Bad Paper: Chasing Debt From Wall Street to the Underworld Read online

  When I asked Dennis about the size of the profits that his old firm made, he offered only one word: astronomical.

  * * *

  The state of Georgia was conceived largely as a philanthropic effort to give debtors a second chance. The venture was championed by a British aristocrat named James Oglethorpe, who, in 1732, founded a colony in the New World that would—in theory—allow debtors to opt out of debtors’ prison and, instead, have a fresh start as farmers. As it turns out, Oglethorpe’s vision for the colony never really took hold and no significant numbers of debtors ever came from prison to the New World. And yet the myth endures that Georgia was once a place devoted to the redemption of the indebted. I wondered why and eventually posed this question to Stan Deaton, a senior historian at the Georgia Historical Society. “It’s obviously not what happened, but what we wished had happened or what we like to tell ourselves happened, because it’s a part of the national narrative,” he told me. After all, noted Deaton, Americans yearned to believe that with hard work and pluck anyone could pull themselves out of financial ruin and reinvent themselves.

  The hard truth is that such reinvention was always difficult, and may be more difficult today than at almost any other time in our recent history. Creditors often lament how easy it is for debtors to declare bankruptcy and avoid paying their debts. There is, however, another side to this narrative. There are countless Americans with poor credit scores who are forced to live in a shadow economy, where they pay hugely inflated premiums for their cars, apartments, and loans. One of the debtors from the Georgia Splinter, a young woman named Catherine, told me that she purchased her car from a dealership in Conyers, Georgia, which catered almost exclusively to debtors. The place was called Prime Auto. I drove out to Conyers and met with one of Prime Auto’s owners, Bob Weir.

  When I arrived, Bob was quick to explain how his operation worked: “Well, what we can do for you is finance you an automobile at twenty-eight percent interest.” Bob arranged his loans through a company called Auto Finance, which offered forty-two-month loans, with a down payment of roughly $1,000. It was Auto Finance that set the interest rates and assumed the risk that a client might not pay. Bob just sold the cars. At this very moment, he said, I could buy a 2005 Chevrolet Impala LS, with just 100,000 miles on it. It could be mine for $9,000 plus interest, which would bring my total bill, when all was said and done, to roughly $13,500. According to the NADA’s Official Used Car Guide, this car’s retail value was $7,200. I asked Bob why he was charging $9,000. It came down to credit scores, he replied. If a customer had very poor credit, Bob would have to offer the financing company an extra cash incentive—above and beyond the 28 percent that it would earn—to cement the deal. This cash incentive was known, somewhat ironically, as “the discount.” A customer with bad credit might have to pay a “discount” of $1,800 in this situation, said Bob, which is why he was charging $9,000. “What it comes down to is this—if you have bad credit, your money is worth about seventy-five cents on the dollar,” he explained. By the time that his clients arrived here, they didn’t have that many other options. “The customer in this market is at the end of the road,” he told me. Bob then corrected himself and added, “There is another road below us.” Would-be clients who couldn’t get financing through Bob’s dealership always had the option of visiting a buy-here-pay-here lot. This was the last resort. I asked Bob where I could find such a place. “Right around the corner,” he told me.

  Around the corner, I found T & B Motors and its owner, Tony Scott. Tony was dressed in a bright green button-down shirt and what can only be described as khaki short-shorts, which covered no more than his uppermost thighs. Tony sat at a desk behind a sign that read, WARNING!! TRESPASSERS WILL BE SHOT. SURVIVORS WILL BE SHOT AGAIN. When I inquired about the sign, Tony pulled out a Ruger LCP .380 compact pistol. “We don’t play,” said Tony. “You come in here and take something that’s ours, we’re gonna blow a hole in you.”

  “Add a little ventilation,” added Billy Bickers, a heavyset man with a 64-ounce mug of Coke in hand. He was one of Tony’s employees.

  “Pull that one out over there, Billy,” said Tony.

  “I try not to pull the thing out unless I want to use it,” said Billy.

  “Well, you might use it,” said Tony, who then pointed at me. “He is a Yankee.”

  Billy pulled out a .357 Magnum.

  The guns were a precaution, explained Tony, against any potential perpetrators—be they trespassers, robbers, or customers. Tony explained that his car dealership offered people a chance to “rebuild their credit and get back in grace with society.” According to Tony, when he opened the business in the mid-1980s, his customers tended to be honest people who had fallen upon hard times. “The people that we’re getting now are absolutely not trustworthy—they’re nearly criminals,” said Tony. The trick to dealing with them, he explained, was viewing them as “children.” “If they don’t behave, you have to spank ’em. You make ’em pay their payments and keep ’em straight—just like you do children.” This was, apparently, how he had raised his own son. “If he didn’t behave, I tore him up. Same way my daddy did me. If I didn’t do right, I got my butt tore up.”

  “Our daddies really did it,” added Billy. He then eyed his boss and added, just to clarify matters: “You’re speakin’ figuratively—of our customers.”

  “Oh yeah, I don’t whip their asses,” said Tony.

