'What caused the bankruptcy?' — a day with debtors in Tampa Bay bankruptcy hearings

TAMPA — At 8:30 on a recent morning, a thin Brooksville woman in a lacy orange blouse sits down at the desk in Room 100-C of Tampa's federal courthouse annex.

Behind the desk is Angela Welch, and behind Welch is a large sign that says: FBI Investigates Bankruptcy Crimes.

The woman raises her right hand and swears to tell the truth. Then Welch asks a series of questions including: "What caused the bankruptcy?''

"My daughter is special needs,'' the woman replies in a soft voice. "I'm a single parent. It's very hard to get employment.''

More questions: Do you have a bank account? Are you filing taxes? How are you getting around? In less than five minutes, the interview is over and as the woman leaves the room, a Largo man takes her place.

Welch is a bankruptcy trustee, appointed by the U.S. Department of Justice to review filings and determine what, if any, assets the debtors have that can be used to pay creditors. The trustees' workload is getting heavier. After years of decline, bankruptcies this year have jumped 11 percent in Florida overall and 12 percent in the state's middle district, which includes the Tampa Bay area.

Filings still remain far below the levels of the early 2000s. The increase is concerning, though, because bankruptcies nationwide have risen only 1 percent and Tampa Bay's economy seems so robust. Job growth is strong, wages are starting to rise. But a day spent in Room 100-C reveals a starker picture, one of people who struggle so much to pay for the basics of life — food, shelter, clothing — that a serious illness or unexpected repair bill can lead to an unconquerable mountain of debt.

Over the next several hours, Welch and Trustee Larry Hyman will hear the stories of 60 debtors — Publix and Walmart clerks, office workers and retirees — who have filed Chapter 7 bankruptcies. Often called "no asset'' or consumer bankruptcies, they typically involve people who have little or no income and nothing that can be sold to pay their debts. By law they can keep up to $4,000 of personal belongings plus "exempt'' items like pensions and cars and houses if loan payments are current.

In contrast to the meager assets, the debts can be massive. A young couple from Apollo Beach has assets of $12,441 and debts of $113,510. A Palmetto man who picks watermelons has $2,080 in assets and owes $73,208.

In most cases, after asking questions and reviewing the bankruptcy petition, the trustee determines there are no saleable assets and files a "report of no distribution.'' If creditors don't object, debts piled up with credit cards, pay day loans, personal loans and medical bills will be "discharged" — forgiven. The debtors can make a fresh start.

Maybe.

At least 14 of the 60 who appear before the trustees have declared bankruptcy before, some more than once. Hyman wouldn't be surprised if some declare bankruptcy again.

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"For the most part they are honest, hard-working people,'' he says of the debtors he's met over 31 years. "But they don't have the technical skills or the financial skills to go into another type of job. They're still kind of stuck doing what they've been doing, and a lot of these people are going to find themselves in the same predicament 10 years from now."

•••

All of the debtors in Room 100-C this day filed their bankruptcy petitions in April. Chapter 7 filings typically increase in April for a simple reason: by that time many people have received — and spent — their income tax refunds.

Tampa lawyer Herb Donica advises clients to use the refund to get a new roof, have their teeth fixed or pay for other big-ticket items before they declare bankruptcy. Once they file, their credit score will plunge and it will be almost impossible to get a loan or financing for several years. It can also be smart to buy a decent car before filing — people need a job to get out of debt, and they need reliable transportation to get to their job. Take out an auto loan while your credit is still good enough.

"The Prius — does that have a loan on it?'' Welch, the trustee, asks a couple from Largo.

"We've had it a year and a half,'' the husband says. They are current on payments so they will be able to keep the car.

As the hearings continue, debtors and bankruptcy lawyers shuffle in and out of the small room, stark but for a few signs and six rows of chairs covered in institutional gray vinyl. The hearings are public so attorneys often tell clients to arrive early so they can hear the kinds of questions they will be asked. As a result, most display little nervousness by the time it is their turn to sit at the desk and tell Welch what caused their bankruptcy:

"Sudden job loss. I was an audio manager, but they're chopping the high-dollar guys like me and replacing them with $11-an-hour guys.'' — a Polk County man.

"My mother is really sick so I'm only able to work 20 hours a week.'' — an Oldsmar woman.

"I already had debt, a little bit, and I was using American Express to pay my bills but I became pregnant and he came early and it landed me in the hospital." — a Port Richey woman.

"It was a gradual thing, medical bills, car accident, insurance changed at work." — a Tampa man.

Most of Welch's questions help determine if there are assets that can be used to pay creditors. "Is there anybody you can sue?'' she asks. (The settlement from a slip-and-fall case might yield a few thousand dollars.) "Do you breed the dog?" (If so, there might be money from selling the puppies.)

Throughout, Welch remains polite and nonjudgmental, even as some debtors lay out stories that beg the question: What were you thinking?

A Pasco County woman, living on Social Security disability income, says she co-signed a loan for her sister and brother-in-law and "they didn't pay.'' She also let them borrow a credit card and "they put $50,000 on it.''

"Did you have a written agreement with your sister?'' Welch asks.

"No,'' the woman replies, adding that she doesn't even know where her sister lives. Since the woman has no way to collect the debt and no other assets of value, Welch tells her:

"This concludes your hearing. Thank you so much.''

