South Bay attorneys are bracing for a wave of new bankruptcies from individuals and small businesses that have exhausted their unemployment benefits and federal stimulus money.
The number of cases filed in the United States Bankruptcy Court’s San Jose division has declined precipitously over the past five years — plummeting more than 35% to 2,718 last year as compared to 4,238 cases in 2015. That downward trend extended into 2020 with 1,391 cases filed in the first eight months of the year compared to 1,845 cases over the same time period in 2019.
“Right now it is quiet,” Los Gatos bankruptcy attorney Julie Cliff told San José Spotlight. “But be prepared for the wave.”
Being prepared means knowing bankruptcy isn’t cheap — basic court fees can amount to thousands of dollars and the standard attorney’s retainer for individuals and small businesses who hope to reorganize and emerge from bankruptcy debt-free is $20,000, Cliff said. But it is also possible to avoid filing bankruptcy if debtors react soon enough.
“Bankruptcy consultations are completely free,” Cliff said. “It doesn’t cost a dime to go and see a couple of bankruptcy attorneys and get some financial advice.”
As funding from the federal Coronavirus Aid, Response and Economic Security (CARES) Act dries up, Silicon Valley residents who are already struggling to pay their bills will need that advice to protect their homes and other assets from creditors who demand payment, Cliff said.
Unemployment statewide in California surged above 16% in April and May and has only declined slightly since — down to 13.3% last month. A recent study by Joint Venture Silicon Valley found the unemployment rate in the region has been lower than statewide, with the South Bay peaking at 11.6% in April and dropping to 9.3% in July.
But the state’s unemployment insurance benefits typically only last 26 weeks, with a possible 13-week extension through the Pandemic Emergency Unemployment Compensation program. For displaced workers who lost their jobs in March when coronavirus started to wreak havoc on the economy and as many businesses were forced to close, time is running out.
Sam Taherian, a partner at the Fuller Law Firm in San Jose, said he’s already noticed an uptick in calls from laid-off workers who had been relying on an extra $600 a week in unemployment insurance from the CARES Act that expired July 31.
Some small businesses and individuals may be able to reorganize under Chapter 11 or 13 of the bankruptcy code, he said, if they can negotiate a plan to settle their debts with creditors that reduces the amount owed or extends the timeline for repayment.
But, as bills pile up and with no more government assistance to keep them afloat, Taherian says most laid-off employees who can’t go back to work and small businesses that can’t reopen will simply go under.
“For a typical small brick and mortar business, the biggest fixed expense item is their lease,” Taherian told San José Spotlight. “If they can’t profitably pay that lease, then reorganization is not a possibility and they have to walk away from their business.”
In those cases, Taherian said small businesses and individuals file for Chapter 7 bankruptcy, which means a court-appointed trustee liquidates non-exempt assets including bank accounts and stock portfolios to distribute to creditors. Some assets, including homes and retirement accounts, can be protected under Chapter 7. Filing for bankruptcy also temporarily stops creditors from garnishing a debtor’s wages and other collection activities, such as repossessions and placing liens on property.
Tracy Tran says she’s worried that could happen to the business she owns with her husband, La Orquidea Salon and Spa in Los Gatos. With the exception of two days in July, Tran said the nail salon has been closed by the state’s public health orders since March. To stay in business, they had to lay off more than 20 employees.
Gov. Gavin Newsom announced a new set of rules for businesses to reopen last week. Hair salons and barber shops that follow those guidelines can reopen in Santa Clara County for indoor service Aug. 31. Nail salons cannot.
“We want to reopen,” Tran told San José Spotlight. “But if it doesn’t happen soon, I don’t know if we will.”
The state’s public health orders have been unfair to nail salons from the beginning, said Linda Do, owner of Blossom Nail Spa. Do has locations in San Jose and Campbell — and though she’s spent $30,000 renovating her space in San Jose to make it compliant with the state’s COVID-19 regulations, it still hasn’t reopened.
Do says she laid off more than 50 workers and owes nearly $150,000 in past due rent. It will take years for her to pay it all back, Do said. Nevertheless, she hopes to avoid bankruptcy.
“I worry that I may never get out of this if we can’t reopen,” Do told San José Spotlight. “The whole industry could be wiped out.”
Cliff said people who are considering bankruptcy as an option should know putting it off for too long can be disastrous.
“Don’t wait until you run out of money,” the Los Gatos bankruptcy attorney said. “If you’re down to your last dollar, you’ve got a second problem because you can’t even afford to file for bankruptcy.”