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Bankruptcy Cases Skyrocket as the Economy Plummets

Bill Kousens recalls when Aerowind Corp., an El Cajon manufacturer that supplied the payload sections of Tomahawk missiles, operated round-the-clock.

“For much of the decade from 1982 to 1992, we were running 24 hours a day, seven days a week,” says Kousens.

The firm once employed as many as 125 workers, he says.

But those days are long gone. In the past 18 months, Kousens has laid off 20 workers, shrinking his staff to 12 as sales dwindle to less than half of the $2.5 million achieved in 2008.

In addition to dwindling defense work, a key customer filed for bankruptcy, putting even more pressure on his business.

“We sold off a lot of our equipment to reduce our debt payments from $50,000 a month to $10,000 a month,” said Kousens.

Though the downturn started more than three years ago, Kousens said he’s been dealing with a federal tax bill dating back to 2005.

Kousens’ business had cash flow problems and he got behind on payroll taxes. After making arrangements with the IRS, Aerowind again fell behind.

The IRS threatened to seize the company’s equipment to satisfy the debt, Kousens’ attorney advised him to file for Chapter 11 bankruptcy protection. The filing permits him to repay creditors a percentage of the debt owed while keeping his doors open.

“The gist of it is that we talked to our creditors before we went and filed,” he said of the filing Aug. 28 in U.S. Bankruptcy Court in San Diego. “It looks like reorganization is going to work.”

Aerowind has plenty of company at the federal building. According to data provided by California’s Southern District Bankruptcy Court, which covers San Diego and Imperial counties, for the year ended July 31, filings for the three types of bankruptcy, (Chapters 7, 11 and 13) were up 63 percent over the like 12 months that ended in July 2008.


Protecting Individuals

Chapter 7, the most common filing for protecting individuals, involves liquidation of assets to repay debts. Chapter 13 usually involves repaying debt at a reduced amount over time.

The total filings for those 12 months were 17,716, compared to 10,874 in the prior year.

The decision to file isn’t taken lightly by debtors, who are aware of the damaging consequences to their credit. It could keep them from obtaining credit for seven to 10 years, say attorneys who practice bankruptcy.

“A lot of people don’t have a choice,” says Mike Isaacs, a bankruptcy attorney with the local law firm of Luce Forward. “They either file bankruptcy or just suffer through people calling them all the time, or suing them.”

As the recession has deepened, the profile of bankrupt debtors has changed.

Just four to five years earlier, most folks had racked up heavy bills on multiple credit cards, had exorbitant medical bills or were single mothers who didn’t have sufficient or any spousal support, says San Diego bankruptcy attorney Len Ackerman.

“The debtors have moved up in class. They’re more sophisticated, and many have two and three pieces of property,” Ackerman said.

In the past, debtors’ real estate may have been leveraged to pay off creditors. But today many debtors are “upside down,” meaning property values are worth less than what is owed on the mortgage.

Ackerman says he’s far busier this year than he’s ever been.

“In the 20 years I’ve been doing this, I have never, ever seen it this busy, and that includes the time that the law changed,” he says. “Now there are more clients than there’s time in the day to help them.”


Regulations Tightened

In 2005, the rule covering personal bankruptcy qualifications were tightened, causing an uptick in filings.

Among clients seeking Ackerman’s services are restaurateurs, chiropractors and just about anyone involved in real estate, including agents, brokers and lenders.

Margaret Mann, specializing in corporate bankruptcy in the law firm of Sheppard Mullin Richter & Hampton, said the downturn has resulted in far more job losses and “is more sustained and broad” than previous recessions, including those in the 1980s and 1990s.

Indeed, Mann says she hasn’t seen it this bad in 29 years of practicing bankruptcy.

In the early part of the recession, Mann worked with originators and borrowers of subprime mortgages, the so-called “liar loans” that precipitated the blowup of the housing bubble.

Recently, she’s helped businesses involved in residential and commercial development, retail and “green” concerns that many would think should benefit from the surge of federal stimulus funds.

“Though tax incentives are in place, people aren’t building new houses financing is tight so they’re unable to get the capital,” Mann said.

In its Chapter 11 filing, Aerowind listed assets of $309,599 and liabilities of $1,156,120. The largest unsecured creditor is the IRS, with a disputed debt of $290,738. The largest secured creditor is Financial Federal, a bank based in Houston, owed $277,459.

“The positives on this (filing for bankruptcy) outweigh the negatives,” says Kousens, who is optimistic about the businesses surviving. “This could have been avoided, but the IRS just didn’t care.”

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