Bankruptcy! How did it come to this?!

I am not a shopaholic.  I am not financially disorganized.  I am not a huge risk taker.  In spite of these traits, my wife and I found ourselves in the Thomas P. O'Neill Federal Building last Thursday for a Chapter 7 Bankruptcy hearing.

How did I get here?  It might be useful to take a peek at my credit history.  It goes back to when I got my first credit card - sometime around 1988, an AT&T Universal Visa credit card which was offered to me, a college freshman, barely 18 years old.  Ironically I was already receiving Financial Aid in the form of some grants, student loans, and work study.  I think I earned about $4 or $5 an hour checking IDs at Boyden Gym at UMass.  I probably worked 16 hours a week.  Obviously I was a good candidate for credit....  And yet I got the card and charged items and paid, at least the minimum, without fail.  Alone, VISA wasn't making a ton off me, but as one of millions of college students, I am sure they were making out pretty well.  I parlayed my Visa account into an American Express and I think I had a Filene's and Sears charge card, too.  I never carried large balances, but a balance I always carried.

After college, I had a job that paid $18,000/year.  The year was 1991 and while not a lot of money, I didn't have that many expenses.  But my tastes still exceeded my salary and I continued to carry a small balance, probably a couple thousand dollars, for several years on end.  When I went back to graduate school and began to just work part-time again, my balances began to creep up and by the time I got my master's degree in 1996 I was carrying a balance closer to $5,000.  I wasn't a mathematician, but it was clear to me even then that paying the minimums or just a bit more wasn't going to bring that balance down significantly or anytime soon.  I just didn't want to think about it and it seemed to be the norm anyway.  I was 26 years-old.  Plenty of time to sort it all out, I thought.

Sometime in 1997 or '98, I attended a financial planning workshop at my job put on by who was then American Express Financial Advisors.  I met with a very kind and personable woman who, for the very first time in my life, taught me a bit about financial planning, long term investment, and monthly budgeting.  The concepts were not difficult, but presented to me as a strategy, it seemed very clear to me how credit had been siphoning my life blood.  I resolved to eliminate my debt, create an 'emergency fund', and contribute regularly and as sizably as I could to my retirement savings.  It was the watershed moment of my financial life.  No longer was I simply managing my monthly bills; I was planning both for any short term emergencies and long term savings.  I was taking control of my financial future.

I was so dedicated to the effort that I sold my car and bicycled or walked to work to save money and in a relatively short period of time, I had ZERO credit card debt, left only with my relatively inexpensive student loans.  It was one of the proudest moments of my life.  And I was amassing what was for me substantial retirement savings while maintaining a cash fund for both emergencies and desired, but budgeted amenities.  I was self-assured and self-righteous in my evaluation of both my finances and the poor state of others.

This was essentially my financial state of affairs for the next 6 or 7 years.  I  had a steady income so affording life was simply a calculation of my net income versus my fixed expenses.  Fast forward now to 2004.  My wife and I plan a modest wedding, but one that still required us to lay out more cash than we had.  Including our honeymoon costs and the soon to follow cross country move we were about $8,000 in the red.  We knew the proposition going in and had resolved to pay the debt off as quickly as we could.  And we did.  In about one year we were back to carrying a zero credit card balance.  It was then 2005 and it seems like the entire world is telling us we're idiots if we don't buy real estate.  The values are going up and up so what's the risk....

We found a pre-construction condominium unit in downtown Salem, MA that seemed attractive, well situated, and we were able to lock in a price and a loan (despite the fact that I had been self employed for only about a year and had little verifiable income).  We took advantage of the market and financed our condo 100%.  That's right, we laid out exactly $0 in exchange $365K condo and an adjustable rate mortgage.  Fear not, though.  We weren't the victims of a rate adjustment that doubled our monthly payment.  I had been shrewd enough to refinance for a 30 year fixed rate mortgage at the height of our condo's value.  Indeed the condo had 'appreciated' $40,000 in value from our purchase price.  We folded that $40K back into the mortgage such that we 'added' 10% equity.  I use the single quotes because we didn't see any of this money; it was all virtual.  And while we could certainly afford our monthly housing costs, I felt that we were still living on the 'red line.'  As I had been doing for years (and continue to do) I carefully monitored our monthly expenses, making sure we were contributing to our savings, and not over spending.  And even with (or perhaps because of?) my close eye on our funds, I felt nervous.  One emergency or a sudden loss of income could send us quickly off the financial cliff.  But for a couple of years, we survived, even thrived by some comparative measurements.  We kept our debts low; we didn't carry credit card debt; we kept up with our student loans, and as a result managed to nearly double our retirement savings.

