American Bankruptcy

MENE, MENE, TEKEL, UPHARSIN. …
God hath numbered thy kingdom, and finished it.

- Daniel, 5:25-26, The Bible, King James Version, 1611

A baited banker thus desponds, From his own hand foresees his fall, They have his soul, who have his bonds; ‘Tis like the writing on the wall.

- Jonathan Swift, The Run Upon The Bankers, 1720

 

 
By Daniel Simpson

MULTIPLE FORECLOSURE BLACKSPOTS, Sept. 2008 – It is a cliché of capitalism that every crisis masks an opportunity. The meltdown that just earned one banker a $20 million hello/goodbye bonus drove another to fling himself under a train.

Depression, recession or paradigm shift, or the twilight of Western hegemony; the fear is legion. While markets gyrate around a Wall Street  bailout more costly, and less popular, than the Iraq war, Americans want to be rescued from their own credit quagmire. If owning a home was their dream, and aggressive lending the national nightmare, it’s little wonder lawyers are getting wake-up calls. Whatever it is that stalks people, from houses worth less than they owe to car loans and mountainous card debts, the answer to their prayers is simple: bankruptcy.

At least that’s how Robert Lovett sells it. And for 11 hours daily, this attorney seems to have no end of takers. Chugging coffee between meetings at his office in south-west Florida, he has few doubts why debtors pack his diary. “My clients love me because I make them feel good about bankruptcy,” he says, wide-eyed about a subject to which he’s devoted the past three years. On his desk, as in the waiting room, there’s a book called They Went Broke!?, hawking horror stories of the rich and famous, among them founding fathers (Adams and Jefferson), modern presidents (Truman), moguls (Ford), starlets and writers (the longest list). “Ultimately, I’m bad for banks,” reflects Lovett, still in his twenties, since he helps write off more of their capital, and thus accelerates the economic fallout. “But I don’t know what’s right anymore.” Twenty minutes later, he’s signed away another few hundred thousand. “Yes!” he shouts, as he checks who’s next on his list. “I just convinced someone to give up their condo.”

The numbers filing bankruptcy are rising sharply, if only back to where they stood in 2005, when creditors got the law changed to make it harder to wipe out debts. Many people assume that’s no longer an option. It’s not exactly taboo, but it carries a stigma, though aggressive attorney marketing could change that. Few of Robert Lovett’s clients are so calculating as to ring-fence assets before consulting him, yet that’s what many want to do. Some own several properties, having bought into the bubble on cheap credit, and hopes of endlessly exponential price rises. All over Florida it’s the same: a speculator’s market tanked as “teaser” mortgage rates expired. There was no one left to palm the houses off on and no more easy loans to keep rolling over. The choices now are stark: a generation of punitive payments, sell up for a loss you’ll owe the bank, or figure out how to pull a fast one. “Just our shop,” Lovett says of his six-member firm, “is destroying tens of millions of dollars a month in bankruptcies.” Other Americans wrestle similar dilemmas, but rarely of the nature faced in Florida, or other sun-belt boom states like Nevada, Arizona and California. “More than 50 percent of people I speak to,” he says, “and this is a conservative figure, could afford to pay but don’t want to.”

It’s not exactly hard to see why. At the peak of the market, David Diaz’s dream home in Cape Coral ( Florida’s foreclosure capital, dubbed “ground zero for the housing bubble”) was valued at half a million dollars. When he decided to give it up, it was worth half that, but he still owed $344,000. His choice was straightforward: “pay a mortgage or buy groceries.” The bust cost his wife her job in construction, which employed one in six of the local workforce. After clearing out his retirement savings, 31-year-old Diaz conceded defeat. Facing mortgage bills of almost $7,000 a month, to cover his new residence and the old place he couldn’t sell, he cut his losses and filed bankruptcy in March. “It’s like a big hole in the boat,” he said at the time. “You can try to bail the water out but you know eventually it’s going to sink.”

His lawyer, Charles Phoenix, is more forthright. “What person in their right mind would pay?” he asks. Imagine you bought a house for $300,000, then saw its value halve within months. Even if prices were to bounce back at the most optimistic projections, which seems far-fetched after half a dozen years of overheating, it would take you more than a decade to get back in the money. In the meantime, you might lose your job. If you don’t, and you’re an average American, your salary’s going to rise by a few percent a year at best; no match for the ballooning mortgages many got stuck with. Though plenty of buyers overextended themselves, and many more were duped into doing so, most of the riskiest loans were refinancing deals.

