Orange County Bankruptcies | Bankruptcy Blog

The OC Register published an article today concerning the number of bankruptcy filings during the month of August in Orange County . The article notes that the total number of filings this past August , 832, is an increase of 88% from the number of filings during August 2007.

This number of filings so far this year (January to August) have totaled 5,545, a 93% increase from the same period in 2007.

This number of bankruptcy filings has not seen such an increase since 2005, when the new bankruptcy rules came into effect. By the end of that year, 12,043 local bankruptcies had been filed, dramatically higher than the 8,449 /year that Orange County typically averages.

During the month of August, there were a total of 602 Chapter 7 bankruptcy filings in Orange County, California. The 10 cities or towns with the most filings in Orange County for the month of August were: Anaheim, Costa Mesa, Fullerton, Garden Grove, Huntington Beach, Irvine, Mission Viejo, Orange, Rancho Santa Margarita, and Santa Ana. Chapter 7 bankruptcy filings in Orange County came from people across 41 different cities and towns in the county. These results are comparable to the numbers previously posted for two weeks of filings in August, with 8 out of 10 cities on the list being the same. Only La Habra and Tustin did not stay in the top ten, being replaced by Costa Mesa and Garden Grove.

“Lehman Brothers announced early today that it will file for bankruptcy, becoming the largest financial firm to fail in the global credit crisis, after federal officials refused to help other companies buy the venerable investment bank by putting up taxpayer money as a guarantee, the Washington Post reported. Leaders of the Federal Reserve and Treasury Department decided that Lehman was unlike the investment bank Bear Stearns, whose sudden collapse in March threatened the world financial system, or Fannie Mae and Freddie Mac, whose potential insolvency did the same. Several firms, led by Bank of America and the British bank Barclays, wanted control of Lehman’s investment banking and asset management businesses, but did not want part of shaky real estate and other investments on Lehman’s books, and wanted either taxpayers or other financial firms to assume part of that risk.”

Orange County is home to numerous businesses, ranging in size from the smallest mom and pop stores to multinational corporations. Along with consumers in Orange County, economic troubles have affected small businesses and large corporations alike. While consumers often are able to find relief in Chapter 7 of the Bankruptcy Code, the solution for businesses is more often to be found under Chapter 11 of the Bankruptcy Code.

While a Chapter 7 filing is often referred to as “liquidation,” a Chapter 11 filing is referred to as “reorganization.” This name is appropriate, because the purpose of most Chapter 11 filings is to devise a court-approved plan for the business to repay its creditors. This plan “reorganizes” the debts, however, by reducing the amount of debt owed to some creditors, while completely discharging debt owed to other creditors. This plan may also include attempts to recover assets, cancel various contracts, and other such steps to help put the business back on a path to profitability. Of course, the reorganization plan must be approved or “confirmed” by the court before it will go into effect. Once confirmed, however, the debts that arose before confirmation are discharged, and the new repayment plans and contractual obligations designated by the reorganization plan supersede any such prior obligations.

So while Orange County residents may find their financial difficulties resolved by Chapter 7 or Chapter 13 of the Bankruptcy Code, most of our local businesses that are struggling with debt may be able to turn to Chapter 11 for help.

Chapter 7 bankruptcies, unlike Chapter 13 bankruptcies, allow the debtor to discharge most debts rather than enter into repayment plans. Whether or not one can file for Chapter 7, however, depends on something called the “means” test.

The “means” test is a two-part test that the Bankruptcy Bill of 2005 set forth to determine if the debtor qualifies to file under Chapter 7 of the Bankruptcy Code.

The first part looks at the debtor’s household income over the last six months, averages it, and then compares it to the median income in the debtor’s state of residence. For any of our fellow Orange County residents, then, the California median is the only one that matters. The California median income per year is $46,814, which means that for six months the total median income would be $23,407, for an average of $3,901 per month. If your residence is in a different state, check to see what the median income is here.

If the debtor’s average income is below the state’s median income, then the debtor qualifies – and does not need to go on to the second part of the test. However, if the debtor’s average income over those 6 months is not below the median, then the debtor must pass the second part of the test.

The second part of the “means” test looks at the debtor’s disposable income. This part calculates whether the debtor will have enough disposable income after expenses to pay into a repayment plan. This calculation involves deducting average monthly expenses to see how much disposable income you have per month for the next five years. If you are at this stage, it might be best to have a professional (or someone who knows the formula well) do the calculations for you.