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Money Talk: Serial Bankruptcy cause the downfall

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There have been a little whirlwind discussion recently between 2 journalist going back and forth. The center of attention was on a book written by a New York Times Journalist by the name of Edmund L Andrews, who wrote the book BUSTED: Life Inside the Great Mortgage Meltdown. In this book, Andrews wrote about his own hell ride of wanting to get a house even though he is well aware of the economic situation the country is in, wanting to prioritize getting a house to start a family.

A veteran New York Times economics reporter, Edmund L. Andrews was intimately aware of the dangers posed by easy mortgages from fast-buck lenders. But, eager to buy a home and start a new life, he gave in to temptation and began a surreal adventure into the mortgage mayhem that nearly wrecked our economy. Busted weaves together the authors own ride to the edge of bankruptcy with the tragicomic stories of his lenders, the Wall Street pros behind them, and the policymakers in Washington who were oblivious until it was too late. The story takes Andrews to the offices of Alan Greenspan, the mansions of subprime-mortgage millionaires in southern California, a despondent deal makers convention in Las Vegas, and Wall Street. Rich with on-the-ground reporting, Busted is a darkly humorous exploration of the cynicism and self-destructive judgment that led to Americas biggest economic calamity in generations.

However, another journalist by the name of Megan McArdle counter argues that it is personal finance mistake, and not what is the general economic meltdown that brought about the couple’s financial situation. She highlights that prior to this, Andrew’s wife have been declared bankrupt twice.

In September 1998, California bankruptcy court records indicate that Patty and her first husband declared bankruptcy. The financial statement they filed with the court indicated family income of $174,000 in 1996, $87,000 in 1997, and $126,000 in the first nine months of 1998. The income fluctuations are not surprising, given that her husband was in the film production industry. By the time of the filing, the couple owed about $30,000 on 8 credit cards, over $200,000 in back taxes, and almost $15,000 in private school tuition, as well as substantial car and mortgage payments.

In 2007, nearly as soon as she was eligible, Patty Barreiro filed again in Montgomery Country. When called for comment yesterday, Andrews was unavailable, but there is no question that it is his wife: his income and occupation are prominently featured in the docket.

This is really highly unusual. For starters, the overwhelming majority of people who file bankruptcy do not make anything close to $100,000 a year–the standard estimate when the 2005 bankruptcy reform was passed was that about 80% of filers had household incomes below the median income in their state. The number of affluent people who file twice is even smaller and has presumably gone down since the 2005 filing largely eliminated abusive serial Chapter 13 filings, which used to be used, often by quite wealthy people, to forestall evictions or foreclosure.

The bankruptcy code requires filers to wait 8 years after a previous Chapter 7 discharge. Barely four months after she became eligible, Patty Barreiro filed again. And the filing shows some suggestion of strategic debt management.

Ms. Barreiro filed separately from Andrews, and had to amend the filing to include Andrews’ income after a complaint from a creditor who wanted to force her into a Chapter 13 repayment plan. She filed when her income was at rock bottom, consisting only of unemployment; the timing may have just excluded having to declare $5,000 in freelance editing income Andrews mentions in the book. And she shed what appear to be jointly incurred debts, such as a Comcast account. Comcast does not service the address listed on the 1998 filing, but as I can attest (to my sorrow), it is the main cable provider in Silver Spring, where she moved to live with Andrews in 2004.

Serial bankruptcies can, of course, happen to anyone with enough bad luck. But they usually don’t. And when they do, they usually hit people with marginal incomes that leave no margin for error in the budget. Most people, even in LA, are able to build a sustainable budget out of an income in the low six figures.

Moreover, pesky bad luck isn’t really the picture painted by either filing. Rather, Ms. Barreiro seems to have spent most of the last two decades living right up to the edge of her income, and beyond, and then massively defaulting. If you structure your finances so that absolutely everything has to go right, it’s hard to blame the mortgage company when you don’t quite make it.

Andrews has been admirably open about many of the poor decisions and the wishful thinking that led him deep into debt. Nonetheless, he has laid much of the blame onto irresponsible bankers and mortgage brokers. The missing bankruptcies substantially undermine this basic narrative arc of Andrews’ story. Particularly in his book, the bankers are the villains, America’s current troubles are the inevitable denouement of their maniacal greed, and the Andrews household stands in for an American public led, by their own greed and longing and hopeful trust, into the money pit.

It’s hard to argue that Ms. Barreiro was forced into bankruptcy by crazed subprime mortgage lenders in 1998. Greedy bankers certainly didn’t keep her and her first husband from paying their taxes.

