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O.C. Bankruptcies Grew 33% in 1991 as Slump Persisted : Finances: Tight credit is blamed for the record 12,368 filings, which include a growing number of sham petitions used to stave off eviction.

January 22, 1992|CRISTINA LEE | TIMES STAFF WRITER

IRVINE — As the recession lingered in Orange County last year, bankruptcy filings soared 33% to a record 12,368, new figures show.

Bankruptcy filings also increased elsewhere in Southern California last year and affected companies involved in the real estate industry, such as Kimtruss, an Irvine-based building supplies company that has been caught in the real estate slump.

Moreover, a flood of sham individual bankruptcy petitions, used to stave off apartment evictions, has inundated the bankruptcy courts. Another reason for the increase in filings is that, for some companies, bankruptcy no longer carries the stigma it once did--making the decision to file a little easier, bankruptcy lawyers said. Some bankruptcy lawyers encourage corporations to use the U.S. Bankruptcy Code to protect themselves from creditors while they put their financial house in order.

When the recession started, bankruptcy experts said, mostly small companies suffered. Tight credit hurt the housing market, and its effect on Southern California's economy was "devastating," said Jeffrey W. Broker, senior partner at Lobel, Winthrop & Broker, an Irvine law firm. Even conservatively run companies began to suffer, he said.

Tighter credit has forced companies to scale down their operations and consumers to reduce purchases. This has hurt the retail industry and forced such companies as Irvine-based RB Furniture to seek bankruptcy protection last year.

"It's a cycle which is extremely difficult to break once it gets started." Broker said. "Lowering the interest rate by itself isn't the answer anymore."

Broker expects bankruptcy filings in 1992 to remain about the same as last year.

The largest increase in county filings was for Chapter 7 bankruptcies, in which corporations liquidate their assets or individual consumers facing runaway debts file for personal bankruptcy. There were 9,918 Chapter 7 bankruptcies in Orange County last year, up 36% from the previous year.

One positive aspect of the increased bankruptcy filings, says Santa Ana attorney Richard A. Marshak, is that banks and other lenders are now more willing to work with their clients to avoid a bankruptcy filing. Because the bankruptcy process can be expensive, creditors have become more sympathetic with companies and are helping clients to resolve their financial problems.

"Bankers and creditors are recognizing that there are advantages to working out the financial problems of a company outside bankruptcy court," Marshak said.

In the case of Kimtruss, the Southern California housing market was booming in 1987 when and a group of investors, led by Lance J. Lloyd, acquired Kimtruss in a deal in which they relied heavily on borrowed funds. Four years later, however, the housing market began to weaken and what had seemed a promising investment turned into a nightmare for Kimtruss. Banks and other lenders cut off the company's credit, and other creditors grew increasingly impatient.

After months of agonizing, Kimtruss finally filed for Chapter 11 bankruptcy last October. The filing gives the company protection from creditors while it attempts to reorganize its debts.

In hindsight, Kimtruss' Lloyd said he might have avoided bankruptcy had he acted more decisively and been "more ruthless" in closing some manufacturing plants when the housing market began to soften in May, 1990.

"The slowdown was dramatic despite repeated statements from Washington that there was not going to be a recession," he said.

The Boom in Bankruptcies

Bankruptcy filings in Orange County were up 33% in 1991. The following is a list by region and chapter filing:

Breakdown by Chapter Filing

Chapter 11: 457 Chapter 7: 9,918 Chapter 13: 1,993 Total: 12,368 Chapter 7: Known as "straight" personal bankruptcy, used by consumers to wipe out unsecured debts. Businesses also file as a means of liquidation.

Chapter 11: Typically a voluntary business bankruptcy that temporarily protects from creditors during reorganization.

Chapter 12: Protects farmers from creditors and allows a farmer to remain in control of the family farm as a "debtor in possesion."

Chapter 13: A personal financial reorganization under which consumers repay creditors under supervision of court-appointed trustee.

Breakdown by Region

1990

Region * Ch. 7 Ch. 11 Ch. 12 Ch. 13 TOTAL Los Angeles 32,078 1,005 1 5,659 38,743 Orange County 7,314 309 0 1,719 9,342 San Bernardino 7,978 164 1 2,903 11,046 TOTAL 47,370 1,478 2 10,281 59,131

1991

Region * Ch. 7 Ch. 11 Ch. 12 Ch. 13 TOTAL Los Angeles 42,723 1,583 9 7,063 51,378 Orange County 9,918 457 0 1,993 12,368 San Bernardino 11,449 228 3 3,249 14,929 TOTAL 64,090 2,268 12 12,305 78,675

*The Los Angeles region includes Los Angeles, Ventura, Santa Barbara and San Luis Obispo counties. The San Bernardino region includes San Bernardino and Riverside counties

Source: U.S. Bankruptcy Court, Central District of California in Los Angeles

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