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Tighter credit standards are putting the squeeze on Tri-City individuals and businesses and contributing to a rising number of bankruptcy filings, according to local experts.
Bankruptcy filings in the Tri-Cities have increased more than 34 percent through June of this year compared to the same time last year, from 534 to 716, according to the Spokane office of the United States Bankruptcy Court.
More than 85 percent of those filings are Chapter 7, which are filed when the debtor can't pay unsecured debts such as credit card bills -- and sometimes secured debt -- and debts are wiped clean, said Kennewick bankruptcy lawyer Bill Hames, who handles mostly commercial bankruptcies.
"The (lack of) availability of credit has hit small businesses," he said. "Even though the Tri-Cities is a little bright spot ... the banks have tightened up nationwide. It's a one size fits all approach."
Most of the bankruptcies Hames handles involve liquidating the debtor's business assets, then directing the debtor to file for personal bankruptcy.
"A lot of small business use a line of credit to operate," he said. And in today's economic climate, many of those businesses aren't able to get the credit they need to run day-to-day.
And while no Chapter 11 bankruptcies -- which generally involve reorganizing a business' finances -- were filed in the Tri-Cities last year, Hames said he's handled four so far this year.
Construction contractors, restaurants and some farmers, especially dairies, are struggling, Hames said.
Stricter standards for credit access also are affecting individuals, said Laurie Tufford, chief executive director of Consumer Credit Counseling Service of Tri-Cities.
Some consumers have gotten used to relying on credit cards to get through financial rough patches, a technique that isn't working so well as lenders are raising interest rates and requiring better credit, she said. "People can't rely on creative financing."
And as seasonal work such as construction is less reliable in a shaky economy, more people are finding themselves in uncertain financial waters, Tufford said, even though the Tri-Cities is in better shape than many places.
"I think we're going to see a lot more bankruptcies before this all evens out," she said.
While a change to bankruptcy laws in 2005 caused the number of filings to plummet, they are on the rise again.
More than 126,400 consumer bankruptcy filings were recorded in July nationwide, which is the highest monthly total since the Bankruptcy Abuse Prevention and Consumer Protection Act took effect in October 2005, according to information provided by the American Bankruptcy Institute.
About 28 percent of the July filings were Chapter 13, which are for individuals or sole proprietors who, after paying living expenses and sometimes secured debts such as mortgages and car loans, can contribute to a payment plan to repay at least some of the unsecured debt, Hames said.
One aim of the 2005 legislation was to encourage Chapter 13 filings, officials said.
Tufford is a proponent of requirements in the law that mandate that those who file for bankruptcy get financial counseling and literacy education.
Every bankruptcy client Consumer Credit Counseling sees gets 31/2 to four hours of education, she said.
Seeking help sooner rather than later is important.
If you're borrowing to pay for items you'd normally buy with cash, "that's definitely an indication that you're going to have problems," Tufford said.
Cutting out extras and closely tracking spending can help too, she said.
And if pride is getting in the way, people should know they're not alone.
"There's a lot of people dealing with the same issues," Tufford said.
Building up savings accounts rather than depending on credit is another smart move, experts said.
The personal savings rate rose to about 5 percent in the second quarter of 2009, according to the Bureau of Economic Analysis.
That's after hitting a low of less than 1 percent at the end of 2001.
The recession may help raise awareness of how damaging using too many credit cards can be, Hames said.
"This may make savers out of a lot of people," he said.
-- Ingrid Stegemoeller: 582-1537; istegemoeller@tricityherald.com; Business Beat blog at www.tricityherald.com
