Given a Shovel, Americans Dig Deeper Into Debt

[groovedaddy]

The collection agencies call at least 20 times a day. For a little quiet, Diane McLeod stashes her phone in the dishwasher. But right up until she hit the wall financially, Ms. McLeod was a dream customer for lenders. She juggled not one but two mortgages, both with interest rates that rose over time, and a car loan and high-cost credit card debt. Separated and living with her 20-year-old son, she worked two jobs so she could afford her small, two-bedroom ranch house in suburban Philadelphia, the Kia she drove to work, and the handbags and knickknacks she liked.

Then last year, back-to-back medical emergencies helped push her over the edge. She could no longer afford either her home payments or her credit card bills. Then she lost her job. Now her home is in foreclosure and her credit profile in ruins.

Ms. McLeod, who is 47, readily admits her money problems are largely of her own making. But as surely as it takes two to tango, she had partners in her financial demise. In recent years, those partners, including the financial giants Citigroup, Capital One and GE Capital, were collecting interest payments totaling more than 40 percent of her pretax income and thousands more in fees.

Years of spending more than they earn have left a record number of Americans like Ms. McLeod standing at the financial precipice. They have amassed a mountain of debt that grows ever bigger because of high interest rates and fees.

http://www.nytimes.com/2008/07/20/business/20debt.html?th&emc=th#

[sui generis]

1. well it's not just "years of spending more than they earn"

When the cost of gas suddenly more than doubled, it didn't just change the cost of gas for your car. It changed the cost of food, products, commercial transport, and even reduced your employers margins if they were in a product business or even ability to pass through billing for travel expenses in the case of third party services.

Being unemployed for even just one month could put someone with a small family into the debt grind; paying for groceries, gas, utilities, or even just trying to cover an ordinary mortgage on an ordinary home.

I think there are lots of people in the past year or so who have had no choice, who haven't been buying non-essentials, who have been frugal and responsible, who don't drive hummers and are good people who have ended up using a credit card to try to make ends meet in the short term only to find out that they can't dig out.

The blame rests squarely on the credit card companies and their rate policies. They went to Congress to create this environment thinking that they'd pull an end run around bankruptcy and get people stuck forever. They just didn't count on 20 percent of their borrowers being in a financial shit hole.

It truly is their fault - when they got global default to pass and then ran it to the absurd limit they destroyed people's borrowing ability, unrelated to their ability to pay. In a nutshell, if you have five credit cards with minimal balances, you miss a light bill and the interest rate on all your cards jumps to 34% (or higher), then they reduce your credit limit to below your balance, charge you overlimit fees and set your minimum payments higher than your income as a result, collectively they force you to live on cash.

But if you're spending all your cash on groceries and rent or mortgage and transportation, there's nothing left to pay those guys. They made their own bed. They need to go out of business or stop bitching about the evil irresponsible consumers.

[JoDog]

3. sui, you described

my situation to a T.

I got in debt to the credit card companies...no one to blame other than my own ignorance. I spent a short time out of work. Things had started to look up--I could pay my expenses out of pocket, and make the minimum payments. Then the gas prices went up, and with that, the price of everything else.

I had a simple choice to make: Eat and keep gas in my car so I could keep my job, or pay the credit card companies.

After much tears and a lot of depression, I have made the incredibly difficult choice to go for the nuclear option at age 31. I'm getting the money together for a bankrupcy. While it will not help any with the student loans, it will help me right the rest of my financial ship. I have a sneaking suspicion that I will just barely beat the rush to BKR court.

And anyone out there who wishes to accuse me of taking the easy way out, let me assure you, this is not easy for me, my loved ones or my family. BKR is an expensive, time-consuming and extremely embarassing process. It goes against what I was raised to believe in. I was an idiot, I got myself into this mess, and now I must get myself out.

[sui generis]

4. before you do Bkr

Check into "debt mill" repayment instead. Look for companies that have a strong track record of working with the big credit card companies (I'll see if I can dig up some reliable names), and avoid the "fly by night" billboard ads.

A lot of times they can do MORE for you by reducing your credit card debt, sometimes as much as 50 percent, getting an abatement on student loan interest (while you are in the debt mill program), and getting you out without the 10 year hit to your credit record that bankruptcy delivers.

There is no cost - but they will review your spending in excruciating detail and confiscate all your credit cards for a three year period. You might call your credit card company and say that you are planning on doing a debt consolidation and which companies would they recommend.

It actually benefits the credit card company in that they DO get paid more cash over time than if they refused to work with you so they LIKE debt mills, when justified.

Give it a shot - good luck!

[FedUpWithIt All]

23. We were able to get over 65% off the totals for 3 of my fiance's credit card bills.

We tried a credit counselor and they refused us because there was not enough accumulated debt. They did advise us though. They suggested we contact the companies when we had a certain amount of money "in hand" and make a payment offer to close the accounts.


