"All conditions and all circumstances in our lives are a result
of a certain level of thinking. When you want to change the
conditions and the circumstances, we have to change the level of
thinking that is responsible for it." -- Albert Einstein
The federal government -- and the majority of Americans -- can no longer get by a single day without taking on additional debt. And as more borrowing goes to simply pay off old debt, or to make interest payments, the new debt does little more than increase banking profits.
Eventually the higher levels of debt will lead to higher interest rates, which will lead to more debt, creating a cycle as vicious as it is inevitable.
Over the past generation, banks and credit card companies have made trillions of dollars of high-interest, unsecured debt available, and Americans have scooped it up. Our incomes have risen an average of 1 percent in real terms, while our household debt has increased over 1,000 percent. As a result, we no longer save. We have no choice but to keep spending until our credit is exhausted and we own nothing.
As Marriner Eccles, the legendary Fed chairman during the Great Depression, noted, "The economy is like a poker game where only a few people control the chips and the other fellows must borrow to stay in the game. But the moment the borrowing stops, the game is over."
How did we allow this to happen?
How could banks keep lending to people who can't afford to pay them back?
Doesn't that fly in the face of tradition, if not common sense?
Don't bank executives realize that they are sowing the seeds of their own destruction? After all, when most Americans can no longer stay afloat, the banks will sink alongside them as they did back in Marriner Eccles' day.
The simple answer is that while the banking industry has gone through its most profound change since the Venetians invented modern finance hundreds of years ago, Americans have clung to old assumptions. In particular, we've continued to believe that banks wouldn't extend us credit unless we could handle it, and that banks want us to save. Yet, the big banks realized more than a generation ago that they make far more money teaching us to spend than to save. They've also learned that making money upfront, mostly in the form of fees, is a lot more fun than waiting for a revenue stream to trickle in.
The reason is simple: Fees can be booked as profits immediately; revenue streams take years. This is why most mortgages, car loans, and even credit card receivables are bundled together and sold off, sometimes instantly, to Wall Street.
Enron executives didn't want to wait for their brilliant ideas to bear fruit. So, with the help of an accounting firm called Arthur Andersen, and the blessing of the S.E.C., they applied a short-term accounting rule called "mark-to-market" to long-term contracts, so that executives could decide how much a new business idea was worth, book it as immediate profit, and then collect a bonus on that profit -- all in the same quarter. When these new businesses instead generated huge losses, executives turned to the world's largest banks to hide those losses -- for a fee. Enron would "sell" the losses to a large bank before reporting its financial results, then buy them back afterward at a greater loss. The bank collected a fee without taking a risk, the bankers got a bonus based on generating that fee, and, most important, the Enron execs rewarded themselves with huge bonuses based on phony -- but consistently growing -- profits.
Of course, mark-to-market guaranteed Enron's eventual failure. But consider that the top ten CEOs in America now earn more than $100 million per year, and you realize how quickly short-term gimmicks can create vast fortunes. The same gimmicks are now being applied to consumer debt.
Most mortgages, car loans, and credit card debt are packaged and sold off to investors at a profit within a short period of time, sometimes seconds. Banks create an estimate of how much the credit card debt is worth and sell it to investors, pocketing a profit.
But there is an even greater misconception at work -- a misconception that debt is not what it used to be. That there is "good" debt, for example, and "bad" debt. Tune in to Suze Orman, for example, and she will tell you that a single number, your credit score, is the key to your financial future. But while a good credit score gets you better rates on your mortgage and credit cards, it also opens up the floodgates for more "good" -- i.e., cheap -- credit to pour into your life, and this credit does not usually remain good or cheap for too long. The idea that one should stay out of debt, period, is now considered unrealistic. After all, who lives without debt? The Unabomber, maybe?