Consumers were enticed to treat their homes as cashpoints, and keep spending in the national interest, though preferably not as leveraged as their lenders, let alone a government in ever greater hock since 1980, which dismantled Depression-era banking rules to keep Wall Street’s gravy train rolling. Cheered on by Alan Greenspan, whose Federal Reserve greased the wheels of irrational exuberance, it all made a modicum of sense; with savings rates close to zero, housing equity was the middle classes’ principal asset and they tapped it with a sledgehammer (only to see it shrink by the trillion once the bubble started deflating, eating away collateral for future borrowing). To sustain this debt-driven frenzy, mortgages were given away like credit cards, via direct mail, online or on the phone. If the terms sounded scary when promotional rates jacked up, or the balance kept increasing because repayments were unfeasibly low, then what the heck, you’d get a better deal from Peter and pay off Paul.

A credit score was all you needed; even pulses were optional: to cite just one notorious example, 23 dead people got approved for loans in Ohio. Elsewhere, a nice-sounding guy named Clarence Nathan borrowed $540,000, even though he had no full-time job, no notable assets and a house that was facing repossession. “I wouldn’t have loaned me the money,” he told National Public Radio. “And nobody I know would have loaned me the money. I know guys who are criminals who wouldn’t loan me that, and they break kneecaps.”

This is the crux of the problem, says Charles Phoenix: by hooking clients on credit crack, lenders have squandered the right to expect much in return. “People in their twenties and thirties have no loyalty to banks and why should they?” he says. “They’ve rarely set foot in one.” If they had to every week to cash a pay cheque, there’d be personal relationships, and a whole host of mutual obligations. “There’s no way in hell a local bank 40 years ago would have loaned to a loyal resident at seven percent, going up two percent a year for all eternity.” But many did something similar, or worse, and sold on the risk in exotically structured products. Now everyone’s forced to face the consequences, except perhaps their architects.

COUNTING THE COST

For much of the past year, investors have sought in vain to spot the bottom. Banks keep collapsing under the weight of dodgy loans, dispersed around the world in complex parcels, and the bets they made on which ones might prove worthless when. Those institutions left standing are so suspicious of what rivals could be hiding on their balance sheets that they’ve given up lending to each other, and gone begging for state aid to plug the holes. In the end they only got it after the President mongered doom on prime-time television. Never mind a second Great Depression, what about the first one, when Franklin Roosevelt insisted that the nation had “nothing to fear but fear itself”? Whatever the bailout might achieve, the underlying problems persist: Americans keep defaulting on their mortgages, leaving lenders and their shareholders (and now taxpayers) to shoulder the burden, if not change their ways. The most woeful wagers might have folded, but what of those that once looked fairly solid?

Nigh on 10 million households owe more on their homes than they’re worth, says the rating agency Moody’s, which predicts a third of them will default this year, voluntarily or otherwise. The numbers “underwater” or “upside down”, as being in negative equity is known, could rise to 12.7 million by June, Moody’s estimates. That’s a quarter of all Americans with mortgages (and debt worth two or three trillion, or up to four times the size of Wall Street’s bailout). Others think the worst could be twice as bad, with recent buyers hardest hit by far. If house prices carry on falling as they have been, says the Harvard economist Martin Feldstein, there’ll soon be 20 million mortgages in negative equity. Without decisive action to forestall it, of which there seems few tangible signs, another wave of foreclosures looms.

It’s hard enough figuring out what’s been lost, never mind how much might be at risk; not that this stops financiers being hired by the government to value securities they couldn’t price among themselves. It doesn’t get much easier on the ground. In Scottsdale, Arizona, a retirement mecca so affluent that its mall boasts Gucci and Louis Vuitton stores, hundreds of lenders, lawyers and debt enforcers have gathered to swap tips on cutting losses. David Haynes, a California mortgage banker, spends his lunch-break hunched over spreadsheets. “No one has a clue what the numbers are or how to calculate them,” he sighs. At least he’s trying. Some banks are so inundated with foreclosed houses that they’ve as good as given up.

