Hard work, hard times: One setback can send a middle-class family reeling

It was only 18 months ago that she and her husband, David, brought their second-born, a healthy baby boy, home to their two-bedroom Greenwood apartment.


		Paul Joseph Brown / P-I
	Gaynelle Harris rides the bus during her job search. Harris' filing of Chapter 7 bankruptcy erased $23,000 of medical debt.

Tammi soon went back to work as a caregiver at an assisted-living facility. David made $35,000 that year working as a crane operator, and she added another $14,000 to the family's income.

"Almost $50,000," she said. "That sounds like a lot of money."

It had been for the Fletchers -- until a few unexpected setbacks set them way back.

A day-care crisis was the first to hit. Next came the loss of Tammi's income. Then an onerous car repair bill. Then a costly debt-consolidation plan that left the family even more cash-strapped.

By last Christmas, the Fletchers were stunned to find themselves turning to bankruptcy court for relief.

"After we paid our taxes, car payment and rent, there wasn't anything left for our other bills," Tammi said. "My husband makes a very decent income, and it's sad to me that a family of four can't live on it."

As part of a yearlong effort to explore the struggles of working families in the Puget Sound region, the Seattle Post-Intelligencer examined bankruptcy filings here and interviewed King County residents who filed in recent months. The review offers a startling picture of the frailty of the middle class in our expensive corner of the country -- a place where even seemingly comfortable families can be hard-pressed to weather an unforeseen financial setback, let alone two or three.

The Fletchers were among the 28,529 households filing for personal bankruptcy protection in Western Washington last year. That number is up about 81 percent from a decade ago.

Many families filing here had annual incomes of $50,000 or more not long ago. And many were sent reeling by one of the top three causes of bankruptcy for families with children: income loss; divorce or separation; or a medical crisis.

Those are not the only causes of bankruptcy, of course. Many who wind up at U.S. Bankruptcy Court on Stewart Street in Seattle are there for a combination of reasons, including simply spending far more money than they had or could reasonably expect to repay.

But there's the rub: For a time, when their incomes were higher, many filers were able to keep up with their debt loads. As soon as trouble hit -- commonly, one of those three triggers -- their fall from a middle-class lifestyle began.

Elizabeth Warren, a Harvard law professor who studied more than 2,200 bankruptcy cases, discovered that couples with children were more than twice as likely and single mothers nearly three times more likely to file for bankruptcy than childless families. She also identified the top three reasons families with children file.

Warren said the jump in bankruptcy filings is not an indication of a rise in conspicuous overspending. She argues in her book "The Two-Income Trap: Why Middle-Class Mothers and Fathers are Going Broke," that the surging bankruptcy rate is a sign that the costs of a middle-class lifestyle's basic building blocks -- housing, health care and education -- have been rising much faster than people's median incomes.


		Paul Joseph Brown / P-I
	Gaynelle Harris meets with Stephen Castellese at WorkSource Renton in hopes of being paired up with a suitable employer. Harris' descent into bankruptcy began in 2003 when health insurance provided through her job as a cashier at Fred Meyer failed to cover about $10,000 of the cost of a hysterectomy.

"Washington's high filing rate is a sign of economic vulnerability, that costs are rising faster than families' ability to keep up with them," Warren said in an interview. "It's not that there's more illness, or more divorce or more job loss -- it's about the underlying economic insecurity of the middle class. These are extreme cases of the problems that are affecting millions of Americans."

The downward spiral

Most any Wednesday morning, the scene on the fourth floor of Seattle's austere new federal courthouse is the same: anxious debtors huddled with their attorneys, clutching manila envelopes stuffed with unpaid medical bills and handwritten budgets showing down to the last penny how credit-card debts and auto loans add up to more than their monthly incomes can bear.

This bankruptcy cattle call is officially dubbed a "341 Meeting of Creditors" -- a requirement for those who file for Chapter 7, known as a "straight" or "liquidation" bankruptcy. In Chapter 7 proceedings, families' debts are wiped out in exchange for all their property and assets.