•••

Centuries ago, people who couldn't pay their debts were forced into slavery or held in debtors' prisons until they worked off the amount they owed. In some places, debtors were even put to death.

The principle of taking and selling assets to pay off creditors began in England in the middle ages. In the United States, Article 1 of the U.S Constitution gave Congress the power to enact "uniform laws on the subject of bankruptcy.'' Lawmakers exercised that authority most recently with the Bankruptcy Abuse and Consumer Protection Act of 2005.

As filings soared, banks and credit card companies alleged that the system was plagued by widespread fraud and that people were being discharged of debts they actually could repay. Despite evidence that those claims were exaggerated, Congress made it harder to declare a Chapter 7 bankruptcy and forced more people into Chapter 13, designed for those who have an income and can pay at least part of what they owe under a court-approved plan.

Passage of the act led to a staggering drop in Chapter 7 filings in Florida's middle district. In 2005, there were 51,480. A year later, 9,102. But Tampa lawyer Kelley Petry, who represents clients in bankruptcy, doesn't think the act was as successful as the banks thought it would be.

"By the time you pay increasing costs of rent and vehicles and utilities and raising children,'' she said, "there is no disposable income left over for many people to be able to fund these Chapter 13 plans.''

So far this year, the middle district has handled more than twice as many Chapter 7 filings as Chapter 13 cases — 7,964 compared to 3,102. And Petry predicts Chapter 7 filings will continue to increase, at least in part because of the banks' own actions.

"During the recession, lenders stopped lending,'' she said. "Now things have loosened up and people are easily getting car loans at higher purchase prices than they should be and credit companies will give almost anybody a credit card.''

•••

At noon, there is a break for lunch. When the hearings resume, Hyman, a certified public accountant, takes over. Like the other Chapter 7 trustees, he works under contract to the Justice Department and is paid a base fee of $60 per case. He gets another $60 plus a percentage of the proceeds if he sells assets and distributes the money to creditors.

Among the questions Hyman asks everyone: "Did you get calls from debt collectors?'' If a collector violated fair debt collection practices, Hyman can sue and perhaps get a judgment with which to pay creditors. So his ears perk up when a New Port Richey man says he was hounded by a company called Portfolio Recovery.

"I know that one well,'' Hyman says. "How many times a day would they call?''

"Quite a few.''

"More than two times?''

"They called even on Saturday and Sunday.''

Hyman makes a note. The man, who owes $350,000 on a loan for a failed daycare business, is poised and articulate. Hyman thinks he could be a good witness in any legal action against the debt collector.

People in Chapter 7 rarely have assets that can be sold. An exception is a Brooksville couple, who begin their hearing with a tearful account of how they paid more than $200,000 for a home renovation that the contractors never finished.

"Where did you get the $200,000 from?" Hyman asks.

"We saved it for many years,'' the wife replies. "Our life savings, our retirement, our daughter's college money.''

In looking through their list of assets, Hyman sees that they own a 2011 Lincoln Town Car outright. The couple's daughter is using it to get to school in Tallahassee but the car has considerable value despite its age and Hyman wants to sell it.

"I understand your hardship and feel terrible for you,'' he says. "But I'm fiduciary for your creditors. Is there any way you could get it back down here?''

"We'll work it out,'' the husband says reluctantly.

By the end of the day, Hyman and Welch will have heard almost every conceivable cause of bankruptcy — divorce, separation, job loss, reduction in income, injury, illness, student loans. A few of the debtors have held good-paying jobs in the past but most have always been on the lower rungs of the pay scale, constantly struggling to hang on.

The final meeting is with a young woman from Lutz. "What caused the bankruptcy?'' Hyman asks.

"An unplanned pregnancy,'' she says. And adds:

"I've been living paycheck to paycheck since 2011.''

•••

The most common types of bankruptcy:

Chapter 7 — For people who cannot pay their debts and agree to let their non-exempt property be used to pay creditors. In Florida, exempt property includes alimony and child support, pensions, IRAs, 401(k) plans and disability benefits and income. Debtors also can keep up to $1,000 in personal property ($4,000 if they don't have a homestead exemption) and $1,000 worth of motor vehicles. Debts that can be "discharged,'' or forgiven, generally include medical bills, credit card bills, payday loans and personal loans. Debtors might still be responsible for some debts including most student loans and IRS taxes. Chapter 7 is not available to debtors making more than a certain amount, currently about $49,000 for one earner and $60,400 for two earners.

Most Chapter 7 filers can keep a home if they're current on mortgage payments and don't have much equity. However, it's likely that a debtor will lose the home if there's significant equity that the trustee can use to pay creditors.

Chapter 13 — For those who have a regular income and make more than the Chapter 7 limits. Debtors develop a plan to repay all or part of their debts over three to five years. Chapter 13 allows debtors to keep valuable property like a home and cars if the required payments are made to creditors. In most cases, the payments will be at least as much as the regular monthly payments on a mortgage or car loan, with extra payment to get caught up on any delinquent amount.

Chapter 11 — Provides for reorganization, usually involving a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in Chapter 11.

For more information, go to www.flmb.uscourts.gov

Contact Susan Taylor Martin at smartin@tampabay.com or (727) 893-8642. Follow @susanskate.

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'What caused the bankruptcy?' — a day with debtors in Tampa Bay bankruptcy hearings

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