You might think that last year's tycoons were lounging on leather club chairs, sipping scotch with their private bankers as they chatted about the many options for their vast new wealth. Instead, some are sitting on the cold, hard benches of U.S. Bankruptcy Court, swilling machine-brewed coffee and wondering how things could have gone so wrong so fast.
It's the New Economy's latest form of whiplash--losing all your money nearly as fast as you made it. In high-tech hubs such as New York, Austin, Seattle, and San Francisco, lawyers and court officials say they see a rise in personal bankruptcy filings from among the people who until recently were celebrated for their killer career moves and financial savvy. Among them are former dot-com CEOs, high-tech programmers and engineers, and e-commerce marketing and sales execs, including about 25 Microsoft Corp. (MSFT) employees, some of them former millionaires.
UNRAVELED. Lenders are also noticing a doubling, to 10% of all filers, of "straights"--those who were paying all their bills one month and became broke the next, with no period of delinquency in between. These are the people, says San Diego lawyer Mark L. Miller, who "reaped the rewards of the dot-com boom, and now they're going down with the demise."
Some of these upscale types got stung by taking out high-risk margin loans to buy options or by locking themselves into luxury lifestyles, only to go broke once the shares imploded. Others exercised their options and hung on to the shares, only to see them unravel--sticking them with huge tax bills on portfolios that are now virtually worthless. Then there are those in their 20s and 30s who charged up tens of thousands on credit cards--for vacations in St. Bart's, new wardrobes from Armani, and Italian furniture--only to get laid off without the cash to pay off even the monthly minimums.
The suddenly unwealthy are adding to a recent surge in personal bankruptcy filings, which in some jurisdictions have doubled in the past few months. After falling by 13% since 1998, national personal bankruptcies jumped 17.5% in the first quarter of 2001. That's almost back to 1997 levels, according to the administrative office of the U.S. Courts.
The surge has been sparked not only by the economic slowdown but also by impending changes to the bankruptcy law. The legislation, awaiting final retooling in Congress, is expected to make it more expensive and onerous for people to file, imposing new conditions such as means testing and debt counseling.
Many fear the new law will put even more pressure on the faltering economy, since it will force more debtors to go into Chapter 13, under which they have to repay debts, as opposed to the currently more preferable Chapter 7, where many get wiped out. "If lenders get more people back in Chapter 13, it will make them extend even more credit to marginal borrowers," predicts Mark M. Zandi of Economy.com Inc. "I'm not sure anyone will be happy with that."
Bankruptcy filings could also keep climbing as more people get caught in the tax trap of the alternative minimum tax (AMT). A 1969 holdover created to ensure that the superrich wouldn't evade the IRS through tax shelters, the AMT is based on the paper gain accrued when stock options are exercised, even if they later lose value. But now, after stock options have become a virtual currency for employees up and down the ranks, the AMT is catching all kinds of people in its net, including rank-and-file workers who hold shares that are now almost worthless.
That has put people such as Judy Pace, a 48-year-old single mother of two in San Mateo, Calif., in financial ruin. Pace owes the government $334,000 in taxes on Broadvision shares that are now worth only $100,000. "I'm in the middle class," says Pace. "This is very surreal." A bill to abolish the AMT has been introduced by Representative Zoe Logren (D-Calif.), but few expect it to pass anytime soon.
EVAPORATED ENVY. So many whose fortunes have shriveled are racing to take advantage of today's more consumer-friendly laws. Some of the filers, according to San Francisco bankruptcy trustee Lynn Schoenmann, are young people whose careers and financial success used to inspire envy--people like Bassam G. Kassab. Until six months ago, Kassab was grossing $6,000 a month at a software company. But when he got laid off and was unable to find a new job, he found himself staring at $48,500 in credit-card debt.
He's a far cry from the typical bankruptcy filers: uninsured workers or lower-income families that went wild with the Wal-Mart (WMT) card. Many of the new bankruptees were supplementing their already-handsome salaries by selling stock options each month. When their companies' shares cratered, they were left without the cash to finance their $900,000 mortgages, five luxury cars, and $120,000-a-year property taxes in exclusive parts of Silicon Valley.
One such Silicon Valley couple, newlyweds in their early 30s with a baby on the way, had a net worth of $35 million a year ago, according to their lawyer, Michael Malter in Santa Clara, Calif. But when the husband's high-tech company stock plummeted from $150 to $11, they ended up owing $3.1 million in taxes on exercised options they held rather than sold, and which are now only worth $1 million. Now they, along with a lot of others, are wondering if the New Economy's wealth machine will be remembered more for what it gave--or for what it took away. By Michelle Conlin in New York, with Douglas Robson in San Mateo, Calif.