Business bankruptcies in San Diego County have doubled from a year ago as the housing downturn has depleted real estate companies' assets.

Major lenders tightened their underwriting toward the end of last year after defaults on risky loans jumped. These lenders issued fewer loans, more closely scrutinized their balance sheets and, after reviewing some loans, exercised their right to force the smaller bankers to take back some riskier loans.

If enough of these loans go bad, it can send the small lenders into bankruptcy.

"There's been a tremendous upswing in Chapter 11s," said John Smaha, a bankruptcy attorney in San Diego. "In the last 10 years, Chapter 11s were almost unheard of in San Diego."

Real estate-related companies appear to represent the majority of the bankruptcies in San Diego, according to court records.

Likewise, Chapter 7 filings, where all assets are liquidated, have jumped by 85 percent from a year ago.

Though a Chapter 7 filing is essentially a closing of the business, for many companies it is the only option. And often, a company will file for Chapter 11 bankruptcy protection in an attempt to stave off closure only to be forced into a Chapter 7 by the judge, who decides whether a company can fairly pay its debts.

Therefore, some of those Chapter 11 filings could turn from bad to worse.

"Sometimes people file Chapter 11 because they don't want to give up. That's a human response," said Michael T. O'Halloran, a bankruptcy attorney in San Diego. "But if you're on the Titanic, it's not going to be fun."

Smaha represents EquiPoint Financial Network, based in San Marcos. A month ago, the mortgage banking company filed for Chapter 11, a restructuring bankruptcy in which the company attempts to work out a plan to pay its bills and re-emerge as a successful company.

During the boom, the company expanded, doing business as far away as Charlotte, N.C., according to court filings.

Another mortgage company, Blueprint Financial in Carlsbad, filed for bankruptcy about two weeks ago.

The two bankruptcies offer examples of how the real estate bust is putting companies out of business and employees out of jobs.

At one point, Blueprint employed 20 brokers. EquiPoint's new president, Bruce Barnes, declined to comment.

Smaller lenders, known as mortgage bankers, relied on a free flow of money from large banks, such as Wells Fargo and Citibank, to buy their loans. But now, the large banks are not biting on new loans and they are kicking back some loans they already bought.

So instead of selling off loans for a profit, some small mortgage bankers are forced to buy back bad loans they already sold. Revenues plummet, debts rocket and soon bankruptcy is the only option.

Such was the case for several North County mortgage businesses, including EquiPoint and Blueprint.

Now, EquiPoint carries just $550,000 in assets while holding $5.3 million in liabilities, according to court records. And EquiPoint's potential debts could grow, as it carries 281 potential buybacks from larger lenders.

Most of the potential buybacks are listed at zero dollars in liabilities, meaning they are not included in the company's listed $5.3 million in liabilities. However, some of the 281 potential buybacks could add to the company's liabilities.

Also, a bad loan used to mean 15 percent to 20 percent in losses. Now, with home price declines reaching peaks, bad loans are causing banks across the country to eat a loss of 30 percent to 40 percent of the loan, Smaha said.

"It makes it impossible to operate. They can't absorb those losses," he said.

Even with its troubles, EquiPoint hopes to emerge from bankruptcy within five months and operate as a broker for reverse mortgages, Smaha said. In that role, it will not act as a banker.

Other lenders, such as Blueprint Financial, are struggling even more. Two weeks ago, the company filed for Chapter 7 bankruptcy, a liquidation of all its assets without possibility of the company returning to business. Its court filings reported holding just $2,300 in assets while owing $2 million in debt, including a $480,000 buyback from IndyMac Bank, the failed Pasadena-based lender.

Easy money during the housing boom through 2005 encouraged homeowners to buy houses they could not afford, securing loans by inflating their income.

As banks tightened their budget lines last year, they found some easy-money loans went to buyers who defaulted almost immediately, so the banks started to kick them back to smaller mortgage bankers, such as Blueprint Financial and EquiPoint.

Further, attorneys said the surplus of available loans spurred start-up developers, who attempted to acquire land, prepare the necessary permits and sell to large, national builders.

With the long permitting process, many of the developers got caught holding land no one wanted to buy after the county's real estate market started to dive in 2006.

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com.