The Wall Street Journal



August 6, 2004








New Group Swells
Bankruptcy Court:
The Middle-Aged


Job Losses, Illnesses Can Push
White Collar Over Edge;
Delay Can Make It Worse

Mr. Hester Takes a Mall Job

August 6, 2004; Page A1

MOUNTAIN VIEW, Calif. -- On a Wednesday afternoon, Jeff Hester stood at the entrance of an empty jewelry store, gazing over his bifocals into the sunny parking lot. He watched cars drive by. He played with the change in his pocket. After a few minutes, he headed back into the store to clean its glass display cases.

A college-educated former computer-systems operator, Mr. Hester now sells moderately priced jewelry in a mall. He is a member of an emerging class of middle-age, white-collar Americans who make the grim odyssey from comfortable circumstances to going broke. Mr. Hester, who filed for bankruptcy last year, puts it succinctly: "I'm 59 and I don't have any money."

Since the 1960s, personal bankruptcy has often been a haven for the young and struggling. Bankruptcy lawyers say younger and less-educated people tended to rack up too much debt while starting families and jobs, without a savings cushion to carry them through lean times. No government agency tracks the age of bankruptcy filers, but the rule of thumb, say those who've worked in and studied the field, was the older the group, the fewer the filers.

That's changing, as personal bankruptcy filings are hitting all-time highs. Last year, there were more than 1.6 million such filings, compared with 875,000 a decade earlier. Some experts say much of the increase is being driven by older people, many of whom have decades of work experience in white-collar jobs.

The Consumer Bankruptcy Project, which surveyed 2,400 bankruptcy filers in 2001 and 1991, found that on a per capita basis, older people are now the most likely to file. In 2001, for instance, per capita filings of individuals ages 45 to 54 increased 58%, to 11 per thousand, according to the study. "The curve is moving to the right," says Elizabeth Warren, a professor at Harvard University Law School, who co-authored the study. "It reflects a more frightening reality for a wide swath of middle-class America."

Many of today's bankrupt baby boomers simply weren't as frugal as their Depression-era parents. But the increase in middle-age people filing for bankruptcy also is attributed to soaring medical costs, an unstable job market and years of aggressive credit-card marketing.

[Jeff Hester]Increased family obligations play a role too, says Ms. Warren. The so-called sandwich generation often bears financial responsibility for both their children and their parents. Because people are living longer, middle-age Americans are now eight times as likely to have a living parent as previous generations, she says. And since many people waited to have children later in life, tuition bills come later as well.

Ben B. Floyd, a personal-bankruptcy trustee in Houston for the past 30 years, says he's now seeing people "who obviously had a white-collar background. They come in looking lost." Personal-bankruptcy lawyers across the country say they've witnessed a tidal shift in their practices, seeing older clients with longer work histories. "These people didn't take their credit cards to Atlantic City," says Gabriel Del Virginia, a New York bankruptcy attorney. "It's largely because people lost their jobs or had a catastrophic illness."

Until last year, Charlene Freeman, a 48-year-old who lives in the Boston area, worked at home, doing technical writing on a contract basis. As the family's primary breadwinner, she says she was earning $150,000 a year, had a perfect credit record and a spacious home with a pool. Her husband is an independent computer technician.

Then, her long-controlled kidney disease turned into kidney failure, halting her income while her medical costs soared. Although she paid $725 a month to insure herself, her husband and child, Ms. Freedman wasn't insured for the numerous drugs prescribed to her. Those costs at one point rose to $1,200 a month. The drug costs are on top of her usual $4,000-a-month outlay for mortgage, groceries, utilities and other expenses.

Although Ms. Freeman has disability insurance, it wouldn't cover anything related to kidney problems because it was a pre-existing condition.

To pay the bills while she battled her illness, Ms. Freeman drained the couple's retirement savings, her home-equity line, and tapped her young son's savings accounts. She used 10 credit cards. What she didn't realize, she says, is that her husband was using checks sent to them by credit-card companies. These checks, sent unsolicited, have no grace period; interest begins to accumulate on them as soon as they hit the cardholder's account.

In May, when her husband went out of town for a job, Ms. Freeman asked for the checkbook so she could pay the monthly expenses. Shocked at the size of their credit-card bills, Ms. Freeman decided to look up the couple's accounts online and add up exactly how much they owed. As her mouse clicked through the pages, Ms. Freeman says her eyes filled with tears. The couple had accumulated $115,000 in debt. "I sat there and said 'I'm s-d,' " she says. She plans to file for bankruptcy in the fall. "It's killing me to file," she says. "But there's no way I can make enough to pay it off."

Her husband, Jim, says he didn't tell his wife he was using the credit-card checks because he didn't want to upset her while she was ill. "I was always banking on that next big job to come in to pay for it, but it never came," he says.

More Aggressive

In recent years, the credit-card industry has grown increasingly aggressive in raising interest rates for certain consumers. Interest rates can go up when a person's payments are late, or when their total debt passes a specific level.

[Chart]Six months ago, Ms. Freeman realized Bank of America had raised her interest rate on its card, citing the total debt her family owed. Other credit-card issuers soon followed suit. She called a few of the banks, and pointed out her prior creditworthiness, but requests to have her rate lowered were denied, she says.

While she's cutting back -- returning the cable box to save $20 a month, keeping the air conditioning turned off -- Ms. Freeman says she's given up hope of paying the credit cards back in full. Today, nine of her 10 credit cards, which she says previously charged interest rates in the 11% range, are charging her rates of 25.9%. Then there are the late fees, which she says are as high as $285 a month.