“I get like 70 calls a day from people who say they can’t pay,” confides a loss mitigation officer for Citigroup, who handles four foreclosure-riddled states from his Arizona office. “Some of them I can work with but most are planning to walk,” he says. “I don’t know how many will, but I can’t do much to stop them.” One case from neighbouring Nevada illustrates why. “We told them the situation,” recalls Richard, a Las Vegas resident who had a car crash that stopped him working for several months, leaving his family $20 short on their mortgage payments. “We said, isn’t this some sort of special circumstance? And they couldn’t agree with us. They said, sure, we’ll work with you, but sorry.” Rather than figure out how to value a deal, the lender pressed ahead with foreclosure, which costs thousands of dollars in legal bills, and considerably more in losses on the property, and often repairs, plus a six percent fee to the estate agent hired to try and sell it.

“A lot of these people simply don’t have the means or the resources” to negotiate, says Paul Reyes, who spent months talking to foreclosure specialists for a Harper’s  magazine feature. “They’re at the mercy of paperwork and bills and all kinds of notices coming in the mail, and so it really is overwhelming.” In Florida, the focus of his article, the system’s swamped. Lee County, home to Cape Coral and its twin city Fort Myers, is hiring extra judges to process foreclosures, which have jumped almost 2,000 percent over the past two years. Two thirds of these cases have yet to be dealt with, which equates to 22,000 houses that can’t be resold, never mind assigned a realistic market value. “The banks are just slammed,” says a Fort Myers realtor who works with them. “A few years back they had pros who’d strike a deal. Now they just want rid of this stuff but they haven’t got the manpower to even think about it.”

Big firms seem to have no one in Florida who decides what to do with Real-Estate-Owned (REO, or bank-held) property. “That’s all handled out of North Carolina,” says a woman in the local outpost of Wachovia, based hundreds of miles away in Charlotte. It’s the same at Countrywide, an infamous predatory lender, bought out by Bank of America and now being sued by several states for foisting “deceptive” and “unfair” loans onto borrowers who couldn’t possibly repay. “You’d need to speak to our headquarters in Texas,” a broker says when asked who’s responsible for foreclosures. “Nothing gets originated here and any property we own is passed onto realtors through the MLS”, or multiple listing service, a network of real estate databases. Before that, a few formalities: mainly paperwork preparing for a sale.

Every weekday morning there’s an auction in downtown Fort Myers. A couple of dozen people show up to make offers on a couple of dozen properties. Mostly it’s the same faces. Only one of the listed houses starts a bidding war, in which a guy called Tom “The Hitman”, as the polo shirt tucked into his shabby shorts bills him, offers a few feeble raises before conceding to his rival from Jacksonville Mortgage. All the other properties are snapped up for a token $100, either by lenders or their agents. This appears to be the norm. A few local scalpers trawl for bargains, but there aren’t really many to be found: banks will usually bid up to the mortgaged value, and to most people that’s over the odds. Among onlookers wielding clipboards stuffed with the day’s catalogue, there’s way more interest in watching stock prices plummet on an iPhone than there is in proceedings, which are over in less than an hour.

“Fewer and fewer properties go through the auction process because there’s either little equity in them or even negative equity,” says Rick Sharga of RealtyTrac, a Californian company that collates foreclosure data for analysts and realtors. “There’s no incentive to buy.” But banks have incentives to sell: they need to shift houses and value what’s left on their books. One option is a “short sale”: accepting less than they’re owed and forgiving the balance. The only reason not to do this is if the house could fetch enough to cover a loan that’s in default. This is unlikely where foreclosures are rife, since they depress the market even further. Even if banks have the staff, they seem reluctant to negotiate. When they do, it’s not always wholeheartedly. Sometimes one department’s negotiating a short sale while another’s preparing to foreclose. On anecdotal evidence, and the meagre numbers of short sales, foreclosure generally wins, if not on principle then because the alternative’s so time-consuming, and difficult to agree.

“If you have a real John and Jane come down from Ohio, then maybe you’ll get a fair price,” says a bank-appointed attorney at the Fort Myers auction. “But not from any of these bottom feeders.” Richard in Las Vegas tells a different story: it’s cutthroat on both sides. Having taken in their family, his wife’s parents want somewhere bigger. “They’ve tried three times in the last three months to get a short-sale house,” he says. “They had the means, they have the credit score, everything, and the lenders keep raising the prices at the last minute.”