Critics complain that it has become too easy to file for Chapter 7. A bankruptcy bill approved in the U.S. Senate last week would make it tougher for people to do so. The House is expected to pass the measure next month and deliver it to President Bush, who favors it.

The 341 hearings generally do last just five minutes, but it's rare to find debtors who don't feel queasy about them -- or worse.

As she raised her right hand recently and swore to tell a federal bankruptcy trustee the truth, Gaynelle Harris could not stop trembling.

"Try to relax, Gaynelle," said Jay Jump, Harris' bankruptcy attorney. "This shouldn't take long."

Five minutes later, as promised, Harris' hearing was over and the 49-year-old epileptic was on her way to erasing $23,000 of haunting medical debt.

Outside in the busy waiting room, Harris relaxed a bit.

"I was a mess in there," said the mother of three. "I had this bad feeling the whole world was going to know that I am irresponsible."

And in a sense, that's true. For the next 10 years, any employer, lender or acquaintance willing to do a cursory Internet search could know about Harris' bankruptcy filing. She may find that her house payments, car insurance or other fixed costs are more expensive. And with more employers running credit checks, her bankruptcy filing could make it more difficult for Harris to find a job.

Last month, Harvard Medical School researchers found that medical illness or injury was a contributing cause in 54 percent of bankruptcy filings nationwide. More than three-quarters of the families in the study had health insurance at the start of the bankrupting illness, but a third had lost their coverage, at least temporarily, by the time they filed.

Harris said her real descent into bankruptcy began in 2003, when health insurance through her job as a cashier at Fred Meyer failed to cover about $10,000 of the cost of a hysterectomy.

Her case is unusual because it involved no credit-card debt.

Whether the initial trigger is the arrival of a new baby, the high cost of setting up two households after a divorce, or simply a lack of basic understanding about the dangers of compound interest, experts say most bankruptcy cases involve downward spirals lasting months.

In their desperate attempts to keep bill collectors at bay, families take out second mortgages and loans from relatives, put surgeries and tax bills on high-interest credit cards and transfer balances from high-interest cards to lower ones again and again.

By the time they sit down before a federal trustee, local bankruptcy attorneys say, most filers have heavy loads of 29 percent credit-card debt or car loans that dwarf their cars' actual values.

Jump, whose popular Kent-based practice works almost entirely with people filing for Chapter 7 and 13 bankruptcies, said he usually sees credit-card debt of between $30,000 and $40,000.

"We are all eternal optimists," Jump said. "It's an incremental process, and most people don't realize it until they are in over their heads."

Unexpected expenses

The Fletchers were doing fine while their child-care situation was under control. At first, Tammi's mother baby-sat during the afternoon hours when Tammi's day shift and David's swing shift overlapped.

But two kids are harder to care for than one, and the baby-sitting began taking a toll on Tammi's mom, who has her own full-time job stocking shelves at J.C. Penney. Day care would cost about as much as Tammi took home from her $9-an-hour job, so she cut back her hours and ultimately quit.

The family's $11,000 of accumulated credit-card debt -- a legacy of past Christmases, clothes and furniture purchases -- became a struggle. Just before Thanksgiving, the family's 2000 Saturn died, leaving them with car payments of $416 a month, but not enough money to afford the $2,300 repair.

The Fletchers were free-falling toward bankruptcy when they sought help from CreditGUARD of America, a non-profit, Boca Raton, Fla.-based credit counseling agency company promising help for "overextended consumers."

The company said it couldn't help with any small bills under $100, but offered to consolidate the family's larger debts into one $320 monthly payment -- an amount the Fletchers thought they could handle on David's income.

But once they signed up for the service, they said they realized their monthly payment would actually be $406, which included a $50 monthly fee for CreditGUARD's consolidation services, as well as higher-than-expected minimum payments to their creditors.

Juan Valladares, vice president of operations for CreditGUARD, said a detailed analysis of the Fletchers' budget showed the bill was one they could afford.

But Tammi said the unexpectedly higher payment left the family with about $50 a week after basic bills to survive. The realization that they had no chance of climbing out of debt -- even with a debt management plan -- led them to file for bankruptcy.

