Bankruptcy filings soared in Colorado in 2009, as consumers and small businesses struggled to find their footing amid the worst recession in decades.
A total of 25,624 bankruptcy cases were filed in U.S. Bankruptcy Court for the District of Colorado during the first 11 months of the year, up nearly 34 percent from the same period in 2008.
That put the state on track to exceed the 25,776 filings made in 2003, during Colorado’s most recent previous economic downturn.
Nationwide, “we’re looking at a million filings this year,” said John Cimino, a partner with Cimino & Benham LLC in Denver, who specializes in consumer bankruptcy.
Business bankruptcies rose at an even faster clip — at 1,274 cases, they were up 51 percent from the same period in 2008 and up nearly 120 percent from 2007. Among them were green homebuilder McStain Enterprises, jeweler Shane Co. and century-old Denver printing company National Hirschfeld.
Many struggling small to medium-size businesses hung on through the early part of the year, hoping that stimulus money from the American Recovery and Reinvestment Act of 2009 would improve their situation, said James Mulligan, a partner at Snell & Wilmer LLP who specializes in commercial real estate law. But filings began to rise over the summer as business owners realized that federal stimulus money wouldn’t help much or wouldn’t arrive soon enough, he said.
“You probably would have seen earlier Chapter 11 filings, but for some expectations of stimulus that did not stir the pot like they thought it would, or at least not as early as they thought it would,” Mulligan said.
Filings under Chapter 11, which grants a business protection from creditors while it reorganizes, soared 70 percent during the first 11 months of the year to 182 cases. Many of those companies may never emerge from bankruptcy.
“Most of the business bankruptcies being filed are really controlled liquidations,” said James Burghardt, a managing partner at Moye White LLP in Denver, who specializes in business bankruptcy.
A major use of Chapter 11 bankruptcy today is to conduct what are called “section 363” sales, Burghardt said. Such a sale allows encumbered real estate to be sold “free and clear” of liens and claims, which are instead attached to the sale proceeds. It’s much quicker and easier than selling liened property outside of bankruptcy.
Given the troubled state of the commercial real estate industry, this may mean that Chapter 11 bankruptcy filings will remain high this year, as well.
And filings are only the most visible part of what’s going on, he said. Because a property in foreclosure tends to fetch less, lenders are increasingly willing to grant troubled borrowers additional time to market real estate under their own names.
“The amount of non-bankruptcy workout activity has gone up dramatically this year,” Burghardt said. “Banks have foreclosed on so much real estate, and seeing what bank ownership does to property values, where they can find ways to work with borrowers … they are increasingly willing to do so.”
This year’s total filings are still well below the 43,125 cases filed in 2005, but those numbers were skewed by a major overhaul of bankruptcy laws that went into effect in October 2005. Because the new law made it much tougher for individuals to wipe out their debt, many people filed in 2005 who might otherwise have waited until the following year (and 2006 filings were indeed unusually low — less than 10,000).
Chapter 7 filings, which allow consumers and businesses to wipe out their debts, rose roughly 32 percent, to 21,684. In many sole proprietorships, the owner’s personal assets are heavily invested in the business, so in some cases a personal bankruptcy is a business bankruptcy, too. The court categorizes a filing as business-related if a business name is used in the filing, if the debtor identifies it as a business case or if more than half the debt is business-related.
Chapter 13 filings, which allow an individual to repay creditors over time, haven’t risen as strongly as one might have expected. A primary goal of the 2005 bankruptcy law change was to steer more people into filing under Chapter 13 rather than Chapter 7. Yet Chapter 13 filings, while up nearly 39 percent in the first 11 months of the year, totaled only 3,749, far below the number of filings under Chapter 7.
“I thought there might be more Chapter 13s this year,” Cimino said. “Because with a 13, you can get rid of a second mortgage. … Basically, if you’re upside down on your first mortgage, you can get rid of a second, third and fourth mortgage.”
U.S. lawmakers in 2009 rejected measures that would have allowed bankruptcy judges to order banks to modify mortgages for homeowners in Chapter 13, a practice known as “cram-downs.”
Cimino’s firm, despite a flood of consumer bankruptcy work, found time to sponsor a unique monthly contest this year called “Win a Free Bankruptcy.” The winner of the monthly drawing gets a free Chapter 7 bankruptcy, provided he or she files within 45 days of being selected.
About 60 people entered for the first drawing, which took place on Dec. 15, Cimino said.