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When bad spending habits and ugly mortgages collide

July 20, 2009 – Comments (6)

You may be familiar with the plight of New York Times economics journalist Edmund Andrews, who has chronicled his financial downfall in an article and new book (I first blogged about it here). He and his new wife, Patty, despite a six-figure income, found themsleves with credit-card bills of $50,000 and an "ugly" subprime mortgage. How dd they do it? As Andrews wrote: 

"Between humongous loan balances and high rates, we had hung ourselves with the rope they gave us. In the previous December alone, we charged $2,845 on the Chase card for Christmas gifts, food, gasoline, clothing and other expenses. The charges included almost $350 for groceries, $700 in clothes from J. Crew, $179 at GapKids and $700 for airplane tickets for two of Patty’s children to visit their father in Los Angeles. Our balance climbed from $14,118 to $17,135, and in January 2006 we maxed out at our $19,000 credit limit. And there were other expenses on other cards: $1,200 in dental work for Patty’s son Ben; $1,600 to rent a beach house the previous year for us and all the children. Granted, the beach house was an embarrassing mistake. But given that Patty had landed a solid job, it seemed like an indulgence we could work off later."

And then there was the ugly mortgage. 

This may be old news to some of you who have been following this story, but Megan McArdle at The Atlantic uncovered a fact Andrews didn't reveal in his article or book: His wife has twice declared bankruptcy: 

"In September 1998, California bankruptcy court records indicate that Patty and her first husband declared bankruptcy.  The financial statement they filed with the court indicated family income of $174,000 in 1996, $87,000 in 1997, and $126,000 in the first nine months of 1998.  The income fluctuations are not surprising, given that her husband was in the film production industry.  By the time of the filing, the couple owed about $30,000 on 8 credit cards, over $200,000 in back taxes, and almost $15,000 in private school tuition, as well as substantial car and mortgage payments. 

"In 2007, nearly as soon as she was eligible, Patty Barreiro filed again in Montgomery Country.  When called for comment yesterday, Andrews was unavailable, but there is no question that it is his wife:  his income and occupation are prominently featured in the docket.

"This is really highly unusual.  For starters, the overwhelming majority of people who file bankruptcy do not make anything close to $100,000 a year--the standard estimate when the 2005 bankruptcy reform was passed was that about 80% of filers had household incomes below the median income in their state.  The number of affluent people who file twice is even smaller, and has presumably gone down since the 2005 filing largely eliminated abusive serial Chapter 13 filings, which used to be used, often by quite wealthy people, to forestall evictions or foreclosure." 

It was clear from Andrews' article that these folks had "spending issues," but McArdle's nugget shows how bad it really is. As she wrote: "Ms. Barreiro seems to have spent most of the last two decades living right up to the edge of her income, and beyond, and then massively defaulting.  If you structure your finances so that absolutely everything has to go right, it's hard to blame the mortgage company when you don't quite make it."

Truer works were never written about financial planning.