Think the rich are different from you and me? Not when it comes to declaring bankruptcy. Over-leveraged people are pretty much the same when the creditor comes calling.
“You have to have the tissues out, for sure,” says Tim Niarhos, Nashville bankruptcy attorney.
“Doctors, lawyers, accountants … it’s all the same in the end. They don’t have enough money to pay their creditors. They’re done, at that point.”
Niarhos, who typically works with high-net-worth people whose businesses have failed, sees clients at some of the worst moments of their lives.
He saw more during the Great Recession.
“Those people were like everybody else, but it just was on a different level,” he recalls. “So they owe $10 million and they’re worth $4 million and their kids go to private school.
“At the end of the day, they didn’t have enough money to take care of their problems.”
Three-quarters of Americans don’t have enough money on hand to take care of even basic emergencies, from an unexpected car repair or veterinary bill.
Federal Reserve research shows 47 percent of Americans say they do not have $400 cash on hand to pay for an emergency. Two recent separate surveys by Marketplace and Bankrate.com found that about 60 percent of Americans could not come up with $500 cash.
A George Washington University study found that 25 percent of people earning $100,000 to $150,000 did not have a spare $2,000.
A Gallup poll found that 16 percent of households making $240,000 a year said they couldn’t cover a financial emergency.
The conclusion: A majority of Americans are spending every dollar they make, and a surprising number of them have high incomes.
Niarhos blames a culture of overspending and instant gratification.
Most Americans feel entitled to the trappings of a middle class lifestyle, owning a home and cars, taking an annual vacation, a college education for the children and secure health care and retirement.
But to afford such a lifestyle, a household would actually have to make $130,000 in annual income, a USA Today analysis found. Only one in eight American households makes that much money, and the median household income is about half of that.
Among the affluent, private school and college tuition, jumbo mortgages and big car payments make it even harder to get ahead of a paycheck, no matter how big it is.
The total estimated annual cost of attending Vanderbilt University as an undergraduate was $63,532 this past school year. And tuition for a state resident will cost $29,938 at the University of Tennessee-Knoxville this school year.
“It’s hard to maintain positive cash flow with a kid or two in private school or college without going paycheck to paycheck,” Niarhos adds.
“They literally spend what they have, which is what everybody’s doing. And the high-net-worth people are the worst at it because they don’t think they ever need to plan ahead.
“They have all these toys and things and then something bad happens. You get sick and you don’t have a job anymore. Or, the insurance you have, you cap out, or you don’t have any disability insurance.”
“The only people I know who have true wealth are people that inherited money to begin with.”
Need to plan ahead
High earners may not get much sympathy for high-class problems. But the shame, stress and despair they feel from a business failure or a divorce is no less real than that of someone in a lower income bracket.
Last year, Tennessee topped the nation in bankruptcy filings with 36,052 total filings, or about six per 1,000 residents.
A big reason is that Tennessee is a creditor-friendly state that makes it easy for creditors to garnish wages and foreclose on someone’s home, says Larry Ahern, a bankruptcy attorney and partner at Brown & Ahern. He also is an adjunct professor at Vanderbilt Law School.
Ahern
“The result is that debtors are pushed to act perhaps faster than they would in other states to restrain the action by filing a bankruptcy,” Ahern explains.
“It tends to leave people with fewer options other than simply filing bankruptcy to preserve their wages and their properties.”
These days, his clients aren’t coming in because the economy is bad or they owe more than their home is worth, which was the story of the recession. Personal problems are now the bigger issue, problems that don’t go away just because business and the economy is good.
“I had developers and contractors streaming in here during the recession, and it was the same thing every time – I have this land or I have these houses and they’re not selling and this is all I know how to do and now I’m not cash flowing, and the bank is coming down on me,” Niarhos explains. “Those were actually way easier to fix.
“Now it’s about something bad personally happening, whether it’s divorce, illness or a business partner defrauding them, you name it, it’s just some incredible soap opera walking in my door all the time now. Everything I have now is complicated.”
Often clients don’t seek help until they’ve compounded their problems and it’s too late to fix them. They’ve cashed out their retirement plans and incurred huge tax penalties to pay off a creditor, not realizing that retirement plans such as a 401(k) or an IRA are exempt under bankruptcy law. They could have gone bankrupt and kept their retirement nest egg intact.
Some mistakenly believe they can save their home by transferring the deed to a spouse’s name, only to find out that they needed to have only one name on the loan note.
Another pitfall is signing for school loans, which, like tax debt, is not dischargeable in bankruptcy.
“So when you take out the loan for your kid to go to college, it’s essentially wiping out two generations if your kid can’t pay the loan back,” Niarhos points out. “And those end up being pretty hefty numbers.”
Helping people in their worst time
Niarhos says he started his career at a big law firm on the other side of bankruptcy – doing work on behalf of creditors. After a successful foray into real estate, he reentered the legal profession – this time on the debtor side. It turned out to be his calling.
“I chose to go back and do debtor work because I just felt like it would be more fulfilling to help people every day. Little did I know that it was right up my alley. My favorite part is sitting in the conference room and strategizing as to how I can help these people.”
The work is so challenging and satisfying, Niarhos adds, that he often doles out free advice to desperate people who cold-call his office –even if they’re not a client he can work with.
“I always take people’s calls who are in trouble and talk to them for 30 minutes and see if I can get them pointed in the right direction, or tell them what to say to the credit card company,” Niarhos points out.
“Lawyers get such a bad rap. People have no idea that we are here all day helping people who are in trouble, who are at a point in their life where they really need someone that gives a damn.
“And that part of the job, I’ve got to tell you, that’s what makes it all worthwhile.”