They are hoping the bankruptcy process will eliminate $13,214 of accumulated credit-card and medical debt, and at least a portion of the $15,648 they still owe on their Saturn, which was repossessed.

In June, the family plans to move to Alaska, where they can live rent-free in an apartment owned by David's mom just north of Anchorage. Tammi, who is 28, plans to work in her mother-in-law's assisted living home while David, 27, pursues a commercial driving career.

Once they are back on their feet financially, they say they will come back to Washington -- but never to Seattle.

"It's just too expensive to live in this city," Tammi said.

In the meantime, the Fletchers say they are being flooded with offers for new credit cards. The one-day record so far: nine new offers.

"I just rip them up and throw them away," Tammi said. "My lesson has been learned."

John Rao, a staff attorney for the National Consumer Law Center in Boston, said outrageous as it may seem, it's become common banking industry practice to try to recruit new credit-card customers off the bankruptcy rolls.

"Even though it's counterintuitive, they are considered a good credit risk because they can't file for bankruptcy again for six years," Rao said.

The heavy role high-interest credit-card debt plays in most bankruptcies has turned Harvard's Warren into an outspoken critic of the banking industry, which has free rein to increase interest rates from 9 percent to 29 percent because of a single late payment and to impose fees on payments that are as little as one hour late.

A generation ago, in the more-regulated 1970s, Warren said, families did not see their debt explode the way it does today because usury laws capped annual interest rates at no more than 14 percent.

Not all bankruptcy experts share Warren's view.

Sam Gerdano, executive director of the American Bankruptcy Institute, a non-partisan research and education organization in Alexandria, Va., notes that the personal savings rate in the country is at an all-time low of 1 percent, leaving debtors with no room for calamity.

"Like farmers, they are eternally optimistic that a better job is around the corner, that they are not going to get sick or care for a sick relative, that their kids won't need braces," Gerdano said. "But when those things happen, there is just no cushion."

TYPES OF PERSONAL BANKRUPTCY

Chapter 7: An individual's debts are wiped out entirely in exchange for certain property and assets. The proceeds of those assets are distributed to creditors. About 70 percent of the people who file for bankruptcy now do so under Chapter 7. A person cannot do this more than once every six years.

Chapter 13: A debtor sets up a plan to repay all or some debts over a period of up to five years. Interest usually stops accruing once a payment plan is filed. Alimony, child support, most student loans, obligations to make criminal restitution and most tax debts are not forgiven. About 30 percent of personal bankruptcy filings fall under Chapter 13.

Sources: Washington State Bar Association; American Bankruptcy Institute

ABOUT THE SENATE BANKRUPTCY BILL

Here are some key features of Senate legislation to overhaul the U.S. bankruptcy laws. If enacted, the bill would:

Set up a new test for measuring a debtor's ability to repay. People with insufficient assets or income could still file a Chapter 7 bankruptcy, but those with income above the state's median annual income who can pay at least $6,000 over five years -- $100 a month -- would be forced into Chapter 13, where a judge would order a repayment plan. (Washington's median household income was $47,508 in 2003.)

Require people filing for bankruptcy to pay for credit counseling.

Give top priority to a spouse's claims for child support among creditors' claims on a debtor in bankruptcy.

Allow for special accommodations for active-duty service members, low-income veterans and those with serious medical conditions in the new income test for bankruptcy applicants.

Limit the value of equity in a home that could be sheltered from creditors to $125,000 -- if the residence was bought less than three years and four months before the bankruptcy filing. Florida, Iowa, Kansas, South Dakota and Texas currently have unlimited homestead exemptions that allow wealthy people to file for bankruptcy and keep their mansions in those states sheltered from creditors. In Washington, however, a debtor is allowed to protect his or her home only if the equity in the home is $40,000 or less. If the equity is above $40,000, a judge may order the house to be sold and the proceeds distributed to creditors.

Sources: The Associated Press; Washington State Bar Association; Martin E. Snodgrass of the Bellevue law firm Snodgrass & Warren

P-I reporter Heath Foster can be reached at working@seattlepi.com

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