As layoffs rise and home values drop, more turn to Chapter 7

January 28th, 2009 by Mike Hinshaw

As thousands of recession-fueled layoffs and job losses clamor for headline space, more homeowners faced with falling values are opting for Chapter 7 protection.

Although few would argue that workers (and their decreased spending power) benefit when hard-strapped businesses close their doors, others believe the nation will be better served by letting marginal companies jump off the Darwinian cliff. Regardless of the various opinions, it’s tough to argue with the numbers that are emerging.

Citing a new report, Associated Press economics writer Jeannine Aversa says that a “new survey by the National Association for Business Economics depicts the worst business conditions in the U.S. since the report’s inception in 1982.” In a Jan. 26 article carried by several papers (here’s one), Aversa says that 39 “percent of NABE’s forecasters predicted job reductions through attrition or ‘significant’ layoffs over the next six months, up from 32 percent in the previous survey in October. Around 45 percent in the current survey anticipated no change in hiring plans, while roughly 17 percent thought hiring would increase.”

Calling the recession a “job killer” that experts believe will continue into 2009, she writes: “The economy lost 2.6 million jobs last year, the most since 1945. The unemployment rate jumped to 7.2 percent in December, the highest in 16 years, and is expected to keep climbing.”

Companies showing up in the latest round of layoffs announced Jan. 26 ranged from presumed leaders to those widely known to be in trouble. Sprint Nextel, recognized as the nation’s third-largest wireless carrier, announced cuts of 8,000 jobs (as well as severe cutbacks for remaining workers) while construction-equipment giant Caterpillar says it’s letting go of 20,000 employees.

Pharmaceutical titan Pfizer Inc. also is whacking 8,000 jobs–even though, as Aversa notes, its plan to buy competitor drugmaker Wyeth in a $68 billion deal is going forward, full-steam ahead. Top-ranked home improvement retailer HomeDepot is jettisoning 7,000 jobs, and the bailout-linked General Motors Corp. says it’s cutting 2,000 jobs at plants in Michigan and Ohio, following temporary shutdowns in January of plants across North America.

Quoted in an Indiana newspaper, a Chapter 7 Bankruptcy Court Trustee for the Hammond federal court says the increases in personal bankruptcy filings in that state are in “direct correlation to how bad the economy is, real estate market is and about jobs in general.

“It’s like a log jam broke lose, and now it’s steamrolling,” said Kenneth Manning.

He goes on to compare current Chapter 7 filers with those from previous years. Manning, also an attorney, is quoted as saying that in years past, most who turned to Chapter 7 were “plain stupid, irresponsible or had large uninsured medical costs.”

But now, he says, “People filing Chapter 7 now are those people who lost their jobs and those who were making a $80,000 gross salary a couple of years [ago] and half that now.”

The article explains that in “a Chapter 7 liquidation bankruptcy, filers must give up their nonexempt assets, but they can walk away from their unsecured debts and start over with a virtual ‘clean slate.’ However, filers must continue to pay secured creditors, including those for home or car loans, if they want to retain those assets.”

The problem, Manning says, is that the job losses, cutbacks and smaller wages for those who do find new jobs comes with strikingly poor timing, when “at the same time, the real estate market has flattened out.”

Manning indicated that during all his 25 years as a bankruptcy court trustee, “2008 was the first time in his career when many filers didn’t try to keep their homes.” The reason, the article summarizes, is because “[h]ome values have dropped so much that filers can’t sell their homes for enough money to pay off their mortgages and still get the amount of their equity out of the sale.”