After all, Americans have accepted the surfing lifestyle in all of its absurdities. We have watched advertisements that say, "Pay off your high credit card debts!" and we have called the 800 numbers and attached our homes to new loans in order to pay off our credit cards, then bragged to our friends that we are "debt free." We are encouraged to rent things we used to own -- including music and, paradoxically, the down payments on our homes. We have accepted this new bargain that we will never be out of debt as inevitable, preordained by the God of our choosing. We have forgotten the feeling of solid ground as we have taken on larger and more treacherous waves. We have ignored the greatest investor among us, Warren Buffett, who has derided our "sharecroppers society." He sounds old, cranky, and un-hip.
Until we wipe out. Until we lose our jobs, until we get divorced, until we discover that our health insurance doesn't cover thousands of dollars of "extras," until we lose our job or until our home doesn't appreciate at the anticipated rate. Until we can no longer surf. And then the "debt hell," as a consumer advocate I interviewed calls it, kicks in. The fees pile up. The interest rates increase. The bargain we accepted ceases to be a bargain. It becomes prohibitively expensive. We learn that we are not middle class at all. We are poor. We own nothing. And then, just maybe, we finally ask, "Well, how did we get here?"
Excerpted from Maxed Out by James D. Scurlock. Copyright © 2007 by James D. Scurlock. Reprinted by permission from Free Press, a Division of Simon & Schuster, Inc.
From my archives
The 'wild, wild west' in loans
When Brenda Spinato's furnace went out on a freezing day in January 2001, she had two choices: Take out a two-week payday loan or borrow from her parents. Spinato was 29 years old and a fiercely independent single mother of three girls. "My pride was a little high," said Spinato as she looked around the immaculate living room of her brick ranch in River Grove. For a quick $1,000 cash loan, Spinato now owes $10,743 -- most of it interest that accumulated for more than three years at 521.43 percent annually. "I feel they waited so long to collect so that they could charge so much in interest," Spinato said.
A payday loan is a short-term loan for a small amount of money, usually $100 to $1,000, from a storefront lender. Borrowers submit a pay stub and a bank statement. The interest charged is an average of 512 percent in Illinois.
Spinato says she got better rates from a neighborhood gang-banger who once loaned her $700 and allowed her to pay it back over time. Street loans with illegal loan sharks in Chicago charge 2 to 5 percent a week, which is 104 to 260 percent annually. Living paycheck to paycheck, Chicago's working class is stung with interest rates on payday loans ranging from 101 percent to 1,541 percent, a Chicago Sun-Times investigation shows.
Only Illinois and six other states allow payday lenders to charge whatever the market will bear. "We're the largest state that doesn't regulate this industry. It's the wild, wild west here," said Michele Latz, director of Illinois' Division of Financial Institutions, which oversees payday lenders.
The industry has fought the state's attempts to regulate it -- hiring former Gov. James R. Thompson to challenge the state's authority before the Illinois Supreme Court last year. Even Supreme Court Justice Mary Ann McMorrow had to recuse herself; she owns an interest in currency exchanges where some payday loans are issued. But Illinois Attorney General Lisa Madigan wants payday loan rates capped at 36 percent -- which payday lenders argue would drive them out of business in Illinois. "It's going to continue to be a battle, but at the end of the day, we're going to win," Madigan insists.
To recoup their high interest, payday lenders use the municipal courts as the ultimate bill collector. They can pass judgments and garnishee wages. Despite thousands of court judgments against defaulting borrowers, Illinois' payday loan industry contends large interest cases, such as Spinato's, are rare.
But the Sun-Times found dozens of big-dollar cases similar to Spinato's, including one in which a 61-year-old Chicago woman took out two $600 loans in 2000 from 10 Minute Payday Loans. With 573.57 percent interest accruing over 18 months, the woman's final bill came to $11,789. That case, says Bob Wolfberg, president of the Illinois Small Loan Association, should never have happened. "The president of the company was shocked," Wolfberg said. As a result of the Sun-Times inquiry into the case, the attorney who pursued such high interest has been fired, Wolfberg said.They are short-term loans for small amounts," Wolfberg said. "A payday loan is similar to using a taxi cab -- good for a short trip across town but not intended to take you to Orlando." Most payday loans are paid back on time, says Wolfberg. They serve a vital need for people requiring emergency cash before payday.
