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Leonard Deming talks about bankruptcy with the Telegraph. Visit www.nashuatelegraph.com to watch a video about bankruptcy.
Bankruptcy cases tell many tales
If you find yourself peering over the brink of bankruptcy, it might comfort you to know that some of the bigger names in New England real estate and business have been there and back, during the last big recession.
The Tamposi family of Nashua, Boston’s biggest landlord, and the current mayor of Nashua are among those who went through bankruptcy in the early 1990s, along with several thousand other individuals and households around the state.
While there are many parallels between the recession of the early 1990s and the Great Recession, which recently ended, bankruptcy lawyers say this recent one seems worse than the first.
“It didn’t seem quite as bleak (in the early 1990s) as it does right now,” said attorney Lawrence Sumski, a Chapter 13 bankruptcy trustee since 1988. “Despite the banks failing, the general economy back then – for people who had a job – wasn’t as bad as it is now.”
Bankruptcy filings have been swelling steadily in New Hampshire since federal bankruptcy laws were reformed in 2006. While filings rose faster in the early 1990s, the state’s per-capita bankruptcy rate last year exceeded that of 1991, the peak year for the previous recession. The Great Recession has brought more bankruptcy filings in New Hampshire, both in raw totals and on a per capita basis.
Technically, the Great Recession began in December 2007 and ended in June 2009.
Bankruptcies in New Hampshire soared from 835 in 1989 to 2,549 in 1990 and then 3,848 in 1991, tapering only slightly the next year, a rate of around 3.47 per 1,000 persons. There were 5,122 filings in New Hampshire last year, for a rate of 3.87 filings for every 1,000 persons, and 2010’s filings topped 2009’s for eight of the first 10 months of the year.
(In 1990, the federal census put the state’s population at 1,109,252. New Hampshire’s population hit 1,324,575 in 2009, according to Census Bureau estimates.)
Nationwide, bankruptcy filings for fiscal year 2010 (the 12-month period ending Sept. 30) were nearly 14 percent higher than the previous fiscal year. Business bankruptcies declined slightly, for the first time since 2006, but personal bankruptcies are hitting all-time highs.
New Hampshire ranked 30th in per-capita bankruptcy filings among the 50 states and four organized U.S. territories for the fiscal year ending in June, with a bankruptcy rate of 4.28 per 1,000 persons, according to federal court statistics. Against other New England states, only Rhode Island (ranked 22nd nationally) had a higher rate, however.
Then and now
In good times and bad, there are always far more individual, consumer bankruptcies than commercial bankruptcies, for the simple reason that there are far more people than businesses.
Still, bankruptcy lawyers around New Hampshire agreed that, subjectively speaking at least, the recession of the early 1990s seemed to hit businesses harder, while the recent recession hit individuals, families and especially homeowners. Both recessions saw housing bubbles burst, and home foreclosures drove many to bankruptcy, then and now, lawyers said. Foreclosures remain a major force behind bankruptcies, but medical bills and unemployment are also common catalysts, lawyers said.
The recent recession and financial crisis saw the collapse of a housing and mortgage lending bubble, and the ensuing fiscal crisis plunged the country deeper in debt, while tightening lending to businesses and consumers. The movers and shakers seem to be making out all right this time, while everyone else suffers.
“These problems seem more long term,” Sumski said. “It’s just a perfect storm of badness.”
Housing prices have fallen of late, much as they did in the 1990s, but foreclosures have also soared in recent years and have become the single largest factor pushing people into bankruptcy, lawyers said.
“The typical case we see, something that’s very prevalent right now, is where somebody’s very behind on their mortgage,” Sumski said.
“You’re getting individuals who can’t make their mortgages and the banks are foreclosing on them,” Chapter 7 bankruptcy trustee Victor Dahar said. “People are losing their houses; they can’t pay their bills.”
While bankruptcy can help people save their homes, it won’t help those who simply can’t make their mortgage payments, lawyers said. Mortgage loans can’t be discharged through bankruptcy, and if there’s no way to pay, foreclosure is probably inevitable.
“You have to be able to do more than want it; you have to be able to show that it’s feasible,” Sumski said.
Bankruptcy can help those who have fallen behind to catch up, however. Past-due payments can be spread out through a long-term payment plan in Chapter 13 cases, and second mortgages can even be “stripped off” and discharged as unsecured debt, lawyers said. Bankruptcy courts sometimes offer homeowners better terms than mortgage modifications through the lenders, where the arrears are often just added to the loan, Sumski said.
“A lot of these modifications don’t really help people as much as they think they would. They just sort of delay the inevitable and cost more in the long run,” Sumski said.
A disaster for businesses
The early 1990s also saw the collapse of a housing bubble, and the banking crisis meant that credit was tight all over, but it was especially bad for businesses. When the FDIC took over local banks, it began calling back loans. Bankruptcies rose sharply in New Hampshire, from 835 in 1988 to 3,848 in 1991, a jump of 360 percent.