Of course, her first husband was involved too–there’s no way of knowing who was at fault in the first case. If indeed anyone was: there may have been a business failure or some other mitigating factor. As I mentioned, I tried to reach Andrews for comment several times, leaving messages on both his office and cell phone that made it clear I was reporting for The Atlantic, and that I wanted to speak to him about Patty’s bankruptcies. For whatever reason, he has not called me back, and so I don’t have his (her) side of the story to tell you.

Of course, no matter what he told me, it wouldn’t let the bankers off the hook. Whatever Patty Barreiro’s spending history, it’s still true that she and Andrews were able to dig themselves in a lot deeper because of fantastically easy credit from a variety of fantastically stupid bankers, most of whom now seem to have gone fantastically bankrupt. But while the willing lenders amplified the problem, given Ms. Barreiro’s history, it seems unlikely they were at the root of it. It’s hard to see them as victims either of those bankers, or a mass mania.

Andrews married a woman with a lengthy history of debt and spending problems. Serial bankrupts were getting into trouble long before there was a credit bubble, indeed long before there were credit cards or 30-year self-amortizing mortgages. In fact, the literary history of America is littered with them; we owe much of Mark Twain’s later work to his catastrophic financial mismanagement.

Naturally things don’t go down too well with Andrews. He wrote a response to the uncovering article, which details the 2 bankruptcies and that how he got himself into this shit has got nothing to do with the 2 bankruptcies:

Ed Andrews: It is hard to believe that anybody would accuse me of trying to airbrush a story in which I recount the cringe-inducing details of my calamitous plunge into junk mortgages.

But Megan McArdle, a blogger for the Atlantic, accuses me of omitting crucial information: namely, that my wife, Patty, was involved in two bankruptcies, one in 1998 with her former husband; and one in 2007, while she was married to me. McArdle says this is “material information that changes the tenor of the story,” and then accuses Patty of “serial bankruptcy.”

These bankruptcies did occur, but they had nothing to do with our mortgage woes. They were both tied to old debts from before we were married or bought a house. They had nothing to do with my ability to get a mortgage; nor did they have anything to do with our subsequent financial problems.

Since Patty had been so brave in letting me tell our own story so candidly, I wanted to spare her the public exposure on these older woes. But that is now impossible, so here is the story:

The first bankruptcy in 1998, five years before Patty and I got together. It occurred because Patty’s former husband, a producer of TV commercials in Los Angeles, didn’t file income tax returns for five years. Patty, who was a stay-at-home mom and wasn’t earning money, was blindsided. She had been signing returns, but he hadn’t actually been filing them. Because her husband’s business income was reported on their personal tax returns, she had to join him in the bankruptcy filing.

All that happened in 1998, and it obviously had nothing to do with the story in Busted. It never even occurred to me to mention it.

Patty’s second bankruptcy stemmed from a loan she received from her sister, while Patty was still living in Los Angeles. At the time, she was caring for four children, working for very modest pay, and receiving almost no child support from her ex-husband. (Despite multiple court orders, he remains chronically delinquent on untold thousands of dollars.)

When Patty couldn’t repay, her sister followed her east and sued her. I offered to pay off the loan by withdrawing money out of my 401k, but I wasn’t allowed to because the purpose didn’t qualify as a “hardship.” Without an alternative, Patty had no choice but to seek bankruptcy protection.

None of this has any connection to our story. It had nothing to do with Patty being a spendthrift. It had no bearing on my ability to take out a mortgage, and it had nothing to do with our financial problems.

Fortunately or unfortunately, Busted is a simple story: we took out a mortgage we couldn’t afford, earned less than we hoped and couldn’t bridge the gap.

One final note: I tried to return McArdle’s call three or four times on Wednesday, but received a busy signal every time. I couldn’t leave a voicemail message.

however, Megan still feels Andrew is missing the point. In another response post, she wrote:

I appreciate Mr. Andrews’ candor, but I disagree that this had nothing to do with his story.