The payday lenders say they have to charge hefty finance fees to turn a profit. Conventional banks have shied away from such low-dollar, short-term loans because their administrative costs make them unprofitable. While some payday loan stores stop charging interest after the due date -- usually two weeks to 31 days -- Wolfberg's association is adamantly opposed to any law that would cap interest and limit loan amounts.
Another payday lender association favors restrictive laws. "We believe a payday loan should be a good loan on the front end," said Tony Colletti, spokesman for the Consumer Financial Services Association, which has been working with community groups to draft a law. "You should not try to make your money on the collection side through triple damages or attorneys fees or interest building up."
Despite opposition to the payday industry that included an influential Catholic priest, legislation to regulate the industry has only met defeat. "I don't have enough fingers or toes to give you all the lobbyists, but it's a $2.4 billion industry," says state Sen. Schoenberg plans this fall to introduce -- for the third time -- a bill that would curb what he sees as predatory practices. "Payday loans exploit people's financial vulnerability and suck them deeper into a whirlpool of debt that they cannot extricate themselves from," Schoenberg said.
At least one Chicago municipal judge has ruled that payday loan interest is "unconscionable" and "obscene." He's ordered the court not to enforce the accrued interest. "Only Tony Soprano gets interest rates like that," Judge Wayne Rhine said in court. Four years after his decision, Rhine remains adamant: "These payday loan folks are predator loan people," he told the Sun-Times.
"You have to be very very desperate to go to them -- so desperate that you'll sign anything to get the money. Usually it's someone who is facing perhaps an eviction, a medical bill or an emergency where the need for cash is urgent and they have no other place to turn."
Such was the case for Amy Peters, who in December 2000 took out a loan for $300 after she had an emergency appendectomy and had missed work as an office temp. Peters was overwhelmed with hospital bills, and her check to E Z Payday Loan in Crystal Lake bounced. Three months later, the store sued her, charging three times the amount of the check -- which is allowed by law -- plus attorney fees. "It's like they are legalized loan sharks," said Peters, a 27-year-old single mother who lives in Wonder Lake. "It was the worst mistake of my life."
Mark Maksymowicz, a 39-year-old father of three girls, says his ability to pay back two $600 loans at 1,541.11 percent interest was complicated by his wife Wendy's illness. She died of a brain tumor last November. "I was missing work left and right," he said. He contends he made payments but they were never credited to his account.
The Payday Loan Store is suing Maksymowicz for $2,010.
Despite the industry's claims, Judge Rhine says payday loans have a high default rate. He and other Chicago municipal judges typically knock off interest over 100 percent. With an annual caseload of 66,000 cases, some payday cases get by, like Spinato's, which came before Rhine in May. "That one must have snuck past me," Rhine said with regret. "The interest should have been knocked off. If I had been aware of it, it would not have gotten through." In July, she filed for bankruptcy court protection from creditors to save her house. She now has to work out a repayment schedule with the loan store.
Spinato insists she tried to pay back the loan after her check bounced in 2001, but she was told she would hear from the store's attorney. Over the years, Spinato admits she received numerous phone calls from collectors, but in each case, she says, they demanded payment in full, which kept going up because the interest kept accruing.
Michael Greene, the bill collector in charge of Spinato's case, details a different scenario. He says Spinato's collection file shows that she agreed numerous times to repayment plans she didn't fulfill. "But she never kept her word on at least six conversations with my agency. He added: "I don't think payday loans are lily white either.
Rochelle, a 40-year-old legal secretary who lives in Glen Ellyn, compared her payday loan to a "death sentence."
"It's like you have to cut off your right leg. They'll stop at nothing," said the mother of two teenagers. Just before Thanksgiving in 2000, Rochelle took out an installment loan from a Payday Loan Corp. store in downtown Chicago.
Rochelle made two payments and then she says she lost her job. This spring, Payday Loan Corp. took Rochelle to court. The judge ordered her to pay $3,477, most of it interest, and garnisheed her wages.