Of course we all know what happened.  The economy went to shit - and fast!  Coinciding with the declining real estate market, my company was also doing some reorganization.  If I was to stay with them I would have had to accept a position which demanded weeks on end of long hours - this at a time when we'd just adopted our newborn son.  The job was a similar role and position I'd held in the past and one which I knew was incompatible - to say the least - with my current family life, career objectives, and gut instincts.  I endeavored to switch to a different role in the company, but with the economic signs pointing south and with what was for the company my comparably high salary, I was left without options.  Within a matter of months, our household income was nearly halved.  Here was that financial crises I had been dreading.

At the same time, I was also going through some personal meditations.  What kind of commute made sense to me?  What kind of job did I want?  What is the value of the rat race exactly?  What, in effect, was worth my time?  Both my wife and I don't place an extremely high value on material things, particularly when it comes with the cost of our personal time.  For me to accept a most any job in Boston meant commuting a couple hours a day.  And those hours were the prime time that I could be with Max - early morning and before bed.  Taking that city job meant missing my son and to me this was something I couldn't abide.  Put simply, I wasn't willing to make the compromises that would eat at my soul, but pay the mortgage.  And the jobs that would feed my soul didn't pay the mortgage which left me, well, unemployed.

I networked and brainstormed and after just a few months on unemployment I found a job in Salem, literally steps from our condo.  Aside from the gut punching 30% cut in salary, there was much that seemed perfect.  The job was close, posed no time in commuting and didn't require any cost to do so either.  I could eat lunch at home and worked normal hours.  I started the job in June of '08, but within a few months, came to the wrenching realization that the job (Interactive Services Account Management) wasn't anything I was truly passionate about.  And I seemed incapable of sticking it out or making it work.  I simply was - and am - at a point where I can't stomach a job that offers little in personal satisfaction, salary notwithstanding.  So here I am in this major pickle.  We have a monthly nut that requires a sizable salary.  Those salaries are, by the day, becoming fewer and far between as the financial market verges on global collapse.  The writing is on the wall.

In late 2008 I began contacting our mortgage company to discuss what I saw as the inevitable.  Soon, I knew, our ability to pay the mortgage was going to conflict with our cash flow to say nothing of our cash reserves.  With me soon to be on unemployment and the job prospects being weak, I was hoping to discuss options - for renegotiating our mortgage, for a short sale - for anything that might be a sustainable solution.  It took several calls and letters and submissions of financial info.  Weeks passed, months of no progress.  Finally, after much effort I learned this cold truth:  until you actually stop making your mortgage payment you are not a problem to them.  It actually makes sense when you think about it. As long as the cash keeps coming in to the bank, what's the problem for them?  From my point of view, it was just a matter of time before the cash crunch came and for me to make those payments would have required draining our savings and our retirement funds - permanently.  And for what?  All that would do is keep our payments current until we were in the same place:  short on funds and long on bills.

After much deliberation, consultation, and discussion, we elected to withhold our mortgage payment, putting the money aside in a separate savings account to at least be able to discuss our position with more leverage with the mortgage company.  When this finally happened, they basically said, 'but you still have funds available to pay your mortgage.'  To them, it made absolutely no difference that to pay this mortgage meant the depletion of all the money we'd worked years to diligently to save.  All they wanted was all the cash we had.  Their threat was this:  cease payments and risk foreclosure, a poor credit rating, bankruptcy.

So let me get this straight, I thought.  If we cease to pay our mortgage, we risk losing our overpriced, and now upside down condo - then about $60K upside down - which 1) we're not sure we want to live in anymore and 2) we didn't actually pay any physical equity into.  So what are we really risking here?  To my mind, we were risking our retirement savings and making a deal with the devil.  Their proposition was more or less in effect:  stay in the condo, work a meaningless job (assuming I could find one!), and wait 5 or 10 years until the market rebounds and the condo is worth at least what you owe - just to break even!  It didn't compute.  The "Why" just didn't equal the "What" and "How."

Our situation was also unique in that for some time Linda and I had been contemplating a move to Connecticut - to be closer to family and to eventually live on Linda's family property.  Linda is a physical therapist and it's extremely easy for her to find suitable employment (I love you, honey!)  The threats of a bad credit rating weren't as scary knowing that we already had our cars, could rent a property without too many hoops through which to jump, and that in the future event we needed to take out a mortgage or construction loan, it would be for something on the family property for which we could get our family to co-sign (we asked our family about this in advance, of course).

