They plod down the street in ones and twos, clutching their paperwork and shivering in the bleak April wind. The college kid with slicked-back hair, the software engineer, the janitor, the accountant and the little old lady--they mount the sandstone steps of the Gus Solomon Courthouse on Southwest Main Street, their footsteps echoing through its cavernous lobby, and march down the long, lonely corridor to Room 223.
They have made this pilgrimage today to declare, before God and everyone, that they are officially, finally, hopelessly broke.
"This is the hardest thing I've ever done," says an 83-year-old widow who lives on $1,026 a month. "Oh lord, you can't imagine how hard it is, when you've worked all your life...and I can't blame anyone but me."
Turn to the business page of any newspaper, and you'll see the traditional measures of economic malaise: Oregon's unemployment rate inching up to 8 percent, the NASDAQ stuck at 1,500. But if you want a better grasp of the real victims of the slowdown, look at bankruptcy.
Nationwide, a record 1,577,651 bankruptcy petitions were filed last year, more than the number of couples who filed for divorce, more than the number of people diagnosed with cancer. The bankruptcy rate is particularly high in Oregon, and 2003 is on track to shatter all previous records.
In March alone, the U.S. bankruptcy court in Portland received 1,344 petitions--roughly 64 every business day, a 34 percent jump from last year.
People typically declare bankruptcy when they have fallen behind--way behind--on their bills. They're putting their rent on their credit cards. Their wages are garnished. The car has been repossessed. Bill collectors are calling night and day. They owe so much money they can barely keep up with the interest, let alone the principal. They are sinking.
Chapter 7 bankruptcy is a radical solution. When you file Chapter 7, you are asking that your debts be forgiven. In return, you agree to hand over all your assets (except for a few exemptions--see "What You Keep," below) to be divided up among your creditors.
Sounds simple in theory. In practice, it can involve enormous complications. Over time, the bankruptcy system has evolved into a subterranean labyrinth, governed by byzantine rules and populated by wandering bands of agents, appraisers, auctioneers, security holders, credit reps and repo men. In this world, far from the public eye, a constant tug-of-war is being played out between the Debtors, who are trying to hang onto what little they have, and the Creditors, who are trying to recoup as much as they can.
In Portland, these battles are waged in a legal ritual called a 341(a) meeting, overseen by an official known as a trustee.
Trustee--it's a nice, friendly word. Don't be fooled. The trustee wields tremendous power. The trustee can seize your car, evict you from your home or take the wedding ring off your finger. The trustee is paid to perform an unpleasant duty that is an essential component of the bankruptcy system--that of a human Cuisinart whose job is to swallow your assets and turn them into a trickle of juice.
Presiding in Room 223, beneath the enormous seal of the Department of Justice, Michael A. Grassmueck, 51, radiates exactitude. Dressed precisely in a black suit and blue tie, his leather shoes buffed to a high gloss, he peers through his wire-rimmed glasses like a broody hen. He wears the expression of a man accustomed to unpleasant discoveries.
Of the half-dozen trustees who administer Chapter 7 cases filed in Portland, none has a more fearsome reputation. "He's very, very thorough," says Ann Chapman, a local bankruptcy lawyer.
"It's the job of a trustee to be ruthless," says another lawyer, who spoke on condition of anonymity. "He's very good at that."
Bankruptcy is a federal proceeding, overseen by a judge. But for people filing Chapter 7, the judge is a mere abstraction--a signature on a document. The real force is the trustee.
Trustees are the eyes and ears of the system. It is their job to scrutinize the paperwork and sniff out assets that debtors might be trying to conceal; to figure out if you splurged on your Visa the day before you filed, or "sold" your Lexus to your brother-in-law; to seize and liquidate any assets, divvy them up among your creditors, and make sure no one walks away with a dollar more than the law allows.
Most of the time, there is nothing to find. The vast majority of all Chapter 7s are "no asset" cases, meaning that the trustee uncovers no assets above the legal limit. This makes sense: Most people filing bankruptcy have long since sold, spent or hocked everything of value. Nationally, fewer than 4 percent of all Chapter 7s yield any assets, according to the U.S. Trustee Program.
But at a conservative reckoning, Grassmueck discovered assets in 11 percent of the 1,948 cases he heard last year--nearly three times the national average.