I called the collectors and i told them what i had to work with. Told them i would send it out immediately and they accepted. On a $650.00 bill they took less than $300. I think many creditors are taking these "deals" because they just want the debt paid.

[Common Sense Party]

5. Many people were spending more than they earned, and not

on necessities. I met several people in town who told me they didn't have a dime to invest because they were living paycheck to paycheck. They told me this standing in the doorway of their $400,000 home, immaculately decorated, with two or three late-model SUV's or luxury vehicles in the driveway, a boat at the side of the house, and jet skis or snowmobiles in the garage.

Yes, there are people in a much different boat--those who got screwed by circumstances, medical crises, divorce, layoffs, etc. I'm not talking about them (nor is the original article).

I'm talking about the people who BEHAVED their way into the mess they're in. They CHOSE to live a lifestyle FAR beyond their income. And their banks and finance companies CHOSE to allow them, anabling them with cheap loans. Those loan officers and banks are just as culpable.

[sui generis]

11. the myth of the welfare queen

was put forth by people who stood to profit by proving the existence of welfare queens.

The fact of the matter is credit card companies ARE evil. A few people are truly stupid enough to get up the proverbial creek, but if the credit card companies want us to believe it was their bad customers who are responsible for this, think again.

Even if such a thing were undeniable (I knows them numbers, so not), the vast majority of bucket rollover (credit industry term meaning rolling into a harder to collect 30 day bucket of arrears) are people who used their credit cards in desperation, and not because they were sitting on a pile of cash and didn't feel like paying. Most people, given a shovel to dig with are not stupid.

The people who need a break the most are unfairly associated with those "welfare queen" credit card borrowers, to the advantage of the credit card companies. I AM talking about those people.

Up until late 2007 net credit loss in the industry was fixed between 5 and 7.5 percent of total borrower obligations. Both "prime" and subprime credit card companies (such as providian) compensated for this by making sure annual interest rates average 15% and average double that for their "risk" pool of subprime borrowers. The "net credit loss" was actually only a loss against uncollected interest in present value terms. Almost invariably the actual principle on most high rate subprime cards is already long paid.

In the industry there are rollover cycles that include slipping holidays, cyclical events like "back to school", and usually school supplies, kids clothing, and pediatric medical events. Other cycles are regional and follow mass corporate layoffs and even events such as Katrina.

All said the NCL in the industry soared right past 20% last year, which actually became a real loss for the credit card industry. They can't afford to hire enough people to call everyone six times a day sixty minutes apart on every phone number they can find for you.

Yes, give people a shovel and people who like to dig will dig. Don't characterize everyone or even most everyone that way, or else you're just being played by the credit card companies who know we would be outraged OUTRAGED I tell you that these evil consumers have ruined America.

[Common Sense Party]

12. "Don't characterize everyone or even most everyone that way...

... or else you're just being played by the credit card companies "

I did no such thing.

You get no argument from me that credit card company practices are evil. I spend a great deal of time in the book I am writing discussing their nefarious tricks.

I also refuse to excuse the conspicuous consumption over-borrowers. And there are many of those. I never said "everyone" or "most everyone" falls into this category. But there are many, and they are as culpable for their choices as the credit card debt merchants are culpable for their choices.

[sui generis]

13. ultimately though

If I loan somebody money, it is 100% my responsibility to make sure I'm loaning it responsibly.

The problem with high credit limits has always been that exercising the minimum interest and minimum payment on the full credit line would likely exceed the borrower's ability to pay it back. I'm going to assume there are sharks in the ocean and if you throw them meat they will eat it. If you don't want sharks at your swimming hole, then you have to either not feed them or feed them elsewhere.

However, the credit card companies routinely chum the waters around our "swimming holes" with insane credit limits, and invariably some dumb bunny will swim out to get a closer look at the sharks.

While I agree we are responsible for not spending beyond our means, I do MUCH MORE blame the cc companies for making it possible at all. They ran some risk/return formula years ago that essentially said they could make a crapload of money before the market melted down, keep people from filing for bankrupcy, and congress would ignore brutal collection techniques after that.

Credit card companies have a vested interest in keeping you paying perpetually, and that means shouldering some risk that some people would actually flounder if they borrowed out to their limit. Now they're seeing the light and blaming their consumers. Blaming everyone but themselves. I've seen the inside at the very top of two major companies and it is ten times slimier than your worst fears. They view stupid and/or gullible people as resources to be harvested and they are shameless about it.

[funflower]

20. Got any actual facts you'd like to share? Haven't heard any yet. n/t

[question everything]

15. And you don't have to cite these extremes

Look at people with cell phones plans of, what $30 a month? And digital cable.. And $150 pair of sneakers..

