Bankruptcies Hit All Time High

May 8, 2002
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GRAND RAPIDS — As the cloud of recession hovered over businesses and consumers in 2001, the number of bankruptcy filings reached an all-time high here in West Michigan. Bankruptcy filings were up throughout the United States, and those numbers are reflected in Michigan, as Chapter 11, Chapter 7 and Chapter 13 filings in the Western District hit record-setting numbers.

Through the end of November 2001, the number of bankruptcies filed at U.S. Bankruptcy Court for the Western District of Michigan was 12,108. Michigan's Western District encompasses counties west of Lansing — including Kent and Ottawa — and the entire Upper Peninsula.

The previous high for a single year was 11,401, set in 1998.

"The economy obviously has worsened, so people who are more marginal have gone beyond the margin — especially in cases where one person may have temporarily lost a job or been laid off," Grand Rapids-based bankruptcy attorney Daniel B. Hess Sr. said. "In some cases, it may be downsizing of hours at places that used to provide a lot of overtime.

"Lots of people have been caught without having enough income to meet their obligations. There may have been a temporary stop of income because of a baby or job situation, and when they get back to full income they may be too far behind or built up too much credit card debt in between.

"If they're behind on a house or car, they may have to file Chapter 13. There are a lot of situations like that of people getting caught in a declining situation."

The first time Michigan's Western District eclipsed the 10,000 mark was in 1997 when the total of Chapter 11, Chapter 7 and Chapter 13 filings reached 11,247. The totals have surpassed 10,000 every year since.

"Business is difficult, and most are experiencing cash flow problems," said attorney Robert Wardrop II, who specializes in business reorganizations and workouts. "For workout attorneys it has been a very active year.

"For individuals, consumer debt is too easy to obtain. We all get numerous credit card applications every week and people roll over old credit card debt into new debt. With the economy and layoffs and overtime cutbacks, it puts a big crunch on everyone."

There were more than 13,000 bankruptcies filed in Michigan's Western District by the end of the 2001 calendar year.

"A number of people have lost their jobs," attorney David C. Andersen said. "Others are going from good positions and going to lower-paying positions as a result of job displacement.

"By the time they have found another job, they may be forced to file Chapter 13 because they are way behind on their payments. We're also seeing more Chapter 7 filings because people just don't have the income to pay."

The number of Chapter 11 filings for businesses are up only slightly. That is good news in some ways, but bad news in other ways.

"It's so difficult to be successful in Chapter 11 that most small companies are liquidating or filing Chapter 7," Wardrop said. "It's very difficult to reorganize, and most of these companies are more successful in a sale of the business to a new operating entity.

"The recession has put more pressure on the businesses that were marginal. Many of these businesses could survive in a good economy, but with the downturn it has really increased the number of businesses in trouble. As a result, we've seen an increase of the number of loans the banks are calling. Many of the companies are going into workout or forbearance before filing Chapter 7 or Chapter 11."

Many businesses in West Michigan have weathered the storm, but the ripple effect of recession has resulted in downsizing and layoffs, affecting both salaried and hourly employees. Non-salaried employees who haven't lost their jobs may have had overtime hours reduced or eliminated

"The economy is taking a beating in some sectors, and we're seeing more people with marginal employment and seeing overtime cuts all around," Andersen said. "People live on a budget based on what they make with overtime hours figured in. When they cut off their overtime, they can't pay their monthly expenses.

"It's generally not a good way to plan. You shouldn't plan a budget based on overtime."

Since the consolidation of the banking industry, there is less locally based ownership of lending institutions than in the past, and many of the relationships that have built up over the years come down to a black and red basis.

"There certainly is a significant increase in what might be called troubled loans for banks or lenders," Wardrop said. "I see a continued increase of the number of problem loans for banks or companies considering problem workouts or forbearance. These companies will either be closing or selling out to a larger company."

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