How to Rebuild After Losing Your Fortune

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.”

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.”

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