Over the last six months, she estimates her family racked up $19,000 in new expenses. Ms. Freeman says her attorney has advised her not to file for bankruptcy for three months because he fears she could be accused of racking up debts she knew she couldn't pay. Ms. Freeman says she isn't using credit cards any more.

The number of credit-card solicitations in the U.S. grew to 4.29 billion in 2003, from 1.52 billion a decade earlier, according to Chicago research-firm Synovate Inc.'s Mail Monitor service. Last year, Federal Reserve data showed total revolving consumer debt at more than $734.1 billion, compared with $238.6 billion in 1990.

Mounting credit-card debt led Mark Taylor, 43, to file for bankruptcy early last year. After losing his job as a community-relations executive at a hospital seven years ago, he started doing consulting work. But as the economy slumped, he says his work dried up, and he began increasingly relying on credit cards.

Since filing for bankruptcy, he says he has tried to shun credit, keeping a card only to rent cars. Learning to be debt-free "is a liberation I can't even begin to describe," says Mr. Taylor, who is now working as a legal assistant at a New York law firm.

For Mr. Hester, who is now selling jewelry in the mall, bankruptcy is the culmination of a tumultuous decade. In 1991, after being let go by his longtime employer in the airline food-service business, and in a failing marriage, Mr. Hester says he became addicted to cocaine. He battled that for the next five years, he says, until he entered rehab and conquered his habit in 1996. Friends and family say he's been drug-free ever since. The period drained him of his savings.

Dream Job

In 1999, after several years working at a Silicon Valley electronics-parts maker, Mr. Hester landed his dream job: setting up and maintaining computer systems at Finisar Corp., a fiber-optics startup. On Dec. 20, five days after he and his second wife, Carol, bought a modest home in San Jose, Finisar launched its initial public offering. Mr. Hester suddenly had stock valued at $250,000.

While the couple spent some of that money on decorating their new house, much of their newfound wealth went to their extended families. The couple paid $5,000 for the funeral of Ms. Hester's mother and $8,000 to move her father to a new home. Mr. Hester began using the new money to try to reconnect with his children, with whom he had lost touch after his divorce. He gave his grown son $60,000 to pay for college. He gave his daughter $10,000 for her wedding and $3,000 to renovate her kitchen. "I felt obligated to pay up because I hadn't been a part of their lives," Mr. Hester says.

In May of 2002, after surviving several rounds of layoffs, Mr. Hester was laid off, for economic reasons, the company says. Convinced he could get another job quickly, he sent out hundreds of resumes -- but received little response. He cashed out the $10,000 he had in his Finisar 401(k) plan to pay living expenses and sold off his Finisar shares, which had sunk to around $10 each, from a peak price of $58 a share.

In November 2002, Mr. Hester threw in the towel on tech. He took a retail job, with a chain that sells low-priced jewelry. "I was selling credit to people who couldn't feed their kids," says Mr. Hester, who declines to name the retailer. "I knew they'd lend them the money, and I knew they would beat them up if they were a minute late."

He could identify with that feeling. By December of 2002, bill collectors had begun calling him, demanding to know when the next payment would be in the mail. He screened calls to avoid them. He sold possessions to pay bills and became withdrawn, his wife says. Over the holidays, the couple totaled their bills, found they owed nearly $40,000, and decided there was no way to pay them back.

In January 2003, Mr. Hester went to work at the jewelry store as usual. He says he had trouble doing the routines of checking inventory and making change for a customer. A doctor eventually prescribed antidepressants. The next month, the Hesters went to see an attorney, who filed for bankruptcy protection on the Hesters' behalf six weeks later.

Like the Hesters, middle-age filers, many of whom are homeowners, often try to pay down their credit-card bills by taking equity out of their homes, bankruptcy lawyers say. But that strategy can backfire. In a personal bankruptcy filing, credit-card debts and other unsecured debts are wiped out. Home-mortgage payments aren't.

Middle-age filers also frequently cash out their retirement plans, even though retirement plans are protected in bankruptcy. Bankruptcy attorneys say that's the most common mistake older bankruptcy filers make.

The downsides of bankruptcy vary from state to state. In some, filers can risk losing their homes. Credit reports list bankruptcy filings for seven to ten years. Congress has gotten close to passing legislation in recent years that would make it much more difficult for many individuals to file bankruptcy, but those efforts have failed.

"The older people stall," says Ron Wilcox, a bankruptcy attorney in San Jose, Calif. "By the time someone gets to my door they've considered every other possibility to get out of this, and drag their feet for years while the debts accumulate higher and higher."

Ignoring the pleadings of his friends, Barry O'Neal says he carried his credit-card debts for 10 years. "I felt there was an ethical question here," says Mr. O'Neal, 62-year-old director of the concert-music division for New York-based music publisher Carl Fischer. "Here are these debts I acquired by spending [the credit-card provider's] money. I battled that for quite some time."

Mr. O'Neal's credit-card debts are rooted in the 1980s and 1990s, when he was paying for hospitalizations and therapy for a family member who had psychological problems. Many of the mental-health-care expenses weren't covered by insurance, he says. He also concedes he didn't reduce his lifestyle expenses during that time, attending concerts and dining out. "I was a little careless with my spending," he says. "It was very foolish."

Those debts never went away. Over the next decade, although Mr. O'Neal tried to make headway on paying off his bills, at one point borrowing against his life insurance to pay them down, he never got ahead. Five years ago, the bills crept past $25,000; by last year, it had passed $40,000.

"It becomes more and more of a treadmill," says Mr. O'Neal, who now makes $50,000 a year. "I realized I wasn't keeping up; only falling farther behind."

Last year, Mr. O'Neal finally gave up and filed for bankruptcy -- after an attorney friend offered to underwrite the cost of the filing.

Write to Suein Hwang at suein.hwang@wsj.com1