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Bankruptcies in isles continue decline

The most prominent filing was the second by the Hawaii Medical Center

By Star-Advertiser staff

LAST UPDATED: 11:36 p.m. HST, Aug 5, 2011

Bankruptcy filings in Hawaii were down 25.6 percent in June, continuing a trend that has seen the filings drop six out of the last seven months.

For the first half of this year, 1,843 cases have been filed, down from 2,022 at this point last year.

The decline in consumer bankruptcies "is consistent with the national trend," said bankruptcy attorney Chuck Choi. "Bankruptcy filings tend to be cyclical, and so I suspect that we're going to have fewer bankruptcies going forward than last year; but on the other hand, I'm not convinced that the economy is turning around locally, based on what I've seen and heard."

Chapter 7

Chapter 13

» Chapter 7: Liquidations.
» Chapter 13: Individuals with regular sources of income set up plans to pay creditors over time.


The most significant bankruptcy of the month was Hawaii Medical Center — the former St. Francis hospitals in Liliha and Ewa — which filed for Chapter 11 protection on June 21. It was the second filing for the hospital, which emerged from two years of court protection in August.

Personal bankruptcy liquidation, or Chapter 7, filings fell 32 percent in June, compared with June 2010. Chapter 13, or so-called wage-earner cases, were flat.

Choi said he expects to see an increase in bankruptcies in the coming months because of a new foreclosure law.

The new law, Act 48, could result in more "deficiency judgments" against homeowners, Choi said. A deficiency judgment is when a lender requires the homeowner to pay the difference between what a home sells for in foreclosure and what the lender is owed. So if a home sells for $500,000 but the bank is owed $600,000, the homeowner could be liable for up to $100,000.

Until the new law was passed, the vast majority of Hawaii's foreclosure filings had been nonjudicial, faster and cheaper than judicial foreclosures, "and the mainland lenders were not bothering to chase the homeowners for a deficiency judgment," said Choi.

Bankruptcy attorney Donald Spafford said the Legislature's intent with Act 48 was to give homeowners more power in the foreclosure process by providing an option for mediation in nonjudicial cases, or in allowing them to elect to convert to a court-supervised judicial proceeding.

Because it might take until Oct. 1 to implement the mediation infrastructure, there has been a freeze on new nonjudicial cases.

Some Hawaii foreclosure industry attorneys have warned that lenders might flock to judicial foreclosures, and they might seek deficiency judgments in part to offset the higher expenses of a judicial foreclosure.

"Foreclosure attorneys are telling me that they will be filing primarily judicial foreclosures, which by definition will result in a deficiency judgment against homeowners, which will then lead to more business for bankruptcy attorneys," Choi said.

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