Banks just waste their own money, says Albie Anderman, a realtor in Phoenix, Arizona, who sells foreclosed properties for fees he says they needn’t pay him, at least not directly. “I’m happy,” he laughs, “but it’s the bank that should be.” They could take the same prices for short sales, Anderman argues, and save money while clearing their backlog. “I’d happily buy on the short-sale side,” he says. “The guys who run these companies aren’t thinking straight.”

They presumably beg to differ. Treasury officials say it rarely makes financial sense to do anything but foreclose, for all the government’s appeals to lenders to try and avoid this, whether by negotiating, through short sales or a transaction called a “deed in lieu of foreclosure”. That hands title back to the bank, along with corresponding obligations, like subsidiary mortgages, or outstanding dues to housing associations. Foreclosure wipes these out, so lenders prefer it. Short sales can come with their own strings attached, this time for borrowers, whose credit rating suffers, marginally less than in foreclosure, but minus its legal protections. “Without a release of liability on the mortgage note, the homeowner will continue to be liable for the unpaid balance,” warns Craig Andresen, a bankruptcy attorney. That’s routinely waived, but you might have to pay tax on the portion of debt that’s forgiven, though Congress is reviewing changes to this law. The only sure-fire way to dodge the taxman is to prove insolvency, which means you might as well be filing for bankruptcy, Andresen argues. The competing vested interests of lawyers and realtors can lay minefields of confusion for homeowners in distress. It’s unsurprising some just opt to disappear.

WALKING AWAY

These days that’s a logical thing to do. “A homeowner who owes 10 per cent more than the value of a house may continue to service the mortgage,” calculates Martin Feldstein, the Harvard economist. “When the excess debt reaches 30 per cent he is much more likely to default.” Average house prices fell more than 15 percent over the past year, and by up to 10 times as much in the worst-hit places, such as Phoenix, Las Vegas and swathes of California. It’s a vicious circle: defaults and foreclosures swell the stock of unsold homes, while buyers hang back for lower prices, which the oversupply delivers, making more defaults likely.

“It’s a business decision,” says Kevin Moran, an estate agent working for banks in Stockton, California’s repossession capital. He says 70 percent of the houses he sells have been abandoned. In a similar proportion of cases, banks don’t even bother contacting borrowers before foreclosing. “They stop paying and they stop talking,” he says. Neither side sees much point in doing otherwise because the market’s collapsed so spectacularly, just as the Internet boom did before it, when companies launched and liquidated inside a year. “This is like Pets.com,” says Dean Baker, a director of the Center for Economic and Policy Research. “We are not going to get the price of $200,000 homes in central California back up to $500,000.”

Karen Trainer bought at that price in 2006, like many others with zero down-payment. By spring of this year, her flat was worth 40 percent less than what she owed. When the promotional rate on her mortgage ran out, she decided to stop throwing money down a black hole. “It just does not make financial sense,” she remembers thinking. The damage to her credit record didn’t put her off. “Within five years you’re about back where you were,” she says. “My husband and I decided we’ll take the hit, we’ll live with it.” Legally, they were free to do so, leaving their lender with a $200,000 shortfall (between the mortgage and the flat’s market value). In California, unlike other states, “banks have no recourse to come after you personally,” Trainer says, though that’s only true of mortgages on primary residences, and then only if lenders don’t take the expensive option of foreclosing by filing a lawsuit.

Elsewhere, it’s often more complex, though the outcome’s much the same. If a house’s market value is less than the outstanding mortgage, a bank can sue you for the deficiency after foreclosure. In practice few do. “The lender has ‘recourse’,” says Howard Lax, a Michigan real estate attorney, “but chooses not to exercise the more expensive remedy for an unlikely recovery.” In other words, they foreclose by placing a notice in local newspapers and waive their chance to get a deficiency judgement against debtors. In the states at the heart of the housing bubble, where people got loans if their income matched minimum repayments, many borrowers are too poor to be worth hassling. Those that aren’t just file for bankruptcy if lenders chase them, unless the two agree a deal to clear the debt, as banks prefer.