Even when the interest stops after six months -- as some contracts stipulate -- the amount can clobber those who live paycheck to paycheck, as most payday clients do.
Edina, a 26-year-old customer service representative and mother of one, became stretched with bills in 2002.
She took out six loans from several Americash stores totaling $1,500. "I kept trying to pay off a little at a time, and they aren't interested in you paying anything unless you pay the whole amount." After six months, the interest had accrued to $3,954. Americash -- the most aggressive pursuer of defaulted loans in Chicago -- took Edina to court and was awarded a judgment of $6,029. Paying 15 percent of each paycheck, it will take her a year and a half to pay off the judgment.
Half of all bankruptcies involve payday loans, claims bankruptcy attorney Melvin Kaplan. "Payday loan stores aren't interested in working out payment plans," he said.
Since 1995, Chicago mail handler John Gray has filed for bankruptcy protection three times after falling behind in payday loans.
Originally posted to Pam's Coffee Conversation at 8/17/2004 06:06:43 PM
FISCAL FITNESS HOW TO SURVIVE THE LOSS OF A JOB
Newsday; 4/10/1994; Christina Dugas
NEW YORK MAYOR RUDOLPH Giuliani recently announced he is cutting 7,600 city jobs. NYNEX is laying off 16,800 employees over three years. AT&T is eliminating 15,000 jobs over the next two years. The list goes on and on. If you fall victim to the next wave of layoffs, how will you pay your bills until you find a new job?
Few people are prepared for such an event. In addition to the financial strain, getting laid off is demoralizing and disorienting. Some people compound the problem by refusing to face up to the seriousness of the situation.
The best thing to do, experts say, is to go on the offensive. Find out what you can do to take control of your finances. Above all, don't wait for the bill collectors to come pounding on your door. Keep in mind that it is often possible to anticipate getting laid off. Rumors of corporate downsizing often precede the actual announcement. You can also assume that if your company is losing money, it might have to downsize at some point. When you see warning signs, don't wait to get a pink slip to begin developing a survival plan.
Everyone should have an emergency fund. If you have time to prepare for getting laid off, make sure that your contingency fund equals three to six months of living expenses and that you keep it in a safe, easily accessible account. Then you can use the fund to supplement any severance package or unemployment benefits.
If you and your spouse or companion both work, it's a good idea to arrange your budget so that you can afford to live on one income if the other person is out of work for a long time, says Larry Elkin, a financial planner in Hastings-on-Hudson. "I call this jobless insurance," he says.
Losing a job always hurts, but it really becomes a crisis for people who have been living beyond their means. When the money stops coming in, you have to be prepared to cut back on your spending, says Paul Richard, vice president of the National Center for Financial Education, a nonprofit organization. "The biggest mistake people make when their income is interrupted is instead of reducing their standard of living, they try to maintain it on credit cards," he says.
Some basic strategies for coping with a job loss:
Start by listing any income you'll still have coming in. Then make a list of your normal monthly expenses. Next, figure out how you can reduce those expenses. Richard suggests cutting back on entertainment. "Do more things that are free and home-oriented," he says. "And do things yourself that you would normally pay others to do, such as lawn service or laundry or cleaning."
Other stopgap measures include holding a garage sale and selling your second car. Consider selling other assets, such as a boat and using the proceeds to reduce your debt burden.
Don't go overboard in eliminating everything that helps you relax and give you pleasure, however. For example, it's probably a good idea to maintain your health club membership if you're not going into debt to do so. Exercise can help you feel better about yourself. "Emotional wellness is very important when you're job hunting," Richard says.
Don't do anything to dig yourself deeper into debt. "Do not charge anything," says Gail Liberman, co-author of "Improving Your Credit and Reducing Your Debt." "Pay for everything with cash."
This is not the time to try to pay off your credit card bills. "I usually don't recommend making [only] the minimum payments, but this is one case in which you may need to, just to keep afloat," says Gerri Detweiler, author of "The Ultimate Credit Handbook."
