TAMPA — He works at Lowe's, making $12.60 an hour selling appliances. She's a retiree who gets $1,015 a month in Social Security. They live in Clearwater in a house mortgaged for $346,000, now worth about half that.
On this St. Patrick's Day, garbed in green for some much-needed luck, they've come to the federal building in downtown Tampa to explain to attorney Mara Mandell how they ended up in bankruptcy.
"How much did you take out of the house?'' Mandell asks, thumbing through papers that show repeated refinancings.
"Uh, $70,000,'' the wife says. "We used a lot to pay off credit cards, but we had to get a new roof, 23 windows.''
"How much is the mortgage payment?'' Mandell asks.
"It's $2,474,'' the wife replies. "That's for the first mortgage. It's $728 for the second.''
"Okay,'' Mandell says, "so they are that high.''
The woman laughs nervously.
"They told me when I refinanced that houses are just going to go up.''
In legal parlance, this is a "341 hearing,'' in which debtors must appear in person to answer questions about their assets and liabilities, and their ability to repay their creditors. Mandell and other attorneys in the Office of the U.S. Trustee — which administers bankruptcy cases — have listened to hundreds of stories like this as filings in the Tampa subdistrict soar, fueled by plunging home values and mounting debt. In February alone there were 1,986 new bankruptcies, a 46 percent jump from the same time last year.
No sooner has the Clearwater couple left than a husband and wife from Valrico slide into the seats. And start to explain how they came to owe $343,633 on a house now worth less than $200,000.
District of debtors
Federal law provides two main ways for Americans to climb out from under personal debt. Chapter 7, the so-called no asset bankruptcy, wipes out most debts. Chapter 13 is geared to people with regular income who can afford to pay their creditors in whole or part.
Concerned that too many people were using Chapter 7 to escape credit card bills, Congress in 2005 amended the law to make it harder to declare bankruptcy in general and to force those who did into Chapter 13 repayment plans.
The new law saw a temporary drop in both Chapter 7 and Chapter 13 filings. But as the torrid real estate market cooled, followed by a slowdown in the economy, the numbers again began to soar. They are on track to return to pre-2005 levels.
Among the most dramatic increases has been in Florida's Middle District, extending from Jacksonville through Orlando and Tampa Bay and on to the Fort Myers/Cape Coral area, which has led the nation in mortgage foreclosures. Last year, total bankruptcy filings in the Middle District hit 42,611, making it the third busiest of 90 bankruptcy districts nationwide.
And many of those filers are people struggling with mortgage-related debt.
"A year and a half ago, more of my clients were probably driven by medical problems or out-of-control credit spending,'' says Charles Moore, a St. Petersburg bankruptcy attorney. "Now, more and more of my clients are coming in with real estate problems.''
Some, he says, are homeowners whose equity credit lines have been cut off by nervous lenders, leaving them with nothing to fall back on as bills mount and plunging prices make it impossible to sell or refinance.
"More than that, however, I have a whole lot of people who were unfortunately self-proclaimed investors,'' Moore says. "Before now, I'd never seen people with three or four properties all upside-down. They have secure jobs, but they are no longer able to afford what they got themselves into.''
Terry E. Smith, the court-appointed trustee who administers Chapter 13 cases in the Tampa Bay area, attributes many of the mortgage-related bankruptcies to loose lending practices.
"There was a period of time from, let's say, '95 to 2005 where there were absolutely no underwriting standards in the mortgage industry,'' he says. "If you could breathe on a mirror and create fog, you got a mortgage. I will see cases in an average day where people are in a $500,000 house with nothing down and they make $50,000 a year.''
Smith predicts housing-related bankruptcies will taper off. Moore isn't so sure.
"I think we may have only hit the tip of the iceberg,'' he says. "A lot of mortgages written in 2007 are not getting ready to reset until probably later this year and we're going to see another wave of problems with those.''
Will new law help?
Tampa bankruptcy Judge Catherine Peek McEwen notes that the Obama administration predicted an 8.1 national unemployment rate for the entire year. It has already hit that level.
"That tells me more people are going to lose their jobs and that more people will not be able to use Chapter 13 to save their homes,'' she says. "You have to be able to pay to play.''
Many home-owners facing foreclosure declare bankruptcy under Chapter 13, a move that automatically stops the foreclosure proceedings and lets debtors work out a court-approved repayment plan. Depending on their income, they have three or five years to make up late payments while keeping up with current ones.
With so many Americans "under water'' in homes worth less than the mortgage amount, Congress is considering a bill that for the first time would let judges in Chapter 13 cases modify the principal and interest rate on homestead property.
Critics charge that the bill gives judges too much power and would be difficult to administer.
Not so, judges contend, noting that they already can — and routinely do — reduce the principal and interest rates on vacation homes, rentals and other non-homestead property.
The bill would also limit judicial discretion by specifying threshold rules for calculating interest rates and fair market value. And it has safeguards for the lender so a debtor in Chapter 13 couldn't sell property and keep all of the profit after the court reduced the mortgage.
However, McEwen acknowledges, the bill has "fuzzy'' areas, like the requirement a homeowner contact the lender 30 days before declaring bankruptcy and "consider'' any loan modification offer.
"What does 'consider' it mean?'' McEwen asks. "That I thought about it for 30 seconds?''
Moore says many of his clients are waiting to file Chapter 13 until they see the final version of the bill, which passed the House and is now in the Senate. He predicts there will be" droves of clients the bill will definitely help.''
"On the other hand,'' he adds, "there are always going to be those people who have suffered job loss, and reducing payments down to zero isn't going to help them.''
Waves keep crashing
Back in Room A of the federal building, Mandell and her colleagues are dealing with the latest wave of debtors to sweep through as the economic crisis spreads.
First, "'it was mortgage brokers and real estate people who couldn't sell houses, then anything related to construction,'' says attorney M. Eric Barksdale. "Then we had car dealers. As you hear the news, we get them.''
Indeed, today's group includes a Chrysler salesman and his wife. They are walking away from two condos in Chicago in an attempt to save their Tampa home.
But even high wage-earners are struggling. A Delta pilot making $137,800 a year tells Mandell that his condo and 401(k) plan plunged in value just as he faced a big divorce settlement.
Before the day is out, Mandell and Barksdale will have heard nearly 40 cases. Across the hall, another set of attorneys is listening to dozens more.
And there is no letup in sight. On the last two days of February, the bankruptcy court for Florida's Middle District received nearly 350 new filings.
Susan Taylor Martin can be contacted at firstname.lastname@example.org.