Bankruptcy filings make for rising tide

Nancy Dreher can hear a wave building over the horizon. She's expecting a towering swell of paper washing over Minnesota bankruptcy courts this year.

"I've been telling just about everyone I can tell that we're expecting huge increases in filings in the next year," said Dreher, chief judge of the U.S. Bankruptcy Court for the Minnesota District. "We're bracing."

The tide already has been rising.

Nearly 13,800 people filed for Chapter 7 personal bankruptcy in Minnesota in 2008. That represented a 49 percent increase over 2007. For the year, business bankruptcies of all types -- including Chapter 7 liquidations and Chapter 11 reorganizations -- were up by two-thirds last year, to 815 from 491.

December was the problem month for individuals and companies alike, a sign that the economy is worsening. Personal bankruptcies rose 73 percent during the month from a year earlier. And 117 companies filed for bankruptcy, with 54 of them filing for Chapter 11 -- nearly half of the total number filed for all of 2008. However, about half of December's filings are connected to the Chapter 11 bankruptcy filings of two large entities -- Denny Hecker's nationwide rental car business, Advantage Rent a Car; and Petters Group Worldwide, a company owned by Twin Cities businessman Tom Petters, who is awaiting trial on federal charges of investment fraud and money laundering.

The sharp increase in December filings is a worrying sign, local bankruptcy attorneys say.

Normally, lenders try to avoid calling in loans at the end of the year; with retailers, in particular, banks don't want to cut off funding during the busy holiday sales season. "December was unusually active," said Joel Nesset, a Minneapolis bankruptcy attorney. "And I don't see anything that makes me think that the need for bankruptcy relief will lessen in the near future."

But Dreher and bankruptcy lawyers representing debtors and creditors all offer a similar explanation for the year past and what they expect for the one ahead.

Filing costs skyrocketed

Filing for personal bankruptcy costs double to triple what it did three years ago and involves far more paperwork and record-gathering than before the bankruptcy law underwent sweeping changes in 2005.

A filing that three years ago cost $650 or $700 today will run $1,500 to $2,000 or more -- all paid upfront.

"It takes people a while, first of all, to figure out what's happening to them and to figure out how they're going to pay to file," Dreher said.

"People who are filing bankruptcy are not prepared to file all these papers," said Walker, who is based in Minneapolis. "It's an unwieldy law. A lot of people are just struggling to pay the money to file."

Cass Weil, a Minneapolis lawyer who often represents lenders, said the national recession -- entering its 14th month -- has contributed to delays in filings.

"There's usually a lag between the catastrophic event and the bankruptcy filing," he said.

"There's a natural tendency not to want to deal with the problem."

Paradoxically, as incomes drop, the day of reckoning may come sooner, but the ability to cope with bankruptcy may come much later than in the recent past.

New Brighton-based bankruptcy attorney Richard Pearson said the ripple effect of economic misfortunes in a recession also can cause a delayed-reaction series of filings for bankruptcy protection from creditors.

"Construction still seems to be pretty messed up," Pearson said.

Then the consequences are passed along to other industries.

"People aren't buying furniture. So people who sell furniture aren't making money," he said.

In turn, the drivers who truck the furniture from factory to warehouse to houses are the next to suffer.

Meanwhile, bankruptcy courts may struggle to keep pace with filings already in the system and those to be filed in the year ahead.

Warned Walker, whose clients often have to save up to file: "The deluge is coming."