The Road to Bankruptcy

At the end of his book's harrowing account of mortgage mistakes and credit card crises,  Edmund Andrews writes:  "While our misadventure had certainly been more extreme than those of many other Americans, our situation was not all that unusual."  And indeed the book reads like the story of an American Everyman, easily sucked in to the alluring world of easy credit as he struggled to blend a new family.  The terrifying implication is that it could happen to you--to anyone who leads with their heart and not their head.

But en route to that moral, it turns out the story has been tidied up a little.  Patty Barreiro, Andrews' wife, has declared bankruptcy twice.  The second time was while they were married, a detail that didn't make it into either the book or the excerpt that ran in last Sunday's New York Times Magazine.

Andrews' desire to shield his wife is understandable--hell, laudable.  No decent person wants to parade their spouse's financial trouble in front of the world.  But this is material information that changes the tenor of his story.  Serial bankruptcy is not a creation of the current credit crisis, and it doesn't just happen to anyone, particularly anyone with a six figure salary.

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.

Credit encourages people to spend more by separating the pain of payment from the pleasure of consumption.  For many, maybe most, people, this means at least one brush with unpleasantly large overdrafts or credit card balances.  And for a small subset of folks, that easy accumulation leads to real, often repeated, trouble.  Those kinds of problems can't be fixed with tighter mortgage lending standards or a 500 basis point uptick in the Fed Funds rate.  And they aren't the main problems facing most Americans today.