Bankruptcies Up 35.8% in O.C. to Record High

Bankruptcies in Orange County are being filed at a rate of more than 1,000 a month, a record level that suggests the recession has cut deeper into this wealthy region of Southern California than previously believed.

The county total through April represents a 35.8% increase from the number of bankruptcies filed during the first four months of 1990.

But bankruptcy specialists say the situation is even worse than that figure may indicate because the filings include a nearly 44% increase in the number of Chapter 7 petitions. In Chapter 7, debts typically are so far in excess of assets that there is no attempt to work out a repayment plan, and the petitioner is instead seeking a total liquidation of assets.

Chapter 11 petitions, generally used by businesses seeking protection from creditors while they reorganize their finances, also are on the rise in the county, up 33.6% over the first four months of 1990.

Orange County’s situation is not unique in the Southland, however. In the seven counties under the Central District Bankruptcy Court’s jurisdiction, of which Orange County is one, more than 25,000 personal and business bankruptcies were filed in the first four months of 1991--including an unprecedented one-month total of 6,776 in April. The year-to-date total is up by 33.8% from the year before, and represents roughly one filing for every minute the U.S. Bankruptcy Court Clerk’s Office has been open this year.

The dramatic growth in bankruptcies is further straining what is already the nation’s busiest bankruptcy court. Each year it processes more than double the number of new cases handled by the next-busiest courts nationwide.

Lines at times numbering more than 200 people snake through the ninth floor of the Federal Courthouse in Los Angeles, where cases are filed. Last week, the huge increase prompted Bankruptcy Court Clerk Frank E. Goodroe to post an unprecedented public apology for the long delays, pleading for “patience and understanding during this especially busy time.”

The situation has not become that bad in Orange County, but the small clerk’s office on the fifth floor of the Federal Building in Santa Ana has been handling more than 200 filings a week since Jan. 1.

Although bankruptcy experts expected an increase in local filings with the slowdown in businesses such as aerospace, construction and retail, no one was prepared for the degree to which they have happened.

“The jobs just aren’t there,” said Elise Edgell, a bankruptcy attorney in Orange. “The local economy is greatly affected by real estate and aerospace, and with builders and defense plants laying off, people are getting into trouble.”

Edgell said she also has seen an increase in personal and business bankruptcies by independent truckers, who have been hit by a reduction in the amount of cargo being shipped.

“What you see is a recession in motion. I don’t see much out there now that will cause it to reverse,” said Richard A. Stewart, a bankruptcy specialist in Los Angeles with the accounting firm Grant Thornton.

Chief Bankruptcy Judge Calvin K. Ashland said he has requested four new bankruptcy judges to help hear the unexpected rise in cases. He said bankruptcy activity is likely to remain high even if the Southern California economy recovers, because of the growth in the area.

“Filings are going up because of the recession, but they won’t go down when there’s a recovery by the same amount of that increase,” Ashland said.

The rising number of cases is only part of the problem for the area’s bankruptcy system. Also straining the system is the growing number of complex large cases such as the filing this year by Carter Hawley Hale Stores, the Los Angeles parent of the Broadway department stores. Six employees work full time in the clerk’s office on the Carter Hawley case, and an area the size of two typical Southern California houses has been allocated just for its paperwork.

Experts say one reason for the big increase in Southern California cases is the steep decline the past two years in the area’s once-hot real estate market.

Many business owners borrowing money pledged as collateral property that turned out to beworth much less than expected. And people who borrowed money to bet on real estate investmentsare increasingly seeking refuge in bankruptcy court as the investments go sour.

“Every couple of days we seem to be taking over another building,” said Encino lawyer Barry Chatz, a bankruptcy specialist affiliated with a law firm that often acts as a court-appointed receiver.

The cooling of the area’s economy in general also has contributed to the bankruptcy surge. Stewart, the Grant Thornton partner, says he often finds that deep-seated problems at many companies were masked by increasing sales that came with the boom in Southern California’s economy in the 1980s. Once the economy slowed, sales slowed, and many of those companies began experiencing severe cash-flow problems.

“When sales shrink, problems come out of the woodwork. Before you know it, you are looking at bankruptcy for protection,” Stewart said.

Two other factors include rising health care costs, which often force people with inadequate health insurance coverage into bankruptcy court, and steep credit-card debt. Bankruptcy lawyers say that in a recession, people who lose their jobs often try to juggle their bills using credit cards, hoping to land new jobs soon.

The more than 25,000 filings were made through the Los Angeles-based Central District of the U.S. 9th Circuit. That includes filings made by companies or individuals in Los Angeles, Orange, Ventura, San Bernardino, Riverside, Santa Barbara and San Luis Obispo counties. San Diego and Imperial counties are in a separate district.

Goodroe, the Bankruptcy Court’s chief clerk, said the rate of increase in bankruptcies in the Los Angeles area is rising faster than that of any other area in the 9th Circuit, which includes Arizona, Nevada and the Pacific Northwest. He said, however, that bankruptcies are rising faster in New England and parts of the Northeast, the areas of the country experiencing the worst economic slump.

UCLA economist David Hensley said the increase in the Los Angeles area is in line with his belief that Southern California over the past year has done much worse in the recession than the rest of the state.

Increases came in both business and personal filings. Statistics from the court show Orange County with the highest percentage increase in the Los Angeles area for the first three months, up more than 37% from a year earlier.

L. E. Creel III, a Dallas lawyer who serves as vice chairman of the American Bankruptcy Institute, said federal officials are predicting that the number of bankruptcies could rise to as many as 900,000 this year from 725,000 last year.

He blames the increase in part on tighter bank credit, which has dried up funds that often are needed to keep strapped businesses out of bankruptcy.

“Businesses that fail, or that are about to fail, can’t survive because there’s no money,” Creel said.

Times staff writer John O’Dell contributed to this story.

Bankruptcies in O.C. Soar . . . The number of bankruptcy filings increased 35.8% in the first four months of 1991 from the same period last year. 1990 Total: 2,958 April 1990: 777 1991 Total: 4,019 April 1991: 1,029 * Totals include filings made under Chapters 7, 11 and 13 of the U.S. Bankruptcy Code. Note: April figures are preliminary

. . . And Have Been Rising Since 1985 The number of bankruptcy filings in Orange County swelled 67.2% from 1985 to 1990. 1985: 5,588 1990: 9,342