"He can smell out money," says a Portland attorney. "The guy's like a bloodhound. And if he's got his teeth in your leg, he's like a pit bull."
The stories are legendary. Like the time he stunned a local author of self-help books by auctioning off the future royalties of her books for a cool $25,000. Or the time he grilled a couple who ran a vending-machine business until they admitted that they hadn't declared the cash that was sitting inside their vending machines the day they filed Chapter 7.
Or the time a debtor had a lawsuit pending against her father for sexually abusing her as a child--a so-called "repressed memory" case. Grassmueck pursued the claim and won a fat settlement from the father's homeowner's insurance.
The woman got nothing.
Grassmueck opens each 341(a) meeting by swearing in the debtor. Then follows a battery of questions. He asks them about their houses, their cars, their tax returns, their jewelry and their guns. If their answers match their paperwork, if the figures add up, and if the value of each asset is thoroughly documented, Grassmueck will probably declare a "no asset" case. Although the paperwork will take a couple of months to go through the system, the hard part is over--the debtor is free.
But sometimes, armed with little more than a hunch and a tax return, he extracts startling confessions--as in the case of the gum-chewing grandmother who finally admits that she's holding a $2,000 money order to use for a deposit on the apartment she's moving into. "That money is not your property," Grassmueck declares, ordering her to give it to her attorney (who will then transfer it to Grassmueck). She stops chewing.
Then there's the couple who both work at Intel, pulling down a combined salary of $74,000 a year. Grassmueck doesn't ask why they're filing--but he does ask the wife to hold up her hands and show him her wedding ring.
The ring cost $2,000 new, she says. Grassmueck peers at it through his glasses, clenching his jaw. Legally, as the trustee, the ring belongs to him. If he wished, he could ask her to pull it off her finger. An individual filing Chapter 7 is only allowed to keep $1,800 worth of jewelry and clothing, total. If Grassmueck reckons the ring is worth more, he can seize it, liquidate it, give $1,700 to the couple, and pass the rest on to the creditors.
In 18 years as a trustee, Grassmueck has learned to size up real estate, rifles, trucks, cattle, wedding rings, lawsuits, oil wells, antiques--and people. In this case, a few seconds' scrutiny convinces him that it's not worth the trouble. He grimaces and goes on to the next question.
Some of the 341(a) meetings are heart-wrenching: the social worker who lost his sanity, and then his job, after his wife left him; the mentally retarded woman who owes $22,000 to the Social Security administration. Take the case of Jack and Margaret Bell of Southeast Portland. She earns $12 an hour as a nurse's aide; he lost a job delivering newspapers in October. "Then it all went to hell," Margaret told WW. "I tried to rob Peter to pay Paul."
The Bells did their best to economize. They turned down the thermostat. Stopped eating out. Didn't travel. Backed out of refinancing their home. It just wasn't enough.
"I've always paid for things," she says, sobbing. "That's how I was brought up. It was hard...so hard. You don't know how much stress it is on a person. You have to fill out so many forms, you have to document your assets, you swear to this and that on threat of perjury. They have you scared to death over every last thing you write in."
Under Chapter 7, the trustee has the power to liquidate your assets. If you own a house, for example, the trustee can auction it to the highest bidder and use the proceeds to pay off the mortgage.
In Oregon, however, Chapter 7 gives debtors a "homestead exemption" worth up to $25,000 for an individual or $33,000 for a couple (other states have different limits).
The Bells owe $91,200 on their home, which was appraised last year at $160,000. If that appraisal is accurate, the Bells should be able to walk away with $33,000 after the trustee's sale.
But Grassmueck is worried about the appraisal. The county tax assessor reckons the house value is only $136,000. If so, there's probably not going to be any money left over for the creditors after paying the realtor fees and giving the Bells their money. In that case, Grassmueck might as well simply turn it over to the bank for foreclosure, and the Bells would get nothing.
Flipping through the paperwork, Grassmueck makes the Bells an offer. He's willing to liquidate the house, but only if they'll agree to lower their claim to $10,000. "I know that sounds low," he says. "But there are a lot of fees in real-estate transactions."
There is a stunned silence. "But $10,000 isn't enough to get us into another house," Margaret protests.