I don't make to make light of the situation and rest assured we grappled with the decision for several months.  Having never done anything like this, it seemed too simple a prospect.  We consulted friends who've gone through bankruptcy, others that have done short sales with lenders, and attorneys with vast and varied experience.  With each investigation and further probing we kept arriving at the same conclusion.  It makes no sense to deplete our savings to pay a bank.  It makes no sense to exist in some kind of financial purgatory, being an indentured servant of a bank and a financial market, until such time as we can sell our property and break even.  Sure it will mean that we've 'rented' a very expensive condo for a few years and that unlike many others who bought and sold earlier, we won't walk away with a profit.  But what it would mean is we won't be working for anyone other than ourselves and that was something that actually did feel right.

So, yes, we stopped paying our mortgage last December.  And yes, we lived off the money that would have gone to the bank (which I might also add has been a victim of its own greed).  And yes, we've abandoned a condo which will eventually be foreclosed upon.  (A side note is that since the first mortgage company went under, they sold the note to some other lender and that lender hasn't even begun to send any notices to us other than the bill.  According to the many stories we've heard, it will likely be many months before the new bank, located in Florida, does anything to address the property.)   We did have to pay a few thousand dollars in attorney and bankruptcy fees;  our credit rating is currently poor; we now don't have any credit cards at all.  (My wife and I enjoy exchanging knowing smiles when the cashiers say, "Would you like to save 10% by applying for a FILL IN THE BLANK RETAILER NAME credit card now?")  We live on a cash basis only and it feels GREAT.

So after a year's worth of machinations, there we were - sitting in Room 255-A in the Thomas P. O'Neill Building, along with about a dozen other people, waiting for the federal bankruptcy trustee to call our names.  When he did we sat down at the table next to our lawyer.  The trustee, a friendly man emitting no trace of personal judgement whatsoever, asked us a few questions related to our petition.  He was essentially verifying the information in our file.  After what was about 5 minutes of us confirming the details, he smiled and said, "Thank you. You're all set."  There is a two month waiting period in which creditors might come forward to challenge our application or make demands against our resources - something that is extremely unlikely to happen.  And after that.  Well, that's mostly up to us.

One bizarre side note.  The room in which we were sitting overlooked Causway St.  There was light post from which traffic signals were suspended.  As we took our seats and looked out the window a peregrine falcon was beginning to peck at a live pigeon.  The falcon was pecking away at the writhing pigeon much to the amusement and disgust of the gallery.  As we waited the pigeon ceased to wriggle and the tell-tale blood of the carnivore's efforts became clearly visible.  It was both off-putting and engrossing - a nature channel outside the window.  As I am watching this, I can't help but metaphorically relate it to our situation.  The carnivore falcon preying on the weaker pigeon.  The corporatocracy preying on the common man.  And here's the kicker.  IMMEDIATELY after the trustee tells us we're all set, the falcon which had been feasting not more than 20 feet from where we sat next to the window, spreads its wings and flies DIRECTLY at me, flaps its wings at the window, then turns and flies away.  W-E-I-R-D.

Surely there were lessons to be learned from this experience - lessons I am still learning, but not the ones you might expect.  To file bankruptcy you're required to take some financial education classes.  The material focuses a lot on budgeting, credit, financial organization, and responsibility.  Much of the class's substance was review and redundant.  They are things I've been doing for a decade.  But when I ponder the question of how we got to this point, I feel that I was mostly guilty of being swept up in the national tide and swell of homeownership.  From the media, to my peers, to our government, to the financial industry everyone was singing the same tune.  Buy real estate.  You can't lose.  You're an idiot if you don't.  We all know that this wasn't exactly true.  And while we escaped by the skin of our teeth, thanks to a set of circumstances not easily duplicated, millions of others are mired in debt.  They are losing the homes they love and hope to stay in.  They are signing new notes that stipulate that they'll pay whatever the bank says is fair in exchange for their promise that they'll pay their last cent no matter the personal and long-term cost. In spite of our recent challenges we are still the lucky ones.

I know that many are embarrassed by financial missteps - as if one's financial net worth is somehow equal to one's personal net worth, assets a calculation of human value, or a credit score a measurement of overall intelligence.  We know this not to be true and yet, we too often place too much value on these numbers.  I've learned a lot about personal finance in the past 15 years and was cocky enough to think that I'd gotten a pretty good handle on things.  But sometimes being humbled is the best thing that could ever happen.  And speaking of good things, I came across some videos on YouTube today which while having little to do with personal finance have everything to do with what's rewarding.  Check it out to lift your spirits.