The restaurants around town are still bursting at the seams.

There is a young couple working with us. He won $10,000 at a radio ruffle, or so, so immediately purchased a set of plasma TV, or something - that is so huge in their modest size living room it is uncomfortable to watch. They purchased two houses, with nothing down, and were leasing late model cars.

Yes, he worked as a mortgage broker, without any knowledge of finance or accounting but, apparently was pulling $100K a year, without even the benefit of college education.

Then he lost his job and now they filed for bankruptcy, dumped their big house and both cars..

And they accomplished all of this in a mere three years.

[Common Sense Party]

16. Absolutely. I'm NOT saying that everyone in dire financial straits

was acting irresponsibly (apparently I have to provide that disclaimer every time I say this), but there ARE MANY people around that WERE living far beyond their means. I know; I've done it. We suffered for it. Many people do not know how to act their wage.

Putting ALL the blame on the debt merchants is like blaming the liquor store or the beer brewer for all DUI's and drunk driving fatalities. Those people still CHOSE to drink too much, and then they CHOSE to get behind the wheel of a car. Are they not at all culpable?

[BridgeTheGap]

17. More than half of all bankruptcies are related to medical emergencies n.t

[Common Sense Party]

18. I don't doubt it. Do you have a link?

I'd like to see the exact number. Is it 51%? 55%? 75%?

There are still many people who DIDN'T have medical problems that wind up in that boat. Many people BEHAVED their way into that boat.

And bankruptcy is not the only financial strait, either.

[BridgeTheGap]

21. Here's one

"About half of the bankruptcy filings in the United States are due to medical expenses. Source: Health Affairs Journal 2005" Health Affairs Journal - 2005

http://www.healthpaconline.net/health-care-statistics-in-the-united-states.htm

[funflower]

19. Half of all personal bankruptcies are caused by a medical crisis

Most were insured when they got sick. Many lost their coverage while they were ill. And, of course, one in six Americans is uninsured. When you consider that 100% of seniors, military and goverment employees are insured, that (uninsured) perentage is a lot higher for the rest of us.

http://www.consumeraffairs.com/news04/2005/bankruptcy_study.html

[WriteDown]

2. 20 year old son?

I sure hope he is making some sort of contribution. My parents had pushed me out of the nest by that age.

[emilyg]

6. I flew out of the nest

at 17. Twenty is more than enough.

[mrreowwr_kittty]

7. That's the first thing I keyed on too.

A lot of young adults are overgrown babies these days. My bf's 19 yo son is one. Sits on his ass all day. Other than taking a couple of classes at community college he does NOTHING to contribute to the household. Drives me nuts. Bf makes excuses for him: He's got ADHD. He's sensitive. :banghead:

[CrispyQ]

9. My friend refers to her 27 year old son as "The Parasite."

He knows she has a tidy sum in her retirement account. He doesn't live at home, but he's always asking for money - usually $500-$1000 a month. What really gets me is she gives it to him. :eyes:

[mrreowwr_kittty]

10. Yet another reason I'm glad I never had any

Back when I was growing up it was clear that your parents were responsible for you until you were 18 or finished college, and then you were on your own. Something has happened in the last few decades where it's become perfectly acceptable for young adults to be parasites, as your friend describes them. Obviously, there are external factors contributing to this (economy, job market), but quite frankly a lot of parents are just not putting their foot down with their grown kids. My b/f's son might not be ready to move out on his own yet, but he could get a part time job and help out around the damn house, at least. Nope, he sits on his flabby butt, raids the fridge, and gets money from his dad.

[Xenotime]

24. You don't see it as helping her son?

You paint a very dark picutre but maybe that's not the case at all.

[CrispyQ]

25. I have no problem with parents who want to help their children.

I do have problems with children who live beyond their means & ask help from their parents without any regard for their parents future & I think this is the case in my friends situation. Do parents who can & want to help their children call them parasites? Maybe jokingly, but my friend isn't joking.

She has recently expressed concern about how much money she has left & that she may not have enough to last through her retirement. She told me that she has never been able to tell her son no. I suspect he's never done without, lives beyond his means & Mom bails him out. I wonder if he will be there for her when she has no money left to give him?

[groovedaddy]

8. What kind of example does the Federal Government set on this?

They're borrowing out the wazoo and we're bad for over using credit?

[question everything]

14. But... but... she was helping the economy

which is 70% based on consumption.

If she stopped buying, millions of retail workers would lose their jobs..

:banghead:

[groovedaddy]

22. Some good letters to the NY Times on Brooks Op-ed on this subject

http://www.nytimes.com/2008/07/24/opinion/l24brooks.html