At a small gathering of entrepreneurs last September, it was Kevin Daum's turn to answer the regular monthly question and name something new he had done recently. Daum had two answers: One, he hadn't borrowed money from anybody. And two, he had eaten food from his barbecue grill every day for three weeks.
The revelations might have sounded whimsical, but the group knew that Daum had been struggling for more than a year to save a dying business, start a new one, and remain solvent. And his answers were, in fact, ominous. Daum had been eating from the grill because he couldn't muster $600 to refill the big propane tank that provided fuel for the stove in his Connecticut home. And he hadn't hit up friends or colleagues for any more money because he and his wife, Deanna, had decided to declare bankruptcy: They'd no longer have to scrape together funds for mortgage payments, credit card loans, and other overwhelming bills.
It took a grueling recession, an epic housing bust, and some rotten luck to exhaust the Daums' financial resources, but that's a powerful confluence of forces that millions of Americans have faced over the past two years. More than 2.5 million Americans have declared bankruptcy since 2008 as unemployment has surged, home values have plunged, and the nation's safety net has frayed. A recovery seems likely to take much longer, and be less buoyant, than the ones after the recessions of 2001 or 1991. And whether the U.S. economy becomes vibrant again, with a prosperous middle class, depends largely on the extent to which mid-career families like the Daums retrench and rebuild—or muddle along with a diminished standard of living.
Just a couple of years ago, Kevin Daum had good reason to envision a much rosier future. He ran the kind of small business that politicians love to coo about, a mortgage brokerage in California that employed two dozen people at one point and earned several million dollars in annual revenue. After the ups and downs of building a business over two decades, Daum's firm, Stratford Financial, was finally on a path toward being prosperous and debt-free by 2008. Daum opened a side business, helping fund and promote an upscale, 300-home development in Southern California. And he parlayed his work with custom-home builders into a how-to book, Building Your Own Home for Dummies, which helped generate more business for his firm. "My business was exactly where you'd want it to be," Daum recalls. "I was bringing in $60,000 to $80,000 per month and working just a couple of hours a day."
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Luxuries followed—not the extravagances associated with Wall Street CEOs but the kinds of indulgences that many middle-class Americans aspire to as they build wealth. As Stratford's business went national, Daum moved his family from California to the New York area, where he had always wanted to live. By 2008, they owned a primary residence in Connecticut and a small pied-à-terre in Manhattan, plus a rental property in Connecticut and a modest home in California that was inhabited by two of Deanna's brothers. The Daums' teenage son attended a boarding school in Massachusetts. To commute between their city hangout and their country home, they drove a BMW 3-series and a Pontiac Solstice roadster.
The first sign of serious trouble came in the summer of 2008. Daum had lending deals lined up that would generate $500,000 worth of commissions if they all went through. But Bear Stearns had just collapsed, the markets were jumpy, and lenders unexpectedly turned down all but one of the deals, which produced just $12,000 worth of revenue. Daum rolled up his sleeves, cut back on expenses and began to focus on projects that seemed more promising.
But suddenly everything was more difficult. One of the primary lenders Daum used to finance deals was the California bank IndyMac, which failed in the summer of 2008—the fourth-largest bank failure in U.S. history. That froze the market for construction loans, the cornerstone of Stratford's business. Daum turned his efforts to the upscale development project in California, but that turned out to be funded by a subsidiary of Lehman Brothers. When the investment bank declared bankruptcy in September 2008, that project died as well. The same month, a small consulting job, for $7,000, fell through just as Congress voted down the first stab at bank bailouts. "I thought I would make a soft landing," Daum says. "But everything I had been working on completely collapsed."
In fact, the entire industry where Daum had spent most of his 25-year career rapidly became a wasteland littered with failed firms and workers fleeing for other fields. Daum and his wife, who had worked at Stratford tending the books, figured they needed to do the same. As a lifelong entrepreneur, Daum didn't want to work for somebody else—and figured nobody would hire him anyway. So he started building a marketing firm, TAE International, that would use some of the tactics he had learned as a theater major in college to help firms better sell themselves to potential clients. To establish bona fides as a marketing consultant, he started writing a book on the subject, titled Roar! Get Heard in the Sales and Marketing Jungle. And he fell back on his expertise in housing to coauthor another book, GreenSense for the Home, that would take advantage of environmental trends.
Daum knew that it takes two years, at least, to start earning income from a new business. And the bills were piling up, with practically no money coming in. The Daums' four properties alone amounted to about $12,000 in mortgage payments each month. They had $250,000 in private loans from friends and colleagues, plus $80,000 in credit card debt. Then there were private-school tuition payments for their son, plus ordinary bills.
They decided to prioritize their son's school and focus on cutting other things. Eliminating restaurant meals, vacations, entertainment, shopping sprees, and most unnecessary spending was the easy part. They switched to a high-deductible health insurance plan, which reduced monthly premiums. Then they had to figure out which bills to stop paying. First they delayed their credit card payments. It was important to keep paying for the cars, since they were easy to repossess, and if that happened it would be nearly impossible to get another car loan. But then a friend offered the use of a Jeep Wrangler, which allowed them to get rid of the other two cars and the payments that went with them.
