By Sonia Narang
Mercury News
Article Launched: 07/24/2008 08:51:45 PM PDT
Like many others caught in the housing crisis, Arthur was on the verge of losing his $600,000 home to foreclosure.
This month, nearing $1 million in debt, the veteran real estate agent and San Jose father of three filed for Chapter 13 bankruptcy.
"I have taken upward of 25 phone calls a day from creditors," he said. "When you have 25 people grinding on you day after day, it takes a toll."
Arthur can add himself to the list of 5,941 people who filed for bankruptcy in the San Jose Division of U.S. Bankruptcy Court from July 2007 through June 2008. Of the four Bay Area bankruptcy courts, San Jose's - which oversees Santa Clara, Santa Cruz, San Benito and Monterey counties - posted the highest increase in bankruptcies - 69.7 percent - over the 12 previous months.
Once, job loss, massive medical bills or divorce were the primary reasons people declared bankruptcy. Now, a growing number of filings are related to the housing crisis, say local judges, attorneys and credit counselors.
In Santa Clara County, the most dramatic rise was seen in Chapter 7 cases, which allow people to relieve their debt by liquidating all assets and property. Those filings jumped to 1,046 from January through June this year, up 86 percent compared with the same time last year.
Chapter 13 filings rose to 688, a 44 percent increase from the same time last year. In Chapter 13, debtors set up a plan to pay off creditors over three to five years.
And countywide in the first half of the year, there were 31 Chapter 11 filings, used by businesses striving to stay open - double the number in the same period last year.
For people like Arthur, who asked not to be fully identified, it started with a home he bought 10 years ago for about $450,000. As its value rose to $900,000, he used the equity to start his own business. Along the way, the home's value dropped to $600,000, and business expenses rose. In order make his mortgage payments, Arthur began relying on credit cards - at least 20 - for living expenses.
Recently, he shut down his business and, unable to pay his mounting credit card debt, Arthur opted for bankruptcy.
It's a similar story for a growing number of Bay Area homeowners, but Arthur at least has some hope of keeping his home. Bankruptcy judges say many others are being forced to give theirs up to pay off credit card debt.
"What's different about this new wave is the number of people who are simply walking away from their houses," said the Northern District's Chief Bankruptcy Judge Randall Newsome, who has overseen bankruptcy filings for two decades.
"It's unlike anything I've ever seen in my career."
"People know there's no hope" of holding onto their homes, said San Jose bankruptcy judge Marilyn Morgan. In fact, 90 percent of today's debtors facing foreclosure don't even contest it, she said.
Morgan, in particular, attributes the steep numbers to the wave of subprime loans - loans made to borrowers who don't qualify for the lowest interest rates because of bad credit.
Others agree. "A lot of borrowers who got these loans were told by lenders that house values would go up," said veteran San Jose bankruptcy attorney Ike Shulman. When home values decreased and mortgage payments rose, foreclosures set in.
Others say that's not the only reason for the spike in bankruptcy filings. A change in U.S. bankruptcy legislation in October 2005 tightened requirements for filing. Initially, experts said, that led to a drop in filings nationwide.
But by April 2007, the numbers rose again, partly after lawyers recognized ways to get their clients' cases filed. The creeping housing and credit crisis saw filings snowball.
The local numbers parallel what's happening nationwide.
The American Bankruptcy Institute reported last month that U.S. consumer bankruptcy filings increased 30 percent in the first half of this year compared with the same period a year ago.
But for now, at least, the numbers don't rival what the Bay Area and nation witnessed in the late 1990s, when credit became readily available and more Americans started relying on credit cards. That's when bankruptcy filings soared to record highs. In the San Jose Division, filings exceeded 10,000 in 1998.
While filing for bankruptcy allows people to start fresh and remove the pressure of a large debt, the consequences are harsh. The bankruptcy will remain on a debtor's credit history for a decade, Williams said. And it can take years for bankruptcy filers to build up their credit again. Mortgage experts say it typically takes at least two years of re-established credit to qualify for a home loan.