  Tony said he had to be tough when dealing with his clientele or else he would be out of business: “The only people they pay are the people that make ’em pay.” According to Tony, when giving out credit, some embraced “the old theory of sling the shit up on the wall and, if enough of it sticks, you’ll make a living.” He couldn’t afford to do that, and so he had devised his own system. At T & B Motors, Tony did everything in house. He was the car dealership, the bank, the credit bureau, the collection agency, and the repo man, all wrapped up into one. Instead of choosing his customers based on their credit scores, he asked them to bring in two pay stubs proving that they were gainfully employed. He loaned them the money, set the interest rate at 24 percent, and dictated the terms for default. If they were late, Tony repossessed the car.

  Tony’s business model, I realized, existed at the rock bottom of the credit market. It was what existed in the complete absence of trust: a marketplace where creditors had lost faith in debtors and debtors had lost any sense of obligation—or ability—to pay. Perhaps some of this was the inevitable result of the Great Recession. For years, banks had given out credit in a freewheeling manner to virtually anyone who asked for it. Then the economy crashed and people couldn’t pay their bills. So, in the case of credit-card debt, the banks sold these debts for a few cents on the dollar and then restricted their new lending to those deemed safe bets. Yet the fact remained that all kinds of other people still needed to borrow money to purchase big-ticket items, like cars. And even with the risks involved, lenders could make money if they were tough enough and charged enough interest. This is where Tony came into the picture. With him, it was back to basics. There was a guy named Tony. He was your last resort. He charged you 24 percent interest, and, if you wanted a car, you paid it. If you didn’t pay, Tony took the car. And if you caused trouble, Tony made it known that he was only too happy to whip out his Ruger LCP .380 compact pistol and add some ventilation to your shirt.

  After leaving T & B Auto, I wanted to see the kind of place where Tony’s customers—the worst-off debtors—might live. The Lorene Lodge in Marietta was a motel geared toward guests who wanted to have extended stays. It was located on a drab stretch of highway where storefront signs advertised bail bonds, help for drunk drivers, and cheap cars for those with bad credit. The establishment resembled a group of concrete bunkers surrounded by parking lots. A sign out front read: LORENE LODGE: WEEKLY RENTAL $130 TO $145. ALL UTILITIES & CABLE INCLUDED.

  In the main office, I met the property manager, a fifty-eight-year-old man named John Carpenzano. I asked him
whether many residents stayed here because their credit was too bad to live elsewhere. Yes, he replied—that pertained to “just about everybody” at the motel, including himself. As he told it, John owed his poor credit to several factors including a flood and the bad economy, which had forced him not just to work here, but live here as well. Just around the corner from the main office, I met a middle-aged woman named Joann Gaines, who invited me into her home, a cramped, dark, disheveled room with a tiny kitchenette. She told me that she was living here in large part because her credit scores were too low to live elsewhere. When I asked her whether she felt safe, she pointed toward a pan on the stove. “I gotta keep a pot of grease on,” she told me.

  “What do you mean?” I asked.

  “If they kick your door in, and I got enough time to get up and get that grease, they’ll burn up,” she told me.

  “They’ll burn up?”

  “They will burn,” she confirmed. “You know what happens when something burns you. Your skin peels off. They’ll think twice before going to anybody’s door trying to kick it in. Grandma taught me that. She said, ‘Don’t kill them, just make them wish they were dead.’”

  Later in the day, I had a chance meeting with a former Lorene Lodge inhabitant who had come back for a quick visit. He was a small, rotund man in his early fifties who introduced himself as Ab Smith. Ab was a recovering alcoholic and, interestingly enough, he thanked the Lorene Lodge for helping him rebuild his credit. At first, I assumed that he meant his credit score, but that wasn’t it. He was speaking about “credit” in the most general sense of the word. When he first arrived at the Lorene Lodge, Ab claimed to have no “credit” at all—meaning nothing to prove that he was a dependable member of society. He was starting from scratch.

  Ab gestured broadly around the grounds of the motel and declared emphatically: “This is scratch.” He explained that when he was getting his life together and wanted a proper apartment, he needed a reference and a record that he had actually been paying his bills consistently. Ab was able to do that right here. The simple act of paying the Lorene Lodge roughly $130 to $145 a week had established a sort of de facto credit record. If anyone ever wanted to check on Ab’s creditworthiness, he or she could simply call John at the front desk, and John could confirm that, yes, Ab really had paid his bills. By doing this, Ab explained, he was eventually able to move into a real one-bedroom apartment that cost him just $435 per month. A room at the Lorene Lodge, by contrast, could cost anywhere from $550 to $620 per month. For Ab, this was progress.

  I took a hard look at the Lorene Lodge and saw it anew. When you lived in the shadow economy, and your credit scores were abominable or nonexistent, you didn’t rely on the credit bureaus to vouch for you. You relied on a place like the Lorene Lodge. This was the starting point. Scratch. When I asked Ab if he was glad to have gotten out of the place, he looked around grimly and replied, “When I come back here, I say to myself, This is who I don’t want to be—this is not a life for a man.”