"I can't help you with your planning, ma'am," Grassmueck replies, not looking up. "There's a good chance, right now, you'll get nothing. I'm sorry you find yourself in this spot, believe me."
Grassmueck is not being mercenary--he is simply the bearer of bad tidings. The tears roll down Margaret's cheek. The Bells have lived in their home for 25 years. They had planned on using that $33,000 as a down payment on a smaller place with a mortgage they could afford. It was a belt-tightening maneuver, but they'd resigned themselves to it. Now even that is slipping away from them.
Grassmueck asks them to think it over--and to call him in the morning if they're willing to settle for $10,000. They walk out of Room 223 in a daze.
In the end, they decide to ignore Grassmueck's offer, and try to sell the house themselves.
One thing a lot of debtors don't realize is that Grassmueck has a vested interest in probing them. Although he swears them in under the seal of the Department of Justice, in a federal courthouse, Grassmueck is not a government employee but an entrepreneur with a financial incentive to vacuum up their assets.
Trustees are paid a flat fee of $60 for every case they hear, whether it lasts only a few minutes or drags on for years.
But the trustees also get a cut of all the hidden assets they uncover.
If those assets amount to $5,000 or less, the trustee keeps 25 percent before paying off the creditors. (For larger amounts, the trustee's share drops. If a trustee uncovers $1 million in assets, for example, he stands to gain 3 percent, or $30,000.)
Grassmueck declined to share his revenue figures. Based on other information he provided, WW estimates his gross income from Chapter 7 cases is at least $225,000.
"I'm a businessman," Grassmueck shrugs. "I'm in this to make a living."
In a stagnant economy, where jobs can evaporate at the drop of an exchange rate, a certain number of people are going to find themselves in over their heads. For many, declaring bankruptcy is a positive step. It gives them relief from the endless phone calls, the bill collectors, the grinding anxiety that keeps them awake at night. It gives them a fresh start, a chance to wipe the slate clean.
True, bankruptcy remains on your credit record for as long as 10 years. But if you pay your bills on time, you can usually get a credit card shortly after filing and obtain a market-rate mortgage a few years later.
Most debtors walk away from their 341(a) hearing with a spring in their step. "I'm so relieved," an elderly woman told WW a few days after her hearing. "It's like a big weight has been lifted off my shoulders."
For good or ill, it's probably going to become harder to declare Chapter 7 soon. "Bankruptcy reform"--a euphemism for tightening the screws on debtors--has long been the No. 1 priority of the finance industry, which has made more than $31 million in political contributions over the past decade, according to the Center for Responsive Politics.
Last year, the U.S. House of Representatives passed a reform bill, but the effort stalled when Sen. Charles Schumer (D-N.Y.) slipped in a provision that would have stopped anti-abortion protesters from dodging lawsuits by declaring bankruptcy. By gumming up bankruptcy reform with abortion politics, Schumer effectively killed the bill.
Bankruptcy reform is back again this year, however. In March, the House passed Resolution 975, the Bankruptcy Abuse Prevention and Consumer Protection Act, which would push consumers into Chapter 13, a form of bankruptcy that is friendlier to creditors.
Consumer advocates say this is no time to make filing bankruptcy more onerous.
Grassmueck himself is leery about the push for bankruptcy reform. It's easy to chalk this up to self-interest--after all, he makes a good living from the current system--but Grassmueck sounds passionate when he talks about the no-win situation many debtors get pushed into, thanks in part to the aggressive marketing tactics of credit-card companies.
"It's driven by Wall Street and Madison Avenue," he says. "You're bombarded by advertising, and you start to think, 'I deserve to have that,' whether you can afford it or not. Pick up any women's magazine and look through the ads. What's the message? That you aren't good enough unless you buy this perfume or these shoes or this watch. And the credit-card companies cater to it--they send you a check in the mail! 'Hey! Here's $5,000! You deserve it.'"
Out of more than a dozen professionals WW interviewed about Grassmueck, none suggested that he was anything but scrupulously honest. In two dozen 341(a) hearings WW witnessed, he never seized an asset on which he didn't appear to have a solid legal claim, and he never belittled a debtor. If anything, he went out of his way to be respectful.
