‘Big spike in bankruptcies’ expected after shelter-in-place

There have been fewer bankruptcies in Humboldt County taking place since the shelter-in-place order went into effect mid-March compared to the same time period in years past, but that’s not expected to last for long.

There were 20 bankruptcies in 2018, 26 bankruptcies in 2019 and 12 bankruptcies this year in Humboldt County between March 15 and May 15, according to court records. Bankruptcy attorney Jocelyn Godinho represents a lot of individuals and small businesses who file for bankruptcy in the county and said the numbers aren’t as high right now because there are a lot of supports, such as bridge loans and mortgage forbearances, available to people and businesses right now.

“When the shelter-in-place order is lifted, the extra federal money runs out and people are finding out that there aren’t jobs to return to, that’s when I expect to see a big spike in bankruptcies,” Godinho said.

When the economy was going through a recession, creditors tightened how much credit they were giving out, Godinho said, so people were taking less financial risks like starting a business. Right before the COVID-19 pandemic struck, the economy was doing well, people were getting credit and starting businesses, she said.

In a situation like this where businesses have no revenue coming in and still have to pay their overhead costs and their debts, Godinho said it could easily put people in a precarious financial situation that precipitates bankruptcy.

“There’s more people calling in regarding bankruptcies because they were in a tight situation before and trying to avoid it,” Godinho said. “And then when this started it was the straw that broke the camel’s back.”

Businesses contacted by the Times-Standard since the shelter

in-place order began have expressed that very issue to varying degrees.

Ross Creech, general manager at Eureka auto body shop Quality Body Works, said his business has entirely shifted operations to give customers the ability to get contact-less car repairs, but that doesn’t change the fact that fewer people are on the road.

“Our business is built on restoring people’s lives after a collision,” Creech said. “Take most people off the road, that’s going to have an impact.”

However, like many local businesses, Quality Body Works was able to get a loan from the Paycheck Protection Program, most of which can be forgiven if a business continues paying its employees.

But several business owners said these funds would only cover overhead costs for a short period of time and it’s unclear if consumer demand will return once the shelter-in-place order is lifted, or if creditors will be as forgiving.

People who got a mortgage forbearance for six months, for instance, may end up owing $10,000 at the end of those six months that they may not be able to pay all at once, Godinho said.

A survey of small- and medium-sized businesses conducted by Facebook found, 31% of these businesses have shut down in the last three months and “47% of open businesses were afraid of borrowing money” because of uncertainty around whether they could pay it back.

“While 41% of owners and managers say they plan to use personal savings to reopen their business when the time comes, 39% do not know where they’re going to get the money,” the survey found.

Bankruptcy gives the option to restructure or eliminate debt for people who have accumulated more debt than they can repay, Godinho said.

Chapter 13 bankruptcy for the aforementioned type of situation could allow a property owner to pay their mortgage arrears over time and save their home from foreclosure, she said.

“I think what we’re going to see is a lot more businesses coming in that are either having to close their doors or they’re trying to find a way they can stay operating and restructure that debt,” Godinho said.

Not every business is going to go that route, however, because not all business have outstanding debt, Godinho said.

Those businesses would likely just let go of their employees and close their doors, she said, which has already started.

A lot of people and businesses are experiencing this situation right now and Godinho said to be wary of debt settlement companies and online “papermill bankruptcy firms.”

Bankruptcy attorneys generally offer free consultations where they’ll go over all the options a person or business has, such as negotiating with creditors, before filing for bankruptcy.

“Bankruptcy should be the last option,” Godinho said.