Prioritize your debts. Some bills are essential, such as rent and mortgage payments, utility bills, car payments and unpaid taxes, says Robin Leonard, author of "Money Troubles: Legal Strategies to Cope with Your Debt." Others, such as the hardware store bill, are nonessential.
Even if you consider a bill nonessential, don't stop paying altogether. Always try to make a small payment toward the bill so that you can avoid hurting your credit record.
Let your creditors know if you are having trouble paying the bills. Believe it or not, most lenders will appreciate it if you disclose your financial problems so that they don't have to chase you down for the money later on. If you have a good record with them and show them you're making every effort to pay them back, they may be lenient with you. They may allow you to temporarily suspend your payments, or allow you to pay only the interest for a while. They even may cut your interest rate if it is higher than the going rate.
Arrange to meet with a loan officer to discuss your mortgage payments, for example. Come prepared to show how you are reducing your spending, Elkin says. And come with a specific idea of what they can do to help you get through this period. "Walk in and say, 'We have a problem and here is how I think I can solve it,'" he says. And if the bank official is unbending, don't give up. Go to a higher level. Start with a loan officer and after that, if necessary, contact a vice president. Many loans are secured. That means if you are delinquent on your payments, the creditor can seize the property that is designated as the collateral, including your house or your car. But remember, lenders don't always want to seize your property. Banks are in the business of making loans; most don't want the headaches of managing real estate, and too much of it looks bad on the balance sheets they give to regulators and investors. So they may prefer to help you work things out.
If you owe money on a consumer product you bought, the creditor also may prefer to make a deal, Elkin says. That's because if you end up filing for bankruptcy protection, they may get stuck with the entire bill. After you negotiate a repayment plan with a creditor, remember to ask them not to report you to a credit bureau, Detweiler says. The goal is to work out a plan to pay back your creditors and keep your credit record intact.
While you are looking for a new job, find ways to increase your cash flow. An obvious suggestion, Richard says, is to get a part-time job to help make up for the shortfall. Consider borrowing from a family member. Unless it is an outright gift, however, think of it like any other debt obligation and draw up a schedule for repaying the money. If you're the one making the loan, make sure you're really helping your relative through a tough period and not just subsidizing a lifestyle that the person can't afford.
Another option is to borrow from your 401(k) plan at work, assuming you have one and that it allows loans. True, you have to pay the loan back with interest, but it's not so bad because the money goes to you.
Under certain circumstances, you may want to tap into your home equity. One advantage of a home equity loan is that the interest is tax deductible. But these loans and lines of credit are inherently dangerous because you can lose your home if you can't make the payments. Many experts say you should only resort to one if you truly have a temporary cash-flow problem.
Don't cash in your retirement plan unless you have exhausted all other options and are totally out of money. For one thing, you will have to pay taxes and stiff penalties if you are withdrawing the money before age 59 ½. Remember, if you cash in your retirement accounts to help you get through a temporary problem, you are jeopardizing your long-term future.
If you're having trouble finding a new job, be sure to consider all the possibilities. Elkin believes that too many people in this situation are reluctant to follow the jobs to other cities. "I wonder how many unemployed construction workers sat out the construction boom in South Florida after the hurricane," he says.
Even though you are out of work and are experiencing financial difficulties, remember that you have rights. Many times a creditor will pass an overdue bill to a collection agency. If that agency then begins to call you and constantly badger you for the money, you have the legal right to tell them to leave you alone, Leonard says. Tell them orally to stop bothering you and then get their address and the name of a contact person and send them a letter to that effect. After that, they can tell you only that their collection efforts have ended or that they are going to sue you for the money.
Leonard also suggests that if you are contacted by a collection agency, try to get the original creditor to take back the bill and negotiate a repayment schedule with you. "Usually they will give you more room to maneuver than a collection agency," she says. And if you work things out directly with the original lender, there is a greater chance that they will extend credit to you in the future.
