Eleven percent of county residents lived below the poverty line (currently $22,350 for a family of four) in 2006; last year, it was 18 percent.
Nearly 2,000 properties in Monterey County foreclosed in 2010, a 95 percent increase over pre-reccession numbers. Since the recession began, nearly 10,000 county properties have reverted to banks.
“I think we’re still going to see some more foreclosures in this county,” says Mary Zeeb, county treasurer. And considering the county’s unemployment rate is consistently higher than the state average, seasonal labor and a new job shortage, she has reson to think so. “I think it might take us a little bit longer to recover than anybody else.”
For the first time in at least 30 years, property values are declining: In 2009, total property value in the county dropped by 3 percent, and in 2010 by more than 4 percent. As the county and cities face budget shortfalls, property tax revenues – which comprise roughly 70 percent of the county’s discretionary spending – are projected to keep dwindling, bottoming out in 2012-13. Since 2008, the county has lost $18 million in property taxes.
“For a 10-year period, when property taxes were averaging 8 percent increases countywide, some cities were getting double-digit increases in property taxes. They were becoming accustomed to getting more revenue. That all came to a screeching halt three years ago,” says Steve Vagnini, the county assessor.
If there’s any silver lining, it’s a better tax collection rate. Foreclosures are actually good for property tax collection, says Zeeb. “That sounds a little bit ruthless, but our delinquency rates are actually going down as we see the banks taking over properties,” Zeeb says, adding the 1 percent improvement this year is “a big deal.” Yet even with an improved collection, sunken property values mean $14.5 million fewer dollars coming in.
Back in court, there’s little to indicate conditions are improving. When Barris asks debtors about what changed since they filed paperwork, she often finds that in addition to a mountain of debt, they’ve also lost their jobs. “Most of the time, I’m still hearing, ‘I got laid off,’” Barris says, “I’ll know things are getting better when I hear, ‘I got a job.’”
For one Salinas attorney, job scarcity actually helped fast track her career. When there weren’t many openings for young attorneys, Magnolia Zarraga, 32, opened her own firm in 2010. A Salinas native and graduate of CSU-Monterey Bay, Zarraga also practices immigration and family law, but has found bankruptcy to be surprisingly rewarding. “You truly are helping people to move forward,” she says.
Zarraga takes on about three pro bono cases a year, and is partnering with Legal Services for Seniors to establish a legal clinic for seniors who need to declare bankruptcy – a growing and underserved population. Lauderdale confirms that geriatric bankruptcies, which were “a rarity in my early years,” are a growing trend.
“It used to be loss of job or medical debt were the big reasons [for bankruptcy],” Zarraga says. “Now the majority of cases I’m seeing are foreclosures.”
Many people put off bankruptcy for as long as possible, dipping into retirement funds, trying to forestall shame or stigma. “It’s clearly a dignity issue,” Lauderdale says. “There are those that overspent. There are those who have a very, very bad relationship to money. At some level, I think that a bankruptcy is the best thing they can do, only because then they won’t have access to credit.”
Bob, who barely kept his house and wiped out $180,000 of debt, says: “At first I felt guilty, because it’s out of my character. I like to pay my bills.” But now that he’s debt-free and his workload is still just a trickle, the $5,000 he spent on filing seems like a good bargain. “It was one of the best business maneuvers I ever made.”
Carlos filed bankruptcy this month, three years after defaulting on his East Salinas house. As a car salesman for Ford, his commission-based income fell by more than half in 2008 to $30,000. “I wasn’t making enough money to pay the mortgage,” he says. His parents, sister, girlfriend and newborn daughter all lived in the home he bought for $739,000 in 2006, when business was good – and when stated-income loans, which didn’t require applicants like Carlos, then 21, to prove they made enough money to afford a huge mortgage, flowed like water.
But still saddled with debt obligations, “I was depending on my credit cards,” Carlos says. To recover the $45,000 he owed, the credit card company began garnishing wages from his new job with Verizon. With 30 percent being withdrawn from each paycheck, Carlos went bankrupt. “I had no other choice.”
The only glamorous part of a federal bankruptcy trustee’s job is the detective work that goes into locating assets and mining out any perceptible fraud. Del Piero recalls a case of a mid-life crisis that put a man into debt for buying houses in Hawaii, Las Vegas and Tahoe, plus a new car. “To this day, we don’t know where the Ferrari went. Neither does the DMV.”
Barris questions one debtor at length about a sailboat he claims as his residence in Moss Landing Harbor. “How many meals do you eat on the boat?” she asks. “Do you keep your clothes on the boat, or the apartment?” If she decides it’s just a leisure boat, Barris can take possession. As of this writing, the sailboat matter was still unresolved.
Federal bankruptcy trustees are “part judge, part investigator and part advocate,” says Del Piero.
It took Del Piero a month to review the Chapter 7 petition of Monterey dermatologist Bob Keller and his wife, Suzanne, going through calculations on the value of several different businesses – one of which had gone bankrupt, forcing him into personal bankruptcy – and other assets, including a boat. Keller, a specialist in anti-aging and cosmetic procedures including liposuction and Botox, still runs Dr. Keller Solutions, though his once prestigious Keller Medical Institute closed down. With investments in several companies, including Monterey Urgent Care and Keller Protective Institute, Del Piero thought there were too many assets to qualify for Chapter 7, and instead proposed Chapter 13 at a hearing in March.
The matter is still pending in court.
“We just got caught in the credit crunch,” Keller says. After investing hundreds of thousands of dollars in lasers and medical equipment, the housing market collapsed – and people stopped spending money on cosmetic procedures.
Keller says he cut back from 15 employees to one. “But still, the numbers just don’t work out,” he says.
He knows eight other local doctors who declared bankruptcy last year. Medical debt can drive patients to the bring of economic disaster, but the system for doctors can be equally “devastating,” Keller says.
Del Piero tells one lawyer whose client’s wages have been garnished even after he filed the bankruptcy paperwork – which is supposed to put an immediate stop to garnishment – to call the creditor and “tell them what they’ve done violates the law. Shake them down so he can get his money back.”
Barris and Del Piero also reassure debtors, recommend food stamps to some, and wish all good luck. It’s not uncommon for people to cry during a hearing, which generally lasts only five to 10 minutes.
Filing bankruptcy tends to damage people’s dignity, says Lauderdale, but it shouldn’t. “If it’s good enough for PG&E, Macy’s, United Airlines, it’s good enough for you. When PG&E files bankruptcy, 12 white men don’t sit around the table and weep,” he says.
Once trustees take possession of assets, they begin the process of cashing them in to disperse among creditors, starting with the IRS. They’ll hold auctions or post the stuff on Craigslist and eBay.
At one auction in February, they liquidated what they hoped was $50,000 in assets; they made less than $30,000 selling manufacturing equipment.
Most creditors who are shorted are national credit cards, but some are local lenders or landlords who may also be struggling. One expectant landlord who appears at court as a creditor lingers after a hearing. Del Piero tells him not to expect to get back what his tenant, the Studebaker collector, owes: “There’s very little here.”
Shannon and Steve are planning to move away from the area as soon as she finishes nursing school next year, probably to Sacramento or thereabouts. “It’s just too expensive to stay here,” Shannon says.
“We put our life savings, everything into this house,” she says. “But now it’s become our enemy.”
Their goal is still to buy another home, once their credit rating recovers from the bankruptcy. “I’m not afraid of the long-term goal. We just have to start over again,” Shannon says. “At least we’re young.”