  • I’m not “accusing” Ms. Barreiro of serial bankruptcy: she has filed bankruptcy basically back to back, which no one is disputing. That is serial bankruptcy.
  • Patty Barreiro’s first bankuptcy does not merely clear past tax debts–indeed, it’s really very difficult to shed past tax debts in bankruptcy. They also discharged $47,655.37 in credit card debt, $4701.10 in past medical bills, $14,303 in tuition to Campbell Hall, a Los Angeles private school, and a few other miscellaneous bills. I don’t have time right now to look up what the disposition of their debts to the IRS for the 1996-98 tax years was, but I suspect they ended up paying the $70,000 they owed. Frankly, given what Edmund Andrews’ says, I’m surprised they got any of their tax debt discharged: as I understand it, it’s nearly impossible to discharge tax debts due to fraud.
  • Patty Barreiro’s second bankruptcy does not merely clear a lawsuit. The value of the settlement was $29,000. The total vale of the unsecured claims discharged was $55,313, inclding almost $8,000 for legal services, almost $10,000 in medical bills, $1200 in phone bills, $1100 owed to Comcast, and $5400 in credit card debt. If the purpose of the bankruptcy was merely to clear the lawsuit settlement, she could have reaffirmed the other bills, though of course, in practice no one ever does that–if you’re going to declare bankruptcy, you might as well get a really fresh start. It’s hard to fault her for clearing the debts, but the fact remains that nearly half the obligations she discharged were not part of the settlement.
  • Andrews is saying that the lawsuit was the driving factor behind the bankruptcy, and that the other unsecured debts are therefore somehow irrelevant. But neither the book nor the bankruptcy filing indicate the means to clear the other unsecured claims without Chapter 7; by her own worksheets, she had very little income and their joint income was exceeded by their allowable expenses. Plus, of course, they’re awaiting foreclosure now. If she hadn’t declared bankruptcy, where would they have gotten the $25,000 to pay off the medical, legal, credit card, and utility bills she discharged?
  • Andrews is correct that many of the debts seem to have been incurred prior to the marriage. I’m not sure what this changes. My contention was not that she somehow illegally shed marital debts–the judge had every opportunity to force him into bankruptcy if he wished. My contention was, first, that the shedding of joint and prior debts along with the lawsuit settlement looks somewhat strategic, and second, that declaring bankruptcy twice is often a sign of deep problems with financial management, and thus should have been disclosed, if only to explain it away.
  • People who declare bankruptcy really are not like other people. People who declare bankruptcy twice, even less so. They have very different financial profiles from the average American–less savings, more debt. When an adverse event occurs, they have no margin for error. And, of course, it’s only worth declaring bankruptcy if you’ve run up some pretty substantial bills; one hears horror stories about naive people declaring bankruptcy to get rid of $2000 in credit card debt or some such, and their attorneys should be publicly shamed before being ridden out of town on a rail. But the average debt discharged in bankruptcy in a Chapter 7 filing seems to be in the tens of thousands.
  • That kind of living up to the edge is, indeed, exactly what Andrews describes happening in his marriage. The bankruptcies suggest that this may be a symptom of a pre-existing problem, rather than the easy credit of the past five years.
  • Andrews seems to now be arguing that the Chapter 7 filings are not relevant because they didn’t affect his ability to get a mortgage. But of course the article and the book is not just about him–rightly, because unless your marriage is pretty dysfunctional, it’s a financial partnership. The two bankruptcies seem to reveal that one partner has demonstrated a historic inability to live within their means. So though the bankruptcies don’t tell us anything about their ability to get a mortgage on their house, they may tell us quite a bit about their willingness to take on a mortgage. This decision is at least as important as the bank’s. I’m sure banks would have given me all kinds of stupid mortgage loans in 2004, but I didn’t avail myself of the opportunity.

I have an email in to Ms. Carman, Ms. Barreiro’s sister, but haven’t yet heard back, so I can’t comment on the particulars of the story–and anyway, I’m not sure how much the particulars matter.

On a very broad note, I don’t see this as a story about the goodness or badness of Andrews or Barreiro–and I’ve been dismayed by some of the nastiness about her in comments here and elsewhere. Rather, I think this matters because the story Andrews told was basically about the subprime crisis, and the book casts him as a sort of everyman, lured in by cheap credit and a likeable scoundrel of a mortgage broker. That may be what happened to many, or most people in the mortgage crisis–but the back to back bankruptcies strongly suggest that this is not what happened to Andrews. That said, I think the story told with the bankruptcies included would still be a story well worth telling.

Personally, I feel Andrews SHOULD have highlighted this little detail of his. That bankruptcies shows that they have some additional burden and shit on top of what they are feeling as a repercussion of their latest financial situation. I havent read the book (nor do i intend to) but if the book is about putting the fucking blame on external parties rather than your own decisions and actions then i think Andrews is really in the wrong, and this book is more like a way to milk some cash to paying for their current financial predicament.

There is a wealth of comments in the 3 posts that lead up to this article. Do have a look at them and see if you agree with them.

Kyith
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