And while it might seem unfair that a trustee's income depends on squeezing heirlooms out of little old ladies who are, by definition, flat broke, the situation is actually more complicated than that. Not every debtor is a little old lady, and not every creditor is a heartless finance company.
If Grassmueck is tough on the unemployed machinists and the certified nursing assistants, he is also tough--some would say ruthless--when it comes to the big boys. Grassmueck has overseen some spectacular bankruptcies, including cattle-king Jay Hoyt of Burns, Ore., who was ultimately convicted of bilking investors out of hundreds of millions of dollars; and Znetix Inc., a Bainbridge Island, Wash., fitness company that collapsed last year in a wave of scandal, owing investors $91 million.
In both cases, Grassmueck zealously squeezed every drop of cash from the estates. In the Znetix case, he filed a $10 million lawsuit against dozens of former directors, including celebrities like Kareem Abdul-Jabbar, for failing to look out for investors' interests.
Yet Grassmueck can still summon the patience to wade through the accounts of a guy who works at an auto-parts store and earns $10.75 an hour.
Watching Grassmueck interrogate debtors, one can't help but feel that rooting out assets is encoded deep in his DNA. "He just can't keep his hands off the little stuff," says one local bankruptcy attorney.
Grassmueck says he's only doing his job--a job that leaves no room for mercy. "If you read carefully the bankruptcy code, it doesn't say that a trustee may make decisions based on compassion," Grassmueck says. "My role is to investigate the financial affairs of the debtor, to examine their accounts and determine if their assets are available to distribute. It's not my business to judge how they got there. I'm not empowered with that."
WW intern Lauren Dake contributed to this report.
WHAT YOU KEEP
When you file Chapter 7, you're essentially turning all your assets over to the trustee for liquidation. There are exemptions, however--stuff you're allowed to keep, so long as it doesn't exceed a certain dollar value. Here are some (but not all) exemptions in Oregon.
* Homestead: If your house can be sold for more than what you owe on the mortgage, you can keep up to $25,000 for an individual, or $33,000 for joint owners.
* Mobile home and lot: up to $23,000 ($30,000 for a couple).
* Domestic animals and poultry: $1,000.
* Household goods, furniture, radios, TVs and utensils: $3,000.
* Tools of a trade: $3,000 (double for a married couple).
* Clothes, jewelry and personal items: $1,800 (double for a married couple).
* Vehicle: $1,700 (double for a married couple).
* Pension or retirement: up to $7,500.
* Guns: $1,000.
* Books, pictures and musical instruments: $600 (double for a married couple).
* Cash: $400.
* Food, fuel and provisions sufficient for 60 days.
CHAPTER AND VERSE
CHAPTER 7 is the liquidation or "fresh start" bankruptcy. It is designed for people or businesses with few assets and allows you to discharge most unsecured debts.
CHAPTER 9 is for "municipalities," which include not only cities but public entities such as school districts, highway authorities, etc.
CHAPTER 11 is for businesses with substantial assets. It is commonly used for corporate reorganizations.
CHAPTER 13 is designed for individuals or businesses that want to hang onto their assets. Instead of wiping the slate clean, you agree to a payment plan.
Trustees (technically known as Chapter 7 panel trustees) belong to a very exclusive club. There are about 1,200 of them nationwide, according to the National Association of Bankruptcy Trustees.
Some debts cannot be discharged through bankruptcy. These include taxes, student loans, child support and alimony.
There were approximately 493 million Visa and MasterCards in circulation in the United States in 2001, according to the Nilson Report.
Credit- card companies mailed out an estimated 5 billion solicitations in 2001, according to BAI Global Inc.
The nation's combined consumer debt totals $1.74 trillion.
Credit- card lending is almost twice as profitable as commercial banking, according to a 2002 report from the Federal Reserve System. The average rate of return for commercial banks was 1.79 percent in 2001. For credit-card banks, that figure was 3.24 percent.
Call the local chapter of Debtors Anonymous at 972- 8576.
Consumer advocates have recently raised the alarm about shady credit-counseling agencies. For more info, contact the Consumer Federation of America at (202) 387-6121 or www.consumerfed.org .
For more on bankruptcy, visit www.abiworld.org .
A trustee's actions can be appealed; all it takes is a letter to the judge.