  * * *

  Scratch was precisely where Shelton—one of the debtors from the Georgia Splinter—didn’t want to be. Yet by the time I met him, in the summer of 2013, he was perilously close. Shelton was the twenty-nine-year-old prison guard from South Carolina whose bank account Sherwin Robin’s law firm had just garnished. One morning, I drove north on the interstate, across the border into South Carolina, and met him for lunch on the outskirts of Greenville.

  We met at a Ruby Tuesday alongside a strip mall. As soft rock hummed in the background and preternaturally cheerful waitresses hovered about, Shelton recounted the details of his day-to-day life. He lived in a small house with his fiancée and her mother, who was quite ill and housebound. He worked twelve-hour shifts at the local prison, and, when he came home, his phone was ringing around the clock with calls from debt collectors—so many called it was hard to keep track of them all. As a prison guard, he made just $29,000 a year. In order to enhance his take-home pay, he had opted to give up his health insurance, but that had been a mistake. He had recently gone to the hospital with chest pains and racked up a medical bill of roughly $900. The doctors said that he had high blood pressure—due, in part, to stress.

  Over lunch, Shelton traced his troubles back to 2004, when Bank of America offered him a credit card with a $3,500 line of credit. At the time, he was just twenty-one years old, making close to minimum wage at a temp agency. This was back in the days of easy money when credit cards, like home mortgages, were still being given out willy-nilly. Shelton used the card to cover costs, like paying off his student loans and going out for dinner. For a year he made regular payments, usually the minimum required, and then he had a dispute over what he owed. He claims that the bank failed to record several payments that he made, and when it wouldn’t adjust his balance, he stopped making payments. (Bank of America says that it has no record of him issuing a dispute or complaint over a missing payment.) Shelton is the first to admit that it was a poor choice; but, at the time, he says he didn’t realize just how ill-advised and costly this decision would prove to be.

  In April 2006, when Bank of America charged off his debt, he owed a principal balance of $2,464. But this was hardly all that he owed. Bank of America tacked on an additional $414 in interest and $752 in fees. Since then, Shelton’s debt had only grown. In April 2010, just four years later, he received a letter from Sherwin P. Robin & Associates saying that he currently owed $8,189, but that “as a result of our difficult economic times,” the firm was willing to reduce the balance. In May, he received a summons to appear in court over the matter. He never showed up to defend himself. Shelton told me that it had proven difficult to get off from work and he didn’t appreciate that he was opening his wallet to pay a hugely inflated debt. In August, the State Court of Richmond County entered a default judgment against him for $5,229. By May 2013, Sherwin P. Robin & Associates had garnished $872 of his wages and was insisting that he still owed them $6,786 when factoring in interest and fees. That means, when all was said and done, Shelton was on the hook for more than triple his original principal balance.

  In the spring of 2013, Sherwin P. Robin & Associates succeeded in garnishing Shelton’s bank account, removing all of the money he had—roughly $1,000. At that point, Shelton’s most pressing problem was his car. He had used a car dealership like Prime Auto that specialized in selling vehicles to people with bad credit. Just several weeks earlier, he had bought an eleven-year-old Mercedes for roughly $9,300. He put $1,500 down and agreed to pay off the remaining balance over the next forty-two months at an interest rate of 24.9 percent. That meant that, ultimately, he would be paying more than $4,000 in interest. Yet his real concern was that he would go into default, lose his car, and not be able to reach his workplace. Shelton’s car actually came with a GPS feature installed that allowed his loan provider to shut off the engine, remotely, the very second that he went into default. Shelton feared that one morning soon, he would be driving to work, down a lonely country road, when all of a sudden his engine would go dead. It seemed like just a matter of time before he was stranded at the side of the road.

  When lunch was over, Shelton offered to give me a tour of the area. We drove past the tiny house where he lived with his fiancée and her mother, and then we stopped briefly at the car dealership where he had purchased his car. A clerk at the dealership told him matter-of-factly that if he went into default and his car engine died, he would also lose his $1,500 down payment.

  Eventually we drove to the prison where Shelton worked. It was an enormous, sprawling complex that looked a bit like a windowless shopping mall shrouded in barbed wire. We parked in the visitors’ lot, situated atop a slight slope, and gazed down on the prison. I asked Shelton what kind of inmates he guarded. “Rapists, child molesters, murderers, drug dealers,” he replied. He seemed lost in thought. “Soon as I pull up in the parking lot, it’s like a morbid state comes over me,” he told me quietly. “Like, just dreading coming to work, because you got to deal w
ith this for twelve hours and you are locked behind these fences.” Every day when he came to work, Shelton said, they scanned, frisked, and searched him. “It actually makes you feel like you are an inmate yourself.”

  Shelton said he worked twelve-hour shifts, without a lunch break, and it was slowly grinding him down. The worst was when he learned that his bank account had been garnished and he would take home no money for the previous two weeks of work. Shelton had no leverage to negotiate. This was because he had failed to show up in court to contest his lawsuit, forfeiting his right to challenge the amount that he owed. Hearing this story helped me understand how the system worked. Shelton wasn’t blameless. Not at all. He had made some poor decisions; but in so doing, he had fallen into a trap and would have to pay dearly while his creditor, with the aid of the courts, stood to profit greatly.