September 29, 2022
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Business failures piling up

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Tight credit markets and slumping revenue are forcing more entrepreneurs into bankruptcy.

Tri-county bankruptcy filings have shot up nearly 65 percent so far this year. The court doesn’t break out business bankruptcies in its data, but recent filings have included small firms and entrepreneurs as diverse as a flooring contractor, a filmmaker, a chiropractor and a Santa Barbara firm that makes molded foam cases for consumer electronics and the U.S. military.

At the U.S. Bankruptcy Court in Santa Barbara, which covers most of the Tri-Counties, there were 1,467 Chapter 7 bankruptcy filings between January and April, up from 896 in the same period last year. There were 17 Chapter 11 filings, up from three last year.

“Filings for bankruptcy cases of all chapters for consumers and businesses are up dramatically and have continued at the same level for the last six months,” said William Winfield, chair of the creditor’s rights and bankruptcy law group at Nordman Cormany Hair & Compton in Oxnard.

A lack of credit to float through tough times and sagging sales account for some of the business bankruptcies.

“Starting last year, and especially in the last six months, there was no money to be had,” said Scott Stanley, whose cafés in Santa Barbara and Carpinteria filed for Chapter 7 bankruptcies June 9, listing about $900,000 in assets and $2 million in liabilities. “All you had is what was coming in, and then you ran out. The rents are the rents.”

Stanley’s Santa Barbara restaurant had moved from State Street to 721 Chapala St. and began offering a dinner menu in an effort to augment slow breakfast and lunch sales. But foot traffic in the area was just too slow, and longtime customers weren’t coming to the new location.

“I figured my dinners and everything were going to kick in, and I was going to do $1 million in sales, that everything would take off,” Stanley said. “It didn’t. I just couldn’t get ahead.”

Because of the way U.S. bankruptcy law is formulated, a Chapter 7 bankruptcy can mean the end of the road for a small business structured as a corporation. Unlike individuals who file Chapter 7, corporations, partnerships and limited liability corporations won’t have their debts wiped away after liquidating their assets to pay off what they can.

“I almost never file a seven for a business,” said Joe Sholder, a Santa Barbara bankruptcy attorney with Griffith & Thornburgh. “Corporations, partnerships and other kinds of entities — they don’t get a discharge in Chapter 7. They get nothing.”

But some businesses have been forced to go that route. Pismo Beach-based Central Coast Transfer filed for Chapter 7 on June 12, listing up to $50,000 in assets, between $500,000 to $1 million in debts and trucking firms among its largest creditors. Brandt Robertson, its president, couldn’t be reached for comment.

For other entrepreneurs, bankruptcy laws prove more forgiving. In the case of an entrepreneur working on his or her own in a “doing business as” structure, debts can be discharged. “The DBA is not a separate entity in the eyes of the law,” Sholder said.

That means that entrepreneurs such as Chris Hall, who was doing business as Precision Tile & Flooring in Los Osos, or Monica Lenches, a filmmaker in Santa Ynez, or John Milhoan, a Santa Barbara chiropractor, will catch a small break. None could be reached by press time.

Chapter 11 bankruptcy involves renegotiating debts with a plan to emerge from bankruptcy and continue doing business. It’s a better option for larger businesses, but “vastly more expensive” than Chapter 7, Sholder said.

“Small businesses typically don’t have enough in the way of assets to make it worth their while,” Sholder said.

Still, some smaller companies are making a go of Chapter 11. Foarm, a Santa Barbara maker of molded foam cases for products from consumer GPS units to handguns and military devices, filed for Chapter 11 on June 8, listing about $794,000 in assets and $797,000 in debts. Its president, Ted Swift, didn’t return requests for comment by press time.

But the big increase in Chapter 11 filings in the Tri-Counties has come in part from real-estate related ventures.

Two big San Luis Obispo County developments – Vaquero de los Robles, a luxury resort near the Paso Robles airport, and Spanish Springs, a development planned near Pismo Beach — filed for Chapter 11 on May 28, with Vaquero de los Robles listing $11 million in assets and $11.6 million in liabilities and Spanish Springs listing $17.5 million in assets and $6.6 million in liabilities. In Ventura County, the developers of Rancho Serrano, 22 upscale townhomes near the Thousand Oaks Civic Arts Plaza, filed for Chapter 11 on June 1.

Sholder is representing one of the SLO County developments and couldn’t comment on that case specifically. But the trend among real-estate-related ventures is clear: Credit is just too tight to hammer things out outside of bankruptcy court.

“When real estate was more liquid, when you could always borrow money from another bank, or when you could sell the asset more easily, it was easier to work out deals,” Sholder said. “But now, in dealing with the banks, it’s much more difficult.”

Until the economy begins to recover, bankruptcy filings will probably continue to rise, even in cities with upscale demographics such as Santa Barbara’s.

“Our little bubble in Santa Barbara does not exist today,” said Stanley, the café owner. “It may exist again — and it better, because there are a lot of business here that depend on it being in a bubble.”

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