Bankruptcy Filings for the Wealthy Jump in 2009

Not even the country’s richest families have been able to ward off the effects of the recession. They’re ringing up plenty of debt and turning to more expensive and more complex methods of reducing their debt according to Bloomberg News, which carries a report based on research released by the National Bankruptcy Research Center.

According to the report, more individuals or families with more than $1,010,650 in secured debt and $336,900 in unsecured debt are taking advantage of Chapter 11 bankruptcies, typically reserved for business reorganizations.

Chapter 11 bankruptcy filings cost a minimum of $15,000 and often cost more. Chapter 7 bankruptcy costs are several times lower, and a case may be completed for $2,000 or less, according to Stephen Kass, a New York attorney.

According to Leslie Linfield, executive director of the Institute for Financial Literacy, having more wealth than the average American does not offer as much protection from bankruptcy as you’d expect:
“You’re living on the edge [when] you’re juggling those financial balls,” Linfield said. “When one ball goes, they all fall down.” In other words, when wealth is wrapped up in property or investments that suddenly de-value, the results are much the same as they are for a family unable to keep up with a variable-rate mortgage on their three-bedroom home.”

In fact, listings for homes worth more than $1 million have risen sharply from July to October, and there is now a 21-month supply of such homes on the market, up from a 16-month supply last year. Many of the new arrivals on the market can be tied back to properties that no longer represent good investments for the wealthy.

And when it comes time to clear these losses, the rich are willing to pay again.

Chapter 11 is a more expensive and time-consuming for debtors and their creditors than Chapter 7 bankruptcy. Since wealthier people are much more likely to have multiple homes, vehicles, boats and other assets not exempt from liquidation, Chapter 11 is becoming a popular option. Falling U.S. home prices have left wealthy individuals often unable to refinance or sell property that has dropped below the value of its mortgage.

Not even celebrities are immune. Actor Stephen Baldwin sought Chapter 11 bankruptcy this July after lenders began foreclosure proceedings against his $1.1 million home, the banks seeking $1.2 million in recovered mortgage loans.

“Real estate is an incredible thing on the downside,” says Jason Green, a Washington bankruptcy attorney. “Equities can only go to zero. Property can go well below zero,” due to expenses such as property taxes, insurance and maintenance on primary residences, investment properties, and vacation homes.

In Chapter 11, all motions to sell assets and raise money can be contested by creditors who believe they should be first in line for compensation. Take the Chapter 11 filing of Philadelphia Eagles quarterback Michael Vick, whose case took 14 months of legal proceedings to conclude. Creditors submitted more than $19 million in claims, and 795 entries for motions, requests for hearings and transcripts were filed. When all was said and done, Vick agreed to pay his legal team nearly $2 million in compensation for their work.

“It’s a lot of hearings, a lot of paperwork,” Kass says. “Chapter 11 is really geared for the big boys.”
Big boys, it seems, need just as much debt relief as the rest of us when the going gets tough.