Florida’s Lee County sees ten times as many foreclosures each month as bankruptcies. Ned Hale, a property lawyer, thinks that’s partly because “the vast majority of lenders are not bothering to sue”. It’s arduous and time consuming, and getting a judgement enforced is tough because Florida’s “a rather debtor-friendly state”. But bankruptcy attorneys say the tide has started turning, citing banks’ efforts to recover deficiencies as a growing source of business.

For a while, “people have been living under an illusion,” says Charles Phoenix in Fort Myers. Websites like youwalkaway.com claim there’s no comeback, bar the dent to your credit rating, provided you follow their advice. That’s provided in a half-hour legal briefing, which costs two-thirds as much as hiring Phoenix to file bankruptcy, but can’t stave off creditors quite as effectively. Other sites swap tips on more creative alternatives, such as using short sales to trade homes with neighbours, and dissolve each other’s “underwater” debts. Or you could commission a phoney appraisal, use it to refinance and cash in your equity, then sell to a friend or relative, who goes and defaults. With apologies to Paul Simon, there must be fifty ways to leave your lender. Realtors say another popular gambit is to buy a cheaper house now the market’s slumped, then walk out on the old one. That way you can still get a loan before foreclosure blights your credit report, consigning you to the prospect of renting.

However irrationally, that’s something most people want to avoid. Unlike some parts of Europe, America’s still gripped by a “fundamental urge”, given voice in its favourite feelgood flick: It’s a Wonderful Life. “It’s deep in the race,” says Peter Bailey, the film’s small-town home-loan patriarch, “for a man to want his own roof and walls and fireplace.”

Another dangerous illusion, counters Christopher McAvoy, a bankruptcy lawyer in Detroit. “The concept of house ownership for this generation is a myth,” he scoffs. “You’re basically renting from a bank, except you’re liable for repairs and all the other expenses. Banks are landlords who have you duped into thinking you’re an owner.” In affluent neighbourhoods on Detroit’s periphery, that’s clearly not the norm, nor in its south-western suburbs, where car workers retire behind picket fences, flush with pensions their descendants can only dream of. But most of Motown’s not like that. And nor’s much of modern working-class America. In debt we trust ought to be printed on the banknotes; it’s certainly how many people function, chasing the dream through lifestyle upgrades instead of living with their means. Only Britain has higher household borrowing, thanks largely to an even more overheated property market.

What of the other values embedded in It’s a Wonderful Life, which trumpets loyalty and thrift and communal toil as if conceived as down-home Puritanism’s manifest destiny? Has the work ethic morphed into “greed is good”? Not exactly, but defaulters give moral scruples short shrift. “Is the bank going to pay for my retirement because I was a good girl and paid my mortgage?” asks Karen Trainer in California. Ethically, she’s not exactly out on a limb. The words “business decision” crop up everywhere. A random sample of similar views from various states: “It’s all about money now and it’s every man for himself.” “If lenders write contracts that say ‘if you don’t pay, we get the house’ and borrowers say ‘well, OK, here’s the house,’ how is that wrong exactly?” “How come corporations get to do things for business reasons, but it’s somehow immoral for individuals to do the same when it’s not in corporate interests?” “Corporations are bound to do whatever they can to make money for their shareholders within the law. Consumers if they’re smart should do the same.”

GOING FOR BROKE

Spend time with people filing bankruptcy, however, and a less cold-hearted picture emerges. “I almost have to argue with them and talk them into it,” Christopher McAvoy concedes; such is their sense of obligation. “I want to be the person who pays my debt,” says one of his prospective clients, a woman in her thirties who owes as much as her $30,000 income, a good chunk of it on credit cards. “Basically, you’re screwed,” McAvoy tells her, in his office on Detroit’s western fringes. “If you were a hardware store you’d be going out of business.”

He’s annoyed to learn she’s hired a debt consolidator. That’s money she could have spent on paying his fee ($1,600 for low-income cases), which has to be settled up front before he’ll file the papers. “I’m sorry you’ve already thrown away eight hundred dollars,” he says. “We don’t consolidate debt, we eliminate debt.” That’s great, she responds, undeterred by a brusqueness that McAvoy keeps on shrugging off in consultations. “Did you ever meet a lawyer before?” he asks, if his manner puts anyone off. “I’m an attorney, I’m a realist. I don’t peddle hope.”

