Bankruptcies skyrocket in area

A few bad decisions and a lot of bad luck have placed Belmont resident Alexis Karrington Stephens on the brink of financial ruin.

So earlier this month, Stephens, a 31-year-old mother of four, joined a soaring number of Charlottesville-area residents who have recently filed for bankruptcy.

“We’ve been wiped out. We’ve been living paycheck to paycheck. And then I found out that I’ll be losing my job at the end of the year,” said Stephens, who works in the accounts payable department of a local real estate company. “I’m not proud of the choice I feel I have to make, but I’ve worked hard. I’ve given back to the community. I’ve done everything I should.”

Between Oct. 1 and Dec. 19, there were 175 families from the Charlottesville area who filed for bankruptcy in the U.S. Bankruptcy Court of the Western District of Virginia. During the same period in 2006, there were only 22 such filings.

In other words, local bankruptcy filings have shot skyward by 695.5 percent over the past two years, federal court records show.

“I’m not at all surprised that it’s going up,” said William W. Sihler, a professor at the University of Virginia’s Darden Graduate School of Business Administration. “I suspect that Charlottesville’s rate is actually better than it is elsewhere.”

The Charlottesville area’s unemployment rate of 3.4 percent is the 17th lowest in the nation, but the region also lost an estimated 1,000 jobs between October 2007 and October 2008, according to a report released Friday by the Virginia Employment Commission.

As a result, many Charlottesville-area residents are finding themselves out of work and struggling to afford mortgage payments, utility bills, medical costs and other major expenses. In a growing number of cases, these families are opting to seek bankruptcy protection.

“Filing for bankruptcy is supposed to give you a second chance,” Sihler said. “It’s supposed to help you get back on your feet.”

There are several types of bankruptcy filings. Chapter 7, for example, essentially involves the liquidation of assets owned by a person or business. Chapter 13 allows individuals with a steady stream of income to set up a payment plan to discharge outstanding debts. Chapter 11, commonly used by businesses, allows a firm to stay protected from creditors while it restructures or reorganizes.

Bankruptcy allows a person to get rid of debt by having the court assign a trustee who sells off the debtor’s assets to pay the creditors, even if it is at a loss. These assets can include the debtor’s home, vehicles and much more.

Filing for bankruptcy can also be a devastating blow to a person’s credit rating, making it nearly impossible for the person to obtain loans or credit cards for at least three or four years.

Wide range of filers

Recent filings show that the Charlottesville-area residents who are seeking bankruptcy protection include those from a range of income brackets, locations and ages.

Over the past two months, these residents have included an Albemarle County psychiatrist, an employee of a Charlottesville environmental nonprofit organization, the CEO of a Charlottesville-based home health care company, a retiree from Scottsville and many others.

The region’s highest number of recent bankruptcy filings was in Albemarle County, which had 40 filings since Oct. 1. Albemarle was followed most closely by Orange County (32 filings), Fluvanna County (24 filings), Louisa County (23 filings) and Charlottesville (17 filings).

Stephens, who has lived in Charlottesville for most of her life, decided to file for Chapter 7 bankruptcy at the advice of an attorney.

Stephens and her longtime partner bought their three-bedroom Belmont home in 2002 for $82,000. Soon after they closed on the house, Stephens became pregnant with their second child and their expenses climbed. For the next several years, the family relied on credit cards and a home-equity line of credit to make ends meet.

In early 2007, the family refinanced their house. Unfortunately, Stephens said, she relied on an unscrupulous lender who convinced her to switch to a 15-year mortgage. Her monthly payments, she quickly realized, were far too high. And then she found out she was pregnant with their fourth child, causing their household expenses to balloon yet again. The lender refused to renegotiate the terms of the loan, she said.

For nearly two years, Stephens and her family struggled to stay afloat despite the unaffordable mortgage payment. But over the summer, her partner’s hours at work were cut back. And in November, Stephens was notified that her job at a local real estate company was being eliminated at the end of the year.

“It’s been a domino effect,” she said. “It has been, literally, a life-changing experience. My choice to file for bankruptcy was an act of self-preservation and preservation of my children. I was looking three years down the road and I didn’t see things getting better.”

As part of her bankruptcy filing, Stephens will lose her house. After the beginning of the year, she said, she and her family will move into a rented apartment in Charlottesville. Stephens added that she hopes to find a new job as quickly as possible.

“It’s not a good time for anybody right now, but I’m trying to stay positive,” she said.

Filings up nationwide

Bankruptcies are on the rise across Virginia and the nation. During the third quarter, bankruptcy filings in Virginia rose from 4,909 in 2007 to 7,401 in 2008, an increase of 50.8 percent. Nationally, there were 292,291 bankruptcy filings in the third quarter of this year, marking a 34 percent increase, according to the American Bankruptcy Institute.

The recent rise in bankruptcy filings is almost certainly due to the unprecedented level of consumer debt, the distressed economy, and the vast number of adjustable-rate mortgage products that are now resulting in unaffordable payments and home foreclosures.

“Bankruptcies are going to be up all over,” said William M. Shobe, director of the Center for Economic and Policy Studies at UVa’s Weldon Cooper Center for Public Service. “Bankruptcies and foreclosures are going to go hand-in-hand.”

W. Stephen Scott, a partner with the Charlottesville-based Scott/Kroner law firm, has been handling bankruptcy cases in the Western District of Virginia for more than three decades. In the past, he said, families would most often file for bankruptcy after they were hit with unexpected medical bills. Now, he said, more people are filing because of credit card debt, job losses and unaffordable mortgage payments.

“Things start spiraling out of control,” Scott said. “People losing their jobs is a factor and that’s been a big problem for the past six months.”

The number of bankruptcy filings is likely to continue to climb in the coming months, Scott said, as the number of filings normally increases after the holiday shopping season. During 2008, he said, the number of filings has been growing since around June.

During past economic downturns in the Charlottesville area, Scott said, business and non-business bankruptcy filings have traditionally spiked upward. Yet this recession, he added, might be different — and not in a good way.

“It seems to me that this time it’s worse,” Scott said. “So far, there have been dramatically more consumer filings.”