Santa Rosa bankruptcy attorney David Gardner was ready to relax into semi-retirement in 2024. Then his phone started ringing off the hook.
“I used to get maybe two calls a month, now I probably get 15,” Gardner, 68, said. “I’ve got almost more work than I can handle.”
Gardner’s new case load is a sign of a troubling trend: The number of people in the Bay Area filing for personal bankruptcy is on the rise.
The increase can be partially attributed to pent-up demand as post-pandemic cases hit the courts. But Bay Area bankruptcy attorneys say they’re seeing a potent local mix of economic struggles strike their clients; particularly the uniquely bad labor market, as thousands have lost tech jobs and haven’t regained their financial footing.
In part, the region is following a national bounceback after bankruptcies slowed during the pandemic, when many were assisted by an expanded social safety net. But from April 2024 to March of this year, residents of Bay Area counties filed 25% more personal bankruptcies in the U.S. Bankruptcy Court for the Northern District of California than in the preceding year — nearly double the nationwide increase. Napa saw the largest bump, 40%, followed by San Mateo and Contra Costa counties, each 30%.
Bay Area residents are grappling with an inflated cost of living, high rent, and higher mortgage rates for new home buyers. San Franciscans’ credit card balances are rising faster than those of people in most other major cities.
More onetime high earners, including unemployed tech workers, have been turning to bankruptcy attorney Carl Gustafson.
Those people “haven’t had to worry about money in a really long time,” said Gustafson. “Because they set expectations that they would be able to become employed, because they always were before, they didn’t make really dramatic lifestyle changes.”
He’s seeing clients who, after losing a job, made the optimistic decision to hold onto pricey apartments and cars. As their unemployment stretched into months, they began to rack up debt to cover their expenses, figuring they could easily pay it off once they found a new gig.
But after a boom in tech hiring, many firms have closed their doors to prospective employees. That’s kept some out of the work force for far longer than they expected, or pressured them to take major pay cuts.
When the bills reach a breaking point, some turn to bankruptcy. Chapter seven bankruptcy can wipe out most of a person’s debt that isn’t secured with collateral, but it’s available mainly to those who make less than the statewide median income. Higher earners must file for chapter 13, which can give them more time to pay off debts but won’t eliminate them.
It often takes an acute financial hit, more than just an inability to make ends meet, to push someone over the edge to filing for bankruptcy, Gustafson said. That might include a repossessed car, a foreclosed home, or a lawsuit from a lender.
During the pandemic, debt, income, and housing protections created a brief period of personal economic safety, unnaturally depressing bankruptcy rates. But Covid also unleashed a wave of special lending meant to keep people above water until better times. For many businesses, those loans only delayed their demise and saddled owners with additional personal debts on the way down.
As the pandemic raged, the U.S. Small Business Administration offered loans up to $2 million for business and nonprofits to pay basic operating expenses. But there was a catch: For any loan greater than $200,000, officials required a personal guarantee, meaning an owner was on the hook.
Now, those owners who never saw revenue bounce back after the pandemic — restaurants especially — are in serious trouble, according to Santa Clara bankruptcy attorney Robert G. Harris. Some enterprises are even digging the hole deeper with additional fast, high-interest debt from fintech firms.
Eventually, the insolvency catches up.
“And when those loans are personally guaranteed and the owner has assets, that means they go into bankruptcy too,” Harris said.
He’s seeing clients with business debt so severe that they have a lien covering the entire value of their home.
Many enterprises paralyzed by the pandemic continue to struggle more in San Francisco than in other metropolitan areas, according to the city’s chief economist, Ted Egan.
“The recovery is happening, but it’s slower than other places,” Egan said.
Further, other delayed debts are coming due, presenting even more of a squeeze. Forced collections on federal student loans restarted in April after a five-year pause, and Republicans are poised to carve up income-driven repayment plans.
On average, San Franciscans have among the lowest rate of consumer debt nationwide, and locals file for personal bankruptcy at about a third of the national average. But the high cost of living can push people over the edge into financial crisis.
Gardner said much of his job consists of reassuring clients throughout the bankruptcy process. Many experience feelings of failure and fear being shamed. But he went through a bankruptcy himself during the Great Recession, triggered by a skyrocketing mortgage payment. He encourages clients not to feel guilty.
“I see what happens to people in circumstances beyond their control,” Gardner said, “despite all their best intentions and all their best efforts.”