That said, the reality he peddles is often just what people need to give them hope. Whether or not they warm to his deadpan wit, that bullish streak sits well with them when he explains what he can deliver. “Bankruptcy’s probably the fastest way to improve your credit score right now,” he says. “Yeah, you keep your house.” As long as you keep the payments up, that is. And your car’s safe, and your retirement savings, and plenty of other stuff besides. “Bankruptcy court is not looking to impoverish you,” McAvoy says. “The trustee’s not going to sell your couch to give two hundred bucks to VISA.”

Even federal government housing loans are still available, though you might have to wait a little while to qualify. Just forget about trying to repay what’s still outstanding. “If you have it in your mind to file bankruptcy you don’t get any extra credit for sending VISA two hundred dollars.” No, seriously. “You don’t need to pay anyone, you need to stop.” But, but… Another client persists: “I just sent these people two fifty last month and I was supposed to send them again this month.” McAvoy slaps his scalp. “NO!” He sounds hurt. “I’m sorry you’ve already given them money. That was voluntary, I can’t get that back for you.” Then there’s this other creditor she forgot about: “I gave them my account number so they can go…”

“Oh fuck.” It’s like a sigh. “You need to stop. You’re not giving them any more money. It has to stop. Now. It’s done. No more. No. You’re servicing old debt.” Shut down your accounts. Switch to cash. And stop paying people! Except your attorney, of course: “We’re wiping out all your debt for sixteen hundred dollars,” he tells another woman. “That’s like five percent of what you owe, it’s a no-brainer.” She’s ecstatic. Can’t thank him enough. In a couple of months, she’ll be unburdened, assuming no mishaps, which might incur more fees, or affect her case. Creditors could sue, say, or additional debts or income streams might surface.

“I can’t predict the future,” he warns in verbal small print. “I can’t guarantee your debts will be discharged or you’ll be able to keep all your assets.” But that’s not what clients hear, on the whole, though a few do get paranoid or antsy. Not this one. She expects no complications, and neither does McAvoy, provided she’s got the paperwork and tells the truth. “You don’t want to be special, you want to be common as any debtor,” he says. “I want to file your case and honestly stop thinking about it and get onto the next one.”

“It’s going to be real good,” she smiles. But even now there’s still that prick of conscience, which seems more acute here in run-down Detroit than further south in the bubble’s boom-and-bust states. As McAvoy puts it later, there’s an in-built commandment in most people to “honour your debts”, and above all “a stigma that in screwing creditors it’s almost like you’re stealing from them,” which isn’t how he sees it. “No one racks up credit card debts just so they can file bankruptcy,” he says. “I haven’t seen many dishonest debtors.”

Sometimes he finds himself counselling people, like a woman who refused to file because her pastor told her it was immoral. His response? To dig out a couple of verses of Deuteronomy, chapter 15: “At the end of every seven years thou shalt make a release,” runs the Authorised Version. “Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the LORD’s release.”

Others pose a different kind of challenge. “It’s almost like a confessional – they want to tell me their life story and say they’re not bad people,” McAvoy says. Frankly, he’s not the least bit concerned. “If I was a doctor and you got syphilis I’d want to cure it. I don’t care how you got it.” But no amount of patter, logic or ethical acrobatics could change how his latest client sees things. “It’s a last resort,” she says, as she signs the pre-disclosure form to engage his services. “My feeling is if I owe money, I should pay. If people owe me, I want to get paid.”

That’s a perfectly reasonable starting position, but the question is how much is feasible. In deference to lenders’ lobbyists, new laws in 2005 raised the bar, and the fees, for filing bankruptcy. They also forced debtors into a means test. Those who earn less than the median (about $50,000 per family nationwide) qualify for simple Chapter 7 liquidation. The rest (if their secured debts don’t exceed a million dollars, or a third of that in unsecured loans like credit cards) have to pay lawyers twice as much and repay creditors what a judge decides they can afford. This process is called Chapter 13 and it’s what McAvoy and his partner decided to focus on when they went into bankruptcy practice. Down in Florida’s Lee County, and its wealthier neighbour Collier, that business is booming as homeowners seek ways out of negative equity. But “it’s just not the same up here,” McAvoy says. South-east Michigan sees more bankruptcies than almost anywhere outside California, but two thirds of McAvoy’s filings are Chapter 7, despite having an office in an upscale suburban catchment area.

