LIANE HANSEN, Host:

Chapter 7 is old-school bankruptcy. For businesses, it's not a court-enforced payment plan or a radical restructuring, it's going broke; Everything gets sold off, liquidated, to pay off creditors. Chapter 7 bankruptcies have been going up, way up in many parts of the country.

M: Our local paper picked the top five professions to be in, in the year 2008, and I think the number two profession was to be a bankruptcy attorney.

HANSEN: That's Mark Zuckerberg. He's a bankruptcy lawyer in Indianapolis, Indiana. His state had the highest number of Chapter 7 bankruptcy filings last year. Zuckerberg says he's seeing a lot of new clients, about double what he saw a year ago.

M: Well, I've had gas station owners come in, I've had somebody who ran a day spa come in, I've had car lots, you know, people that have their own independent car lots come in. I mean, it's affecting all different sectors of business.

HANSEN: Nationally, Chapter 7 business bankruptcies were up 59 percent in the first nine months of last year over the year before. One of the states with the biggest increases was Virginia. The filings there jumped 177 percent.

Tom Gorman is a bankruptcy lawyer practicing in Alexandria, Virginia. He's in the studio, welcome to the program.

M: Hello.

HANSEN: The Northern Virginia suburbs strike me as being a very affluent place: tech firms, lots of construction, government jobs. How is the economic slowdown affecting small businesses there?

M: A lot of it's real estate driven. The downturn of the real estate economy impacts Northern Virginia very heavily. When you go to a place like Winchester, for example, they don't have the ups and downs in bankruptcy we do in the D.C. suburbs. They have industry there. They have apple factories and that sort of thing, so they're not as dependent on real estate. In Northern Virginia, when the real estate market crashes or goes down, it has a much larger impact, a ripple effect.

People, their biggest asset tends to be their home. When the value goes down, they can't pull out equity through refinancings, maybe can't sell the home because there's no equity. And so the real estate economy there is probably the single biggest driving factor.

HANSEN: But the small businesses are suffering because of this?

M: Oh, yes. Some of it is not real estate driven. I'm about to file for a college bookstore, and their trade was used books to college students at a state university. They're getting killed by Amazon. So some of it's just the passage of time. It's like blacksmiths went out of business. And some businesses have just become obsolete. But the real estate downturn affects everybody.

I'm working now with a guy who runs a store that does granite countertops and cabinets. And when people aren't buying houses and can't refinance their house, small retailers are greatly impacted - restaurants, everybody.

HANSEN: The 177 percent increase in Virginia seems incredible. Is it something about Virginia or you're seeing this nationwide?

M: I can't speak to nationwide. My practice is so provincial, but I think in Virginia, it's because a few years ago when the market was go-go, small business owner to refinance their way out of their problem by taking equity out of their home. So filings were probably way down. And so now, when you say up 177 percent, I think that's an anomaly.

HANSEN: So set the scene for us. What is it like when a small business owner walks into your office for the first time?

M: Well, they're not happy to be there. They tell you it's somewhere between the dentist and the undertaker. Most people are a little bit embarrassed. You have to massage them a little bit. And then you have to ask them the big question: Do you think your business is viable? Can you make it if I can buy you time - in which event, you're looking at a Chapter 11 reorganization where you try to make it through.

If not, are you prepared to close up and file Chapter 7? And then a lot of times there's complicating factors, usually small- to medium-sized business, the principle has guaranteed personally the lease, the line of credit with the bank or the SBA.

HANSEN: SBA being the Small Business Administration.

M: Small Business - yes, yes, or a bank. There's usually a line of credit behind it that they've guaranteed and maybe their spouse has guaranteed. And you have to talk about the impact to them personally if you close up shop and go out of business. Are you prepared to potentially lose your home - your others assets if the guarantees come to roost?

HANSEN: That's tough. That's tough. You talked about the troubles in the housing market having kind of this ripple effect on the small businesses, and you've talked about some, what seemed to be high-end kitchen appliances or flooring companies, some companies that are associated with the housing market. The businesses that you're seeing coming into your office, are they newer businesses or you're seeing older businesses being forced to liquidate?

M: Both. And a lot of times, older businesses, when they liquidate, it's because of management turnover. An older owner sold to a new owner who wanted to take it over, or had their child, you know, a lot of parents dream that my son or daughter will take over the business, new people come in. But I would say it's more newer businesses. Businesses that when the real estate boom hit recently, they opened up - new shopping centers opened around the new housing, people opened, and then when the housing market crested and fell, the businesses get impacted.

HANSEN: I understand you had someone, a contractor that had come in - been in business for 30 years?

M: Oh yes. This was somebody who did, like, you know, home improvements, additions, basements, garages. And I hate to keep harping on it, but when people can't refinance their home and pull out the equity because the equity's not there, they're not able to get their basement refinished or build that addition.

And so a small business that operates sort of paycheck to paycheck, if people aren't finishing their basements, and that's what you do, and the business dries up, you're impacted.

HANSEN: Would you say it's a good time to be in business as a bankruptcy lawyer. Is your firm hiring?

M: We're hiring staff. We've got more cases, frankly, than we can get out at the production end. So yeah, it's a busy time. Two of my partners are bankruptcy trustees, there's five in Northern Virginia, and two of them are with us, that they're very busy, but they're not making any money because they get paid on commission. And because most of these businesses don't have any value, the homes don't have any value. We're not making as much money as one might think.

HANSEN: Tom Gorman is a bankruptcy attorney based in Alexandria, Virginia. Thank you for coming in.

M: My pleasure.

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