“The acceleration of bankruptcies was just phenomenal,” Nashua bankruptcy lawyer Leonard Deming said. “You had a lot of movers and shakers … who lost their shirt.”
The early 1990s recession and banking crisis was a disaster for businesses that had gotten comfortable with easy, unsecured credit, said Daniel Marr, a Nashua attorney who represents creditors in bankruptcy court.
“You had businesses for the longest time that didn’t really understand what a demand note meant,” Marr said. When the FDIC took over banks and began calling back loans, it forced many firms into bankruptcy.
“You no longer had that relationship with your local bank. … It was a lot more colder and impersonal as a result,” Marr said. “A lot of these companies that were marginally doing okay, when they had to call on that line of credit, that was the catalyst that put them into bankruptcy.”
Such was the case for Nashua Mayor Donnalee Lozeau. She and her husband, David, filed for bankruptcy Feb. 2, 1992, after the collapse of 11 New Hampshire banks, including the one that had loaned them $1 million to start their business, City Streets Restaurant.
“In the fall of that year, the FDIC stepped in and, even though we were current with our payments, demanded either immediate full payment of the $700,000 balance of our loan or the keys to our restaurant,” Lozeau wrote in 2007. “It would be just like a homeowner who had their mortgage called. Who could pay their mortgage in full on demand today?”
“We didn’t have the money, but we did have 40 employees and were fully booked with holiday parties through the busy Christmas season,” she added. “Filing for bankruptcy was the only way we could stop the clock long enough to fulfill our commitment to our customers and keep our staff employed through the end of the year.”
In the end, the Small Business Administration, which had guaranteed their loan, got the building, other creditors got paid, and the Lozeaus were able to keep their home, she wrote, describing it as a “painful time.”
Tamposi is one of the biggest names in Nashua real estate, but in 1991, the six children of Samuel Tamposi all filed for Chapter 11 bankruptcy, along with the Tamposi Family Real Estate Investments company, after several banks sued to collect on unsecured loans.
The Tamposis were forced into bankruptcy as the real estate market collapsed, according to news accounts of the time. Their loan payments exceeded income, and debts exceeded their assets, according to news accounts of the time.
Samuel Tamposi Jr. declined to be interviewed about the experience, but the family’s fortunes have since recovered, documents in an ongoing family legal dispute reveal. His father created a series of trusts before he died, while the children were still in bankruptcy, and left his sons Stephen and Samuel Jr. to manage his holdings. The trusts’ net worth grew from around $21 million in 1995 to more than $146 million by the end of 2008, lawyers wrote.
The Tamposis weren’t the only real estate players caught short in 1991. Boston’s biggest landlord, Harold Brown, filed what remains Massachusetts’ biggest-ever individual bankruptcy that year, after banks sued to collect on loans for which he’d fallen in arrears, the Boston Globe reported.
Brown’s worth had been estimated at $500 million before bankruptcy, Boston Magazine reported, and he emerged with about $10 million. By 2006, when the magazine profiled him, Brown, then 81, was again one of the city’s largest landlords. Brown told the Wall Street Journal that bankruptcy had made him more cautious about his debt-to-property ratio, and thus better able to weather the current downturn in real estate.
By most accounts, the 1992 bankruptcy of Wang Laboratories was a result of the company’s own business strategies and had nothing to do with the banking crisis or recession. As one of the bigger dominos, however, Wang’s fall was a blow to the region’s morale and economy. The company emerged from bankruptcy two years later and was eventually sold.
The biggest difference between the two recessions, so far as bankruptcies go, is the law itself.
Current federal bankruptcy law was adopted in 1978, and Congress has amended bankruptcy law several times, most notably in 2005, with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA for short), designed to make bankruptcy more painful for most people.
“It made it tougher for people to file. It made it more expensive for people to file.… That was the goal,” said Robert Lawless, a University of Illinois law professor who specializes in bankruptcy and consumer credit and business law.
The impending changes to the federal bankruptcy law resulted in a sharp spike in bankruptcies before it took effect in 2006.
Some lawyers argue bankruptcy was better before BAPCPA, including Nashua attorney Deming, who has been representing debtors in bankruptcy court for more than 25 years. Deming said the changes gave creditors too much clout, and make it harder for debtors to get back on their financial feet. More debtors now are forced into Chapter 13, rather than Chapter 7, and fewer debts can be forgiven, Deming said. The entire process has become more expensive, and Deming said he believes that forcing more people to pay back more debt may be good for creditors, but actually harms the economy as a whole.
“It’s a penny wise, pound foolish approach,” Deming said of the move to make bankruptcy more difficult for debtors. “You’re taking a lot of money out of the economy that would be used for goods and services.”