The focus shifted to saving their houses. Daum's business was getting nibbles from potential clients, but he was still far from being able to cover all the mortgage payments. Deanna had started applying for accounting jobs but found only small consulting gigs that paid little. So the couple tried everything else they could think of. A wealthy friend loaned enough to cover tuition payments for their son and a few other expenses. Other friends and relatives pitched in a few bucks. They renegotiated one of their mortgages at a lower interest rate, which saved a little.
The Daums also gamed out what would happen if they sold one or two of their East Coast properties and moved into the third. That produced tension over the Manhattan apartment: It was a dream of Kevin's to live in New York, and he was committed to the place. Deanna saw it as more of a luxury they could do without. Other things were easier to agree about, such as gathering up all the loose change they could find and feeding it into a Coinstar machine in exchange for some folding money. And there was a final fallback position: Walk away from everything and join the Peace Corps.
Kevin Daum is a gregarious fellow who conveys a sense of optimism and loves to point out that Thomas Edison endured hundreds of failed experiments in his famous laboratory and still became one of the greatest entrepreneurs ever. But Daum's battle to save his homes ground him down. Creditors called incessantly. Daum worried that his son, who was getting ready to apply for college, would feel the stress, muff his applications, and jeopardize his future. And self-doubt was a latent bogeyman that challenged the confidence Daum needed to make his business succeed. "You're battling this issue of self-belief, your ability to step up on a daily basis," he says. "There were days when I would sit and stare at my computer."
There was a break in the spring of 2009, when their son got accepted to Georgetown—with a full scholarship, since the family income had fallen to practically nothing. "That was a huge weight off my shoulders," Daum says. "I finally thought, 'I can't screw him up!' " But their finances continued to erode. Daum had a spat with his wealthy friend, and that assistance disappeared. He felt guilty exercising instead of working and gained 40 pounds. The stress of continually coming up short mounted. "When it got to August [of 2009], I finally told Deanna, 'I can't beg for money anymore,' " Daum explains. "I looked at her and said, 'It's over. It's time.' "
It wasn't hard convincing her. As a bookkeeper, Deanna thoroughly understood their financial predicament. "It was an emotional struggle to let go," she says. "Before, I would panic about the possibility of a derogatory mark on our credit report. But I probably detached sooner than he thinks. We were beyond emotional at that point. It was more logical."
An attorney OK'd the plan, and Kevin and Deanna decided they'd file his and hers bankruptcies. Deanna filed hers last fall; Kevin held on a bit longer but filed this spring. That meant they'd default on the loans they held, including the mortgages on four homes, which would trigger foreclosure proceedings. Their credit ratings would be wrecked, making it nearly impossible to get a conventional loan.
Yet they both felt an immediate sense of relief. The creditors stopped calling. It was easier to concentrate on new business without worrying about old loans. They decided to abandon Connecticut altogether and consolidate their life in a new apartment they'd rent in New York, aided by a weak housing market and falling rents. And living in New York meant they could get by without a car.
A few regrets nagged at them. Deanna, who's now 43, felt that if they had capitulated sooner, they might have been able to save a bit more money and borrow less from friends. With his history in the lending business, Kevin, 45, felt remorse at defaulting on the loans for four properties. "It's not like we've been bad spenders," he pleads. Before declaring bankruptcy, he even tried to arrange a "short sale" on the New York apartment, which would have entailed selling the place for less than he paid in 2006 and splitting the loss with the bank. But the bank didn't even respond to his suggestion, which made the ultimate decision easier: "At that point, I figured, 'The banks aren't doing me any favors, and they're getting bailed out by the government anyway. I'm going to stop worrying about them and start worrying about myself and my family.' "
As the foreclosures progress, the Daums are putting disappointment behind them, adjusting their expectations, and enjoying some freedoms they didn't anticipate. Kevin insists, semiconvincingly, that owning a home isn't that important to him anymore. As they clean out their homes, Deanna seems a bit more resolute. "When I started seeing all the stuff we had, I felt wasteful," she says. She highlights the pros and cons of living with less: "You're conscious of every dollar you spend. It's good that you're aware, but every time you spend money, you feel guilty. But I'm comfortable with our standard of living right now."
As for business, the Daums are optimistic and apprehensive at the same time—like millions of other Americans. "I've gone from working an hour a day and basically thinking I'm retired to working 18-hour days," says Daum. "But I'm inspired by the do-over. I'm back to the starting-and-building phase." His marketing firm is attracting more clients, although many of them don't yet seem convinced that the recession is really over. So money remains tight.
Meanwhile, Daum's book Roar! comes out in mid-April, and he's so determined to make it succeed that he had the words "New York Times Best Seller" tattooed on his chest, backward, so he's reminded of his goal every morning when he looks in the mirror. His other book, GreenSense, is due out around the same time. And if those don't produce a breakthrough, he figures he'll come up with something else that does. "I've built a million-dollar business before, and I'm confident I can do it again," he says. "What if it gets worse? Can I keep going? I don't feel I have any choice."