Bad choices or bad luck? Either way, they're broke

The Orlando Sentinel (MCT) - Financial absolution unfolds in a stuffy sixth-floor conference room with a couple of dozen chairs, a fire extinguisher and a sign on the wall that warns, "The FBI investigates bankruptcy crimes."

The debtors arrive in suits and dress shoes, jeans and sneakers _ a few with kids in tow.

They wait in a cramped sitting area, talking with their lawyers in the low murmurs of a funeral home. Those without legal help are easy to spot. They act like nervous freshmen looking for biology lab.

"Should I be in there?" asks a woman in a white blouse and capri pants. "I don't know if I should be in there."

Ideally, no, but caught in the grip of a deepening recession, some have little choice.

So four days a week, people who have reached the end of their financial rope shuffle through, searching for a fresh start. Clutching file folders and a hope that their luck will change, they tie up the loose ends of their bankruptcy, trying to shed the fiscal straitjacket that has bound them for months.

"Most of them look pretty worried when they come in," says Marie Henkel, a bankruptcy trustee who interviews the debtors. "When they leave, I think there's a great sense of relief."

CHAPTER 7 VS. CHAPTER 13

With the economy sinking, bankruptcy has become the escape hatch for a growing number of Americans. In 2008, nearly 13,000 people filed for it in Orlando's federal court, an 80 percent leap from 2007. This year an additional 7,800 cases have gone on the books for the federal district stretching from Jacksonville to Tampa.

About 28 percent are Chapter 13 filings _ cases in which the court approves a multiyear repayment plan. But more than 70 percent are Chapter 7 bankruptcies _ where the debtor has no realistic chance of repaying. In these instances, certain assets are sold, creditors take what they can and the remaining debt vanishes.

The upside? Debtors get to quickly start over. The drawbacks? Creditors lose out, and bankruptcy clouds a filer's credit record for a decade.

The people behind those filings are mortgage brokers, engineers and teachers. They're young couples who tried to game a delusional housing market, and middle-age men laid off from jobs they had held for more than a decade. Some made profoundly bad choices, while others suffered equally bad luck.

'MY HEART BROKE FOR HIM'

Attorney Avie Croce recently handled the case of a 79-year-old retiree who lost half his household retirement income when his wife entered a nursing home. Unable to cover his mortgage and other costs, he went back to work, lugging boxes in a department-store warehouse.

Ultimately, bills overwhelmed him, and he declared bankruptcy.

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"He had so little, his nephew paid his filing fee," Croce said. "My heart broke for him."

When it was his turn, the man joined the crowd riding the elevator to the sixth floor of the Fairwinds Credit Union building in downtown Orlando.

By the time a bankruptcy reaches this point, much of the paperwork has been handled. Debtors come here so a trustee can review their records and ensure they haven't squirreled away money or property that could be sold to pay off creditors.

The slate won't be formally wiped clean for several weeks, but the meetings in the sullen, airless conference room mark the beginning of the end.

"By the time they get here, they've gone through all their assets," said attorney Tonya Schroeder. "The idea is to give them another chance."

Tuesday, the list of debtors contained 71 names with meetings scheduled from 8:30 a.m. to 2:30 p.m. When called, they sat with Henkel, who gently _ but firmly _ worked through a series of questions about their financial situation and remaining assets. On the table were a tape recorder and a small sign reading, "Speak up! No mumbling!!"

Did the debtor list all real estate? the trustee asked. Is he or she named in a will? What about other real property?

"I have some equipment," said a photographer from Apopka, Fla., "but it's like 6 years old."

Thirty minutes later, Anthony Mendoza pulled up a chair.

Mendoza, a 41-year-old salesman, declared bankruptcy in January.

He is now living with his parents in Orlando as he works through a divorce and looks to build his client base.

He sells corporate promotional items _ such as mugs, T-shirts and pens _ but that market has collapsed with the rest of the economy. He lost most everything _ including his car, he said _ but resisted pulling the plug until he had no other option.

'IT WAS VERY HARD'

In an interview later, Mendoza described the calls from creditors _ how he would tell his two sons not to answer the phone. He knows, he said, that he "wasn't setting a very good example for them," and early this year realized he couldn't repay his debt.

"It's almost like you have to accept defeat," he said. "It was very hard."

So Tuesday, Mendoza quietly answered Henkel and tried to focus on the future. He's got a "pretty good job" now, he said, and just this week learned of a few other sales opportunities.

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"I'm really working for my kids _ to send money home to them," he said. "The other stuff can wait."

His business with Henkel complete, Mendoza rose and headed for the door. Before he left the room, another debtor had taken his seat.

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PROS AND CONS OF FILING

Pros: A financial fresh start. Consumers who are eligible for Chapter 7 may be forgiven most unsecured debts. You may be able to keep many of your assets, although state laws vary widely in defining which assets. Collection efforts must stop as soon as you file for bankruptcy under Chapter 7 or Chapter 13. You cannot be fired from your job solely because you filed for bankruptcy.

Cons: It will remain on your credit record for up to 10 years and may hurt your future finances. But in one respect, bankruptcy may improve your credit records: Because Chapter 7 provides for a discharge of debts no more than once every eight years, lenders know that a credit applicant who has just emerged from Chapter 7 cannot soon repeat the process. As you re-establish credit, you may have to pay higher interest rates or have to rely on credit cards secured by a deposit.

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BANKRUPTCY: WHAT YOU NEED TO KNOW

Definitions:

Chapter 7: A liquidation, in which a court-appointed trustee distributes assets among creditors. Some property is exempt, and not all debts can be discharged.

Chapter 13: A debt-repayment plan for individuals with a regular source of income. The debtor agrees to make periodic payments to creditors over a 3- to 5-year period.

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ALTERNATIVES

Creditors might be willing to settle their claim for a smaller cash payment or stretch out the loan to reduce the payments.

You may take out a big loan to pay off all of your smaller debts. But afterward don't run up new debts.

HELPFUL WEB SITES

American Bar Association: Discusses pros and cons, and alternatives to filing for bankruptcy: tinyurl.com/czvo9s

Internal Revenue Service: Online manuals lay out the purpose, terms and procedures for filing for Chapter 7 and Chapter 13 personal bankruptcy: tinyurl.com/cfkddh and tinyurl.com/clu9uk

U.S. Courts: Provides the basics for all forms of bankruptcy: tinyurl.com/cufvr7

SOURCES: Sentinel research, American Bar Association, McClatchy-Tribune

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© 2009, The Orlando Sentinel (Fla.).