The 2005 bankruptcy law may also have helped to inflate the housing bubble, Deming said. Congress considered giving bankruptcy judges the authority to reduce interest rates or otherwise modify mortgages, but banks lobbied hard against it and won.
Home mortgages are one of the few types of privately held consumer debt that can’t be discharged by bankruptcy, and since bankruptcy judges have little leeway to alter the loans, lenders also have no incentive to negotiate with borrowers who fall behind.
That level of security made housing loans a highly attractive investment, all the more so once the loans were bundling them up into bonds or other financial products, a practice called “securitization.” Investors poured money into the market, lenders loaned, borrowers bought and values soared … until it all came crashing down. Now, there has again been talk of giving bankruptcy judges more power to modify mortgages, but Congress has yet to do so.
Securitization of consumer debt existed before the 1990s, but started to become more common during the 1990s, Lawless said. By 2007, it had become the norm.
“That (the securities market) really was the primary reason there was such a huge increase in consumer credit during the 1990s.” Lawless said. “This stuff has been around for a long time. The volume has changed.”
Securitization has also created headaches for borrowers trying to catch up on a mortgage, Deming said. In about half of all his cases, he said, he has trouble establishing who actually owns the lien on a client’s home.
“When we filed 20, 30 years ago, we pretty much knew who held the mortgage. Now, you don’t know who’s got it, and as soon as you file (for bankruptcy), they automatically transfer it to someone else,” Deming said.
Sumski agreed, saying, “Now the records are so much more convoluted, and they’re traded back and forth like socks.”
The last resort
Bankruptcy is not so much a harbinger as it is a footprint of recession, bankruptcy lawyers say; because it is seen as a last resort, bankruptcies tend to start rising well after a recession is under way.
Some experts argue bankruptcies actually have little to do with hard times.
“Contrary to popular belief, bankruptcy filings aren’t cyclical with recessions necessarily,” Lawless said. “Like many complex things, there’s more than one explanation.”
The single biggest factor behind bankruptcy filings in the United States and elsewhere in the world, Lawless argues, is the availability of consumer credit. People wind up in bankruptcy because they go too deeply into debt. In the long run, Lawless said, the easier it is for people to rack up debt, the more bankruptcies will rise.
“It is almost a truism, but it’s a truism that the U.S. credit industry denied for many years,” Lawless said. Creditors tend to see bankruptcies as the result of irresponsible spending, not irresponsible lending, he noted.
Deming agrees that creditors should share the blame, if there is any, for bankruptcies. Recalling that banks were mailing out pre-approved credit cards “like potato chips” during the 1990s, and that mortgage brokers encouraged borrowers to reach beyond their means throughout the 2000s, he asked, “Really, shouldn’t creditors be held accountable? Shouldn’t they watch who they are giving credit cards to?”
On the flip side, Lawless said, tightening credit markets – such as has happened in recent years – also pushes bankruptcies higher in the short term, as people and businesses can no longer borrow their way out of (or at least away from) fiscal ruination.
Bankruptcy has little bearing on the upper or lowest economic classes, Lawless said. The wealthy, by definition, can’t file for bankruptcy, and the poor have too little (to gain or lose) to make the process worthwhile.
“Bankruptcy is primarily a middle class phenomenon. You need income or assets to protect before bankruptcy makes any sense for you,” Lawless said. “If you truly don’t have anything, as a legal proceeding, bankruptcy doesn’t really make sense.”
Just because someone doesn’t file bankruptcy doesn’t mean they aren’t hurting, however, Lawless said.
Writing on Credit Slips, a blog devoted to financial topics, Valparaiso School of Law Professor Alan White argues that individual bankruptcy filings nationwide haven’t been rising nearly as fast as one might expect of late. Consumer debt and defaults (most notably home foreclosures) are at all-time highs, White wrote, but bankruptcy filings are not. White calls the trend “one of the inscrutable mysteries of the financial crisis.”
“Somehow, historically unprecedented levels of consumer debt and loan defaults have not produced the surge in bankruptcy filings one would expect,” White wrote, adding later, “bankruptcy is clearly not playing a central part in de-leveraging the American homeowner.”
White suggests that people may be turning first to what he calls the “shadow consumer bankruptcy system” of private consumer debt counseling and management companies.
Sumski said he expects bankruptcy fillings will continue to rise even as the economy improves, since the recession has pushed more people toward insolvency, but people tend to forestall filing as long as possible.
“Most people don’t tend to file until the situation becomes pretty bleak,” Sumski said. In fact, he added, waiting too long is a common mistake. “The biggest mistake is waiting too long to speak to a lawyer … The earlier you get some professional help, the better.”
“The idea of bankruptcy court is to basically bend over backward to try to help people through a temporary situation,” Sumski said. “There’s always bankruptcy” in good times and bad, he said. “We’ll always have bankruptcy.”
Andrew Wolfe can be reached at 594-6410 or firstname.lastname@example.org.