State bankruptcy filings up 40 percent

SEATTLE -- When Julia Ruedas and her husband bought their first home in Auburn three years ago, they were convinced their days of rent increases and instability were behind them.

But it was too good to last. Last year, their mortgage rate increased and they couldn't refinance. The couple struggled to cover the mortgage and other debt. In August, they lost their jobs and declared bankruptcy, one of the 18,000 cases filed in Washington in the first 10 months of this year.

Bankruptcy filings statewide are up 40 percent from a year ago — the highest level since Congress changed the law in 2005 and made it tougher for people to cancel their debts.

The rate of people declaring bankruptcy in Washington state also is accelerating. The state ranks 12th in the nation — up from 27th last year — in average monthly growth in bankruptcy filings from 2007 to 2008, reported AACER, a bankruptcy data and management firm.

"It never was this pervasive," said Todd Trierweiler, a Portland bankruptcy attorney who practices in southwest Washington, a region that leads the state in the increase in bankruptcy filings and, not coincidentally, in unemployment rates.

Across the state, declining home values and tighter credit have added a new twist to the old story of families bankrupted by medical bills, divorces or job losses. Experienced attorneys say they've never seen so many filers with houses.

In some cases, those filing for bankruptcy bet on real-estate investments at just the wrong time. An engineer acquired more than $4 million in property. One schoolteacher took out mortgages to buy five houses.

More common are those who faced insurmountable increases in mortgage payments when their teaser interest rates jumped, say bankruptcy attorneys. By then, the real-estate market had dropped and they couldn't sell their homes. They include retirees, nurses, teachers and software engineers.

Count among them the Ruedas, who like many first-time buyers in the recent housing boom, relied on 100 percent financing with an adjustable rate to buy their three-bedroom rambler.

Said Ruedas: "It was the American dream, right?"

Hole gets deeper

The 2005 reform in bankruptcy law was designed to stop wealthy people who could afford to pay their debts from escaping their responsibility, said lawmakers at the time.

But the reform "is not a very good match with reality," said Robert Lawless, co-author of a new national study of 2,500 households that filed for bankruptcy in early 2007. The study's data comes from the Consumer Bankruptcy Project, a joint effort of law professors, sociologists and physicians at multiple universities.

The current bankruptcy law has discouraged all income groups, not just the wealthy, from seeking protection from creditors, said Lawless, a University of Illinois law professor.

As a result, filers are deeper in the hole than they were in 2001: While the median income of filers, $27,000, stayed flat from 2001 to 2007, those in 2007 carried about 20 percent more secured debt — used to buy homes or cars — and 44 percent more unsecured debt — the kind related to credit cards, medical expenses and utility bills.

Joseph and Jill Hutchison, of Maple Valley, declared bankruptcy in September, only after trying for months to stave off that step. Joseph Hutchison has a good salary as an engineer but ran into financial problems after their 20-year-old uninsured son fell ill two years ago. To help pay his medical bills, the couple charged up credit cards and took out loans against life insurance and retirement accounts. But then their mortgage reset, increasing their monthly payment. They tried to refinance but were turned down — their home value had dropped.

The Hutchisons, who have four children, reported three times as much income as the median bankruptcy filer from the national study. But their net worth also shows they're about five times deeper in the hole compared to the typical bankruptcy filer in the study.

Those declaring bankruptcy are just a glimpse into the economic crisis, Lawless said, because many people believe they can't file for bankruptcy anymore.

Indeed, filings in Washington plummeted after the change in law, and haven't reached the levels seen from 1995 to 2005, when they peaked at nearly 47,000. This year's growth rate, however, is on pace to be the highest since at least 1991.

"There are a lot of people out there suffering," Lawless said. "The bankruptcy filings are just one window on that suffering."

Credit problems rise

When she got married at Lake Tahoe in 2001, Julia Ruedas and her husband didn't have any money for a honeymoon. But they dreamed of one day buying a home and then having kids.

The kid arrived first. Ruedas, who worked for a credit union and managed the family's finances, had health-insurance coverage but said the hospital bill still was hard for her to pay because she and her husband each netted only about $12 an hour. She used a credit card to cover the balance due.

In the summer of 2005, Ruedas and her husband found the dream home for themselves and their 8-month-old baby in Auburn for a little more than $200,000. The three-bedroom house had a fenced backyard and was next to an elementary school.

To buy the house, they put down about $1,000 in earnest money but no down payment. On the advice of their loan officer, she said, they signed for a first mortgage that covered 80 percent of the price, and a second mortgage for the rest — with both mortgages having adjustable rates of interest.

By the fall of 2006, the region's superheated real-estate market was cooling off. Ruedas said the couple refinanced and paid off a decade's worth of accumulated credit-card debt — including that old hospital bill. They chose to refinance, she said, because their loan officer told them they would save up to $400 a month.

But when they went to sign the paperwork, they were told the teaser rate wasn't available, she said. They committed to an interest-only first mortgage, and a higher interest rate on the second, Ruedas said, after their loan officer assured them they could refinance again in a year. That prospect evaporated as the nation's mortgage crisis unfolded in 2007.

Their monthly payment, originally $1,200 a month, rose to $1,600 and in November 2007, jumped to about $2,200, she said.

By then, they had a second child, and Ruedas' husband was working two jobs — managing a warehouse and loading freight on planes. He left the house at 5:30 a.m. and returned at 10 p.m.

They got behind on payments. Bill collectors called during the day and at dinnertime, and Ruedas and her husband would argue over the finances. Some nights, Ruedas lay awake in bed for two hours desperately calculating.

"I know the electricity is going to be turned off in two weeks, so I need to pay that bill and just pay half the minimum due on the credit card," she recalled thinking. But after the couple defaulted on the minimum credit-card payments, those banks began charging nearly 30 percent interest on the balances.

Ruedas and her husband sought help from a debt consolidator earlier this year. Several bankruptcy attorneys say they caution clients against paying fees to debt consolidators.

"We're seeing a lot of people who paid money to these so-called debt consolidators," said attorney Tom Hyde. "If you owe anything other than credit-card debt, they can't help you."

Today the couple are living in their house and waiting for the banks to foreclose on them. Her husband has a new job. They pay cash and shun the credit-card offers they still receive in the mail. Ruedas expects her decade-old Jeep Cherokee to quit soon.

Bankruptcies show up on credit reports for about a decade, and it can take years for families to rebuild their credit and qualify for conventional loans.

She doesn't dream about owning a house anymore.

"It's an item," Ruedas said. "I just want to be with my family and be happy."

The new law required the couple to take a financial-literacy class. Ruedas said the class gave her practical tips and pushed her to follow through on them.

"Some of this stuff is common sense, like keep track of your checkbook, mail your credit-card payment a couple days before it's due, but it's hard if you're living paycheck to paycheck," she said.

Looking back on the family's experience, Ruedas said loan officers, real-estate agents and banks all behaved irresponsibly. She's culpable, too, she added.

"We didn't have to sign the thing that we did. It was greed on everybody's part," Ruedas said. "We all wanted the American dream."

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