Detroit’s property downturn is more structural, another symptom of industrial decline. The carmakers that built it are broke, and they’re next in line behind the nation’s panhandling bankers. “Imagine living in a city with the country’s highest rate for violent crime and the second-highest unemployment rate,” screamed Forbes magazine in January, naming the place “America’s Most Miserable”. It also just scraped second in the “America’s Fastest-Dying” category. Parts of Detroit look like ghost towns; foretastes of the end of suburbia, or reruns of Mad Max. At a stoplight on the city’s main artery, a few blocks the wrong side of Eight Mile, a man walks down Woodward swinging a baseball bat. I duck right into the streets where Henry Ford once lived, driving past rows of deserted stately homes. Around one in five stands vacant thanks to foreclosures; others look abandoned to crackheads. As in Florida, people are fighting the decay in their surroundings, mowing lawns and boarding up houses to entice new occupants. Looters are a menace, assuming there’s anything still left to steal: people facing foreclosure sometimes strip radiators for scrap. Pipes and wires too. “Right now the city of Detroit is the biggest copper-mining location in the country,” a local real-estate agent quips.

Down by the river, beyond which lies Canada, the scenes are more apocalyptic still. Indian Village looks like post-Katrina New Orleans, only gutted by flames instead of the elements: timbers rent asunder, crumbled brick and hollow windows. “Messiah Affordable Housing – Now Leasing,” reads a board on the side of a church. Others outside houses tout for buyers (“For sale: $500 down and $300 a month”) or taunt the agents (“Remax give us a call and tell us how we’re doing”). More formal placards announce a neighbourhood surveillance scheme, or say: “This house is being watched: Stop Halloween Arson”. No wonder some lenders forestall foreclosure and let debtors squat. It’s their only hope of having something left to sell.

Perversely, says David Bernstein, a U.S. Treasury economist, the more stringent bankruptcy code has actually “increased the number of individuals walking away from their homes, their mortgages, and their other financial obligations.” Experts say the wisest response would be to give judges the power to modify mortgage agreements, “cramming down” the debt to levels borrowers could repay under Chapter 13. Unsurprisingly, this isn’t a big hit with bankers.

It ought to be, says Elizabeth Warren, a Harvard law professor who specialises in bankruptcy. Cramdowns are “the first step to finding the bottom of the floor,” she says, and therefore essential to recovery, both on Wall Street and in the wider economy. “A bad problem is going to get worse if we don’t deal directly with homeowners.” The only viable way of doing that is to negotiate away the “underwater” part of loans, then sign people up to fixed payment plans on the balance. Even if it wanted to, the government couldn’t just take on the original debts: they only exist as jumbled-up derivative bundles. “Thanks to the way-too-smart Wall Street crowd,” Warren says, “those mortgages are all fractionalised and can’t be purchased directly.”

Eric Stein of the non-profit Center for Responsible Lending agrees new bankruptcy laws are “by orders of magnitude the best thing that can be done to keep people in their homes.” That would help break the market’s downward spiral. Echoing the message, 30 consumer groups have urged Congress to “give Main Street Americans what they need: … bankruptcy relief.” Democrats tried, unsuccessfully, to get cramdowns included in the Bush administration’s banking bailout. This legislation tells the Treasury to twist arms when it starts buying toxic home-loan securities; officials should “encourage the servicers of the underlying mortgages … to minimise foreclosures.” If only. “Treasury has been encouraging servicers to do loan modifications since last fall, but with very limited success,” says Adam Levitin, a Georgetown law professor. “There is no reason to think that the bailout suddenly changes anything.”

Bankruptcy’s not a general panacea, whatever its advocates claim. “There is in my mind no negative consequence of filing,” McAvoy says. “If someone’s insolvent and eligible, that’s no difference to the lender – it’s just making it official.” But not all debtors follow the logic, never mind creditors. Emotions and expectations often trump reason. “It’s a big deal for me and it’s going to affect me for a long time,” says one of McAvoy’s clients, a former realtor whose earnings dried up when she moved to Detroit. “You made all the wrong choices,” he tells her, but this time the wisecracks aren’t welcome. “I want to just get it over with,” she says. “It’s not an easy decision for me. If there’d been any other option I’d have taken it.”

