At 10:30 on a rainy Friday morning in a Maryland civil courtroom, George and Sally sat and listened as a bankruptcy judge parceled out what little was left of their world.
The house was already gone, sold by the bank. So was the Range Rover and the Lexus, repossessed by the leasing company. The jewelry? Pawned six months ago in a desperate attempt to stay afloat. Now the judge was deciding just how much their remaining creditors would get.
Outside the courtroom Ashley Lester shook her head.
“You know how much those two take home a year after taxes? About $600,000. That’s after taxes. Yet there they are in a complete liquidation. It just don’t make sense.”
Lester is a credit counselor, someone people like George and Sally come to see when they finally escape denial and admit they need help paying their bills.
Lester worked with them for seven months, trying to work out arrangements with the many creditors. But George and Sally hadn’t told her everything and there were many other unpaid bills. This left one option: bankruptcy.
“You talk about an addiction to drugs or alcohol and it’s nothing like debt addiction,” Lester says. “Nothing else even comes close.”
Two years earlier, George and Sally had it made. They had just signed on the dotted line for a 30-year-mortgage for a $1.4 million home in Potomac, Maryland, just outside of Washington. It was their latest perk of success, something to go with the Range Rover, the Lexus, the vacation timeshares in St. Thomas and Aspen and with the beach house at North Carolina’s Outer Banks.
Between George’s law practice and Sally’s marketing firm, they earned well over a million bucks a year. Unfortunately, they spent like they earned two million.
In 20 years of accumulating the trappings of success, they didn’t save or invest their money. They used it to buy things: expensive vacations, fancy watches, a boat, suites at the Willard so they could entertain friends and watch the Fourth of July fireworks on the Mall.
Six months after moving into the new home, and spending $75,000 furnishing it, they started coming up short at the end of the month. So they used cash advances on the nine Visa and Mastercards they carried to pay the bills. Each month, they found themselves a little shorter, so the float on the credit cards grew. Within six months, they were maxed out on every credit card they carried, even the new ones they obtained to get access to more cash.
Sally pawned her jewelry. George sold off his Nikon cameras and fancy computer equipment. Still they were behind.
So they went to see Lester. She took one look at their finances and advised them to sell the house. They resisted. She told them to get out of the leases on the Range Rover and Lexus. They tried, but the leasing company wanted substantial cash penalties.
“When they finally agreed to sell the house, the dip in real estate prices left them no equity. In fact, they owed $400,000 more than the house was worth.”
Lester worked with their creditors, but Sally and George were still having trouble meeting even the reduced payments.
“So I pulled a credit report and found they had a bunch of other creditors they hadn’t told me about. I told them I couldn’t work with them it they couldn’t be honest with me. They left and tried to work it out themselves. You see where it ended.”
In the end, George and Sally filed bankruptcy with more than $3 million in debts and less than $100,000 in assets. They owed more than $700,000 in unsecured credit card debt (including $189,000 to American Express).
“How can anybody get that deep into Amex?” Lester was amazed.. “If I’m behind on a $75 bill for three days, they’re on the phone to me.”
When the bank foreclosed, they owed $1.1 million in principal on the House. The bank sold the house for $700,000, leaving George and Sally liable for the additional $400,000. They also defaulted on loans on two vacation time shares, the beach house in North Carolina and more than $500,000 in unsecured department and specialty store charge accounts.
“What you have here is a case study on how to go broke in Washington on $1 million a year,” Lester said.
George and Sally walked out of the courtroom on that Friday morning clear of debt, but saddled with a bankruptcy record that will stay on their credit report for 14 years. Lester hopes the lesson they learned will stick. She doubts it will.
“Too many times I’ve watched people use bankruptcy as an escape valve and then head out and start living beyond their means again. Too many creditors are quick to embrace someone coming out of bankruptcy because they know the couple can’t declare again for another seven years. These two don’t need more credit, they need to lean how to live within their means.”
The real crime, Lester says, is how their remaining creditors got less than five cents on the dollar from a couple who still take home more than a half million dollars a year.
After George and Sally leave, a much younger couple enters the courtroom. He is an unemployed construction worker and she’s a hairstylist with an income in 1996 of $17,800. They have $51,000 in debts and no equity in anything.
Lester shakes her head.
“These kids are the ones who need the help that a bankruptcy law provides. They need the fresh start and they will learn from it. I guess we have to allow people like George and Sally to take advantage of the system so we can help people like these kids. That’s both the beauty and the tragedy of the system.”