Three years ago, life looked awfully bleak to Carmine Warren.
While undergoing surgery and chemotherapy for cancer, Warren and his wife Lynette found that the insurance payments they were getting didn’t make up for his inability to work for weeks at a time, and their bills began piling up.
“It got to the point of: 'Do we pay the bills, do we pay for medicines or do we pay for food for us and our boys?'" Warren remembers.
When creditors threatened to put liens on their home in Orlando, Fla., the Warrens felt they had no choice but to file for bankruptcy.
Bankruptcy is a scary word for many families, who often associate it with failure. But experts say the majority of people who seek bankruptcy protection have suffered a severe financial setback.
The 'big three' causes: they’ve lost a job, their spouse has divorced them or died, or they are hit with heavy medical bills, according to Cleveland bankruptcy attorney Alan Kopit.
While the bankruptcy law that goes into effect Oct. 17 aims to stop consumer abuse of the system by making it harder to wipe out debts, it also can be a lifeline for families like the Warrens who are overwhelmed by situations beyond their control.
“Unexpected things happen in life,” said Kopit, who is legal editor of the Lawyers.com Web site. “Life throws you a curve ball, and you can swing and miss. You should be able to get another chance, a fresh start, and the bankruptcy law allows you to do that.”
Today the Warrens are rebuilding their financial lives. Carmine Warren, now 40 with his cancer in remission, has started his own computer repair business, HomeorofficePC.com, and his wife has been promoted within the mortgage company she works at and is bringing in more money herself.
The couple has a monthly budget and sticks to it, he said. They have an emergency fund to carry them for at least six months, if necessary, and they’re saving again for retirement.
“I learned the hard way you have to be prepared,” he said. “If something bad happened today, I think we could handle it.”
Bankruptcy attorney Brad Botes, whose firm Bond, Botes and Neway PC handled the Warrens’ case, worries that the new bankruptcy law will make it more difficult for financially devastated families to get relief through bankruptcy.
All applicants will be required to pass a lengthy “means test” to determine if they can repay creditors. They’ll have to come up with more documents, including tax returns and wage statements, and pay higher fees to attorneys, who must certify the debtors’ financial statements. And they’ll have to undergo credit counseling.
In many cases, they won’t be eligible for a Chapter 7 bankruptcy, which discharges their unsecured debts; instead they’ll be forced into a Chapter 13 bankruptcy, which is basically a repayment plan.
“Six months from now, many of the people who were devastated by Hurricane Katrina and Hurricane Rita will have to seek bankruptcy protection,” Botes said. “Adding hoops these people need to jump through to get a fresh start, that’s going to create problems.”
Botes also says he resents the “mean-spirited” assumption in the new law that most bankruptcy filers dug their own financial graves.
He described the case of a factory worker in his 50s from Birmingham, Ala.
“The guy did everything right,” Botes recalled. “He saved, he put his kids through college, he had a good pension.”
Then the factory shut down, taking his job and pension and health insurance with it. The man went to work pumping gas to bring in money for himself and his wife, but the work and the stress led to a heart attack. Eventually, the hospital that treated him came looking for $100,000 for his medical bills.
“When he came into my office to talk about bankruptcy, he broke down in tears,” Botes said. “It wasn’t his fault, and there are so very many people like that out there.”
There are, of course, people who mismanage their finances so badly that they end up in bankruptcy court.
Overspending is what got Paul Richard of San Diego, Calif., into trouble. He ran up more than $40,000 in credit card bills and declared bankruptcy in 1970. His petition was approved on his 25th birthday.
“I remember pulling my boss at Burger King aside and telling him about it,” Richard said. “I was worried it might cost me my job.”
His boss kept him on, but Richard recalls “the embarrassment, the sense of failure ... and the immediate sense of relief” that the bankruptcy brought him.
He began to educate himself about money and soon was teaching a course in personal finance at his local church. Today he is executive director of the Institute of Consumer Financial Education in San Diego, which focuses on developing good spending habits and holding down debt.
Richard believes Americans have become too accepting of bankruptcy.
“There’s an attitude out there of, ’Gee, if Texaco can abrogate their bills, why can’t I? If Orange County can declare bankruptcy and if Continental Airlines can declare bankruptcy — more than once — why can’t I?” he said.
While he believes the new bankruptcy law will discourage some filers, he also believes the better goal is to teach people good money management so they never have to consider it.