While the outcome may be liberating, it’s a traumatic process. And it doesn’t always deliver what people hope. Some obligations can’t be made to vanish; outstanding tax bills for example. And for all it can tidy up your credit history, its trace can be a black mark in itself. In some jobs, a bankruptcy can stop you getting hired. It can also make it harder to get more credit, though that’s not necessarily the case. Scouring legal records, some lenders specifically target new bankrupts, using ads that imply their problems weren’t their fault. “Karl Malone Toyota realizes that the last three months have been very hard for you,” for example. “While you won’t be able to go and get a mortgage right away, you can easily receive a secured car loan today at Karl Malone Toyota.” What’s more, “a payment history of as little as three months on a vehicle will provide you with numerous unsecured credit card offers.”

“I’ve had people buy houses, buy cars, after bankruptcy,” says Carmen Dellutri, a Florida lawyer. “All of a sudden it’s become not fashionable but OK.” Academics question whether there’s now “less stigma, or more financial distress,” to quote the title of a paper by Elizabeth Warren and two peers. “The traditional notion in many societies is that bankruptcy is, and should be, shameful,” they say, citing such examples as the requirement that bankrupts prance naked in the “vast Paduan Palace of Justice” and slap their buttocks three times against “The Rock of Shame” while shouting: “I declare bankruptcy!” It might be less public now, but the stigma’s still a deterrent. Perhaps more so, Warren says; rates of filings are rising despite it.

Even the promise of starting anew can be a chimera. The top three triggers for bankruptcy are divorce, job loss and medical problems, all of which entail ongoing expenses, or diminished earnings. Research suggests one in three people won’t fare better after filing. Christopher McAvoy’s experience is bleaker. “About 25 percent will be OK,” he confides, “the rest are screwed.” Clients hear a sanitised version. “I can’t get you more money,” he explains. “I can just make your debts go away.” As for the woman he told that her house wouldn’t be seized, it’s not so simple really. “She’ll lose it,” he says later. “There’s no way she’ll be able to pay.”

For all its pitfalls, the bankruptcy business trades on promises of setting people free. Charles Phoenix in Fort Myers makes the most of his surname for marketing. “A fresh start,” declare his contracts, beneath a reincarnating firebird. “The only way out of this crisis is to strengthen the consumer,” Phoenix says. “We put money in people’s hands by wiping out debt.” His sideline does it more directly: Ivy, Deanna and Lisa (Phoenix’s wife) are Golden Girls. They urge associates, “women seeking to do good in the community,” to get “personal networks to host home parties where invited guests bring their old gold and you purchase it”. Think Avon ladies and pawn. Buyers take a 7.5 percent cut, hosts 10 percent. “Everybody wins,” says a rival firm, MyGoldParty.com. It seems so: gold prices have doubled in the last three years.

Like it or not, says Elizabeth Warren, lenders also need to give Americans something to fight for. “The best part about cramming down mortgages,” she says, “is that, in a world of relative loss, this is a relative win. Foreclosure loses much more value.” That goes for neighbourhoods and families as much as bankers. Whether the laws change or not, “more homeowners should consider bankruptcy to save their homes,” Warren counsels. “Even if they cannot rewrite the mortgage, they may write off enough other debt so that they can still make their payments.”

One day, the government itself could need relief. America’s more than $10 trillion in the red; mostly owed to banks in China and Japan. Its economic future’s in their hands and for all their mutual dependence, a time must come when it no longer suits them to feed Uncle Sam’s greed. How that will play out remains a mystery. For now, the only certainty is lots more filings. Most families depend on dual incomes. More affluent on paper, they feel less secure than ever. And while safety nets exist, they keep eroding. A burst of hyperinflation could wipe them out.

Robert Lovett in Florida chose bankruptcy work because: “I knew this was the one safe haven in these times.” Up north, in Detroit, it’s a similar story. Christopher McAvoy still does family law, probate and the like, but that’s barely 20 percent of his practice. “Before, I would dabble in bankruptcy to keep a client happy,” he says. “Now I’ve got 15 appointments in the next two days. I’ve never done this many, this is crazy.” Priorities haven’t changed, just clients’ fortunes. “People still want to get divorced but they can’t pay me,” he says. “I’d go out of business without bankruptcy.” Even the professional classes aren’t immune. “I’ve had dentists, chiropractors, engineers,” McAvoy says. “I’m just waiting for my first lawyer.”