Bankruptcies in the San Jose division, which includes South
County, have more than doubled compared in the last year, and a few
high profile cases have local businesses bracing for a long
year.
Bankruptcies in the San Jose division, which includes South County, have more than doubled compared in the last year, and a few high profile cases have local businesses bracing for a long year.
Mervyn’s, Quiznos, Fresh Choice, Shoe Pavilion, Linens n Things, all well-known chains with South County locations, have each filed bankruptcy within the past three years.
“Linens n Things is in Chapter 11,” Gilroy attorney Joe Thompson, who has experience in bankruptcy law, said. Chapter 11 bankruptcy is when a business goes through a major re-organization.
“If companies that size can go bankrupt, you can imagine what it’s like on the west side of the freeway (in Gilroy),” Thompson said. “Insolvencies are all over the spectrum, from the highest to the lowest, it doesn’t discriminate. If you’re Home Depot or Wal-Mart, it might affect your bottom line, but you’re not in the same hot water as small businesses.”
Chapter 7 bankruptcy is when a person or business sells all its assets and is in turn forgiven as much of its debt as is possible, according to San Jose-based bankruptcy attorney Charles Greene. He said he’s seen a steady increase in Chapter 7 bankruptcy filings over the past several months.
Between October 2007 and September 2008, there were 4,101 Chapter 7 bankruptcy cases filed in the San Jose division, according to the United States Bankruptcy Court Web site. The San Jose division includes Santa Clara, Monterey, Santa Cruz and San Benito counties. The year before, there were just 1,693. In September, 430 Chapter 7 cases were filed. In September 2007, 145 Chapter 7 cases were filed.
Greene said that the past nine months he’s seen the most dramatic increase in bankruptcies in his 34 years in business.
“The severity … would put this in the worst economic cycle I’ve seen as a bankruptcy lawyer,” he said. “I’m in a growth industry.”
Greene said he expects to be busy for at least the next year, as the domino effect of bankruptcies falls into play: when one business files bankruptcy, they’re forgiven their debts to other businesses; in turn, those businesses are squeezed tighter than they already were in the financial crisis.
So why are all these businesses going bankrupt? Greene said it’s because they’re accounts receivable aren’t paying.
“They do a job, they expect to get paid, and then the company or person can’t pay them.”
The housing crisis strikes small businesses hard, Greene said. Myriad contractors in the industry from painters to plumbers throw up their hands in the face of defaulted payments – and a bleak future full of more.
“I think it’s going to play out that there won’t be as many dollars for consumers to go to restaurants, dry cleaners, gift card stores – you’re aware that 70 percent of the gross domestic product in our country is based on consumer spending,” Greene continued. “People I know are concerned that this is only the beginning of a significant downturn in consumer spending.”
Thompson concurred, saying he assumed one-third of Hollister’s businesses are candidates for bankruptcies.
“Nobody has money, general contractors are broke, trades – electricians, plumbers, sheetrockers – they’re all broke, bankrupt or planning bankruptcy,” Thompson said. “Of the three towns, Hollister is definitely the worse.”
Thompson said Morgan Hill is somewhat shielded by its high-tech foundation while Gilroy remains buoyant thanks to strong retail stores.
But, Thompson acknowledged that Gilroy could be hit hard soon.
Despite the gloomy picture Thompson paints, area businesses are putting on an optimistic front and forging ahead.
Keith Spain, owner of Morgan Hill-based Harvest Builders, said he’s been through a lot in the nearly 20 years he’s been a contractor in Morgan Hill.
“There’s always peaks and valleys in this business,” Spain said. “You just have to weather through these times and be as smart as you can in spending money during the good times.”
Spain said there are a lot less phone calls for his specialties: home remodeling and additions.
“People are hesitating right now,” he said. Spain’s customers aren’t as aggressive as they were two and three years ago. Then, they didn’t hesitate to pull $150,000 in equity from their home and put it into a remodel, Spain said.
Since Spain has been in business since 1989, he said 95 percent of his business is word of mouth. Still, even with his roots in the community, Spain said business has been cut in half.
The same goes for contractor Carlos Lopez, owner of Gilroy-based CDL Construction, who said he’s taking on smaller projects and going further to work. In a Thursday phone interview, Lopez was on a job in Salinas.
When he first started his business eight years ago, Lopez said he would take any job he could get. After a while, he could be choosier. But now, he’s reverting back to his old ways – taking whatever job he can get.
“A job is a job, whether it pays $100,000 or $1,000 – they all get the same respect throughout the entire project,” Lopez said. “I personally am just trying to re-evaluate how to proceed. Everybody’s tight right now. All the way down to the final end, carpeting, trim, painting – everybody is feeling the pinch.”
Lopez said he briefly considered bankruptcy as an option several months ago, but decided to weather through the tough times. He’s not sure about his colleagues, though.
“I hear a lot of people talking about how bad it is, they’re losing their houses,” he said. “I don’t know if they’re filing bankruptcy or are just trying to muddle through it.”
Lopez said he does the smaller jobs himself, and subcontracts everything else. He doesn’t have any employees.
Spain said he might have to scale back on his three employees in reaction to the downturn. Most people in the building industry are trying to think positively and ride out the next six months, he said.
Morgan Hill Chamber of Commerce President Chris Guisiana said she’s expecting a membership boost during the economic crisis. Currently, the chamber has about 630 members, she said.
“Business owners realize we can help them promote their businesses,” she said. “They see the value of participating in our events, in our networks and committees.”
Guisiana said whether or not businesses will be struck hard by the economy varies widely. But being a small, locally-owned business alone might not be such a bad thing.
“Usually, in down times, people like doing business with people they know,” Guisiana said. “People tend to do more one-on-one business. The trust level has gone down.”