If you lack discipline or become depressed and overwhelmed by the burden of looking for a job and trying to pay the bills, you may need professional help. Consider contacting one of the more than 850 nonprofit Consumer Credit Counseling Service offices around the country. Locally, there are Budget and Credit Counseling Services offices in Manhattan and Melville. These services will help you develop a budget and a repayment plan. You can also take advantage of a plan they offer in which they will negotiate the repayment plan with your creditors. Then you make one monthly payment to the counseling service and they pay your bills and deal with creditors. There is an initial consultation fee and a monthly fee for the payment service. You also should know that if you use a counseling service's repayment plan, it is likely to show up on your credit report. So be sure to ask the counseling service how that will affect your ability to get credit in the future. But it might be worth it if it means no more calls in the middle of night from bill collectors. "The peace of mind alone may be well worth going to a counseling service," Detweiler says.
When the bills are due and money is tight, there are some strategies that can help with problem. As with all debt, it is important to contact your creditor if you believe you will soon fall behind on your payment schedule. Creditors may be willing to work out an extended payment schedule.
Mortgage: Your mortgage is an important billtry to pay it first. Your mortgage may or may not appear on your credit report each month, but payment information will, in most cases, be reported to the bureaus if you become 90 days or more overdue on your payments.
Bankcards: Visa and MasterCard are the most valuable references on your credit report, so pay them on time, even if it is only the minimum monthly payment.
American Express: American Express cards must be paid in full each month. If you don't pay, you are considered late and that information will likely be reported to all the major credit bureaus.
Car Loans: You don't want to get behind on a car loan because in some states your car can be repossessed after you've missed only one payment. If your car is worth more than you currently owe on it, you may be able to refinance your loan with lower monthly payments. If not, your lender may agree to a temporary schedule of reduced payments.
Child Support: Delinquent child support can reflect very negatively on your creditworthiness. All child support payments $1,000 or more in arrears must be reported to credit bureaus if the credit bureau requests that type of information.
Taxes: The IRS can be extremely tough if you don't pay your taxes on time. If you are notified by the IRS that you owe past-due taxes, make every effort to pay them as quickly as possible. If you can't pay, contact the IRS to try to arrange a repayment schedule.
Medical Bills: Most medical bills are not reported to credit bureaus until they are sent to collections. It's likely that you can work out a modified payment schedule with the doctor or hospital. Be sure to
confirm any agreements in writing and ask for confirmation that smaller payments will not harm your credit rating.
Student Loans: Federal student loans may be deferred if you are having financial difficulties. If your loan is deferred, you will not be required to make any payments during the deferment period and no
interest will accrue during this period. Remember, though, that you cannot qualify for deferment if your student loan is in default.
Small Bills: Set aside small bills, such as those for magazine subscriptions, book clubs, or local accounts, but be sure to contact the creditor if you think the account will be turned over to collections.
SOURCE: "Guidelines for Juggling Your Bills from The Ultimate Credit
Handbook," by Gerri Detweiler
Know Your Rights!
Here's a sample letter to a collection agency to tell it to cease
Basnak Collection Service
49 Pirate Place
Topeka, Kansas 69000
November 11, 19
Attn: Marc Mist
Re: Lee Anne Ito
Account No. 98-90-92
Dear Mr. Mist:
For the past three months, I have received several phone call and
letters from you concerning my overdue Rich's Department Store account.
As I have informed you, I cannot pay this bill.
Accordingly, under 15 U.S.C. 1692c, this is my formal notice to you to
cease all further communications with me except for the reasons
specifically set forth in the federal law.
Very truly yours,
Lee Anne Ito
SOURCE: Money Troubles: Legal Strategies to Cope With Your Debts, by
For More Information on how to deal with a financial crisis:
"Money Troubles: Legal Strategies to Cope with Your Debts" by Robin
Leonard. Published by Nolo Press for $16.95. Call (800) 992-6656.
"Improving Your Credit and Reducing Your Debt" by Gail Liberman & Alan
Lavine. Published by John Wiley & Sons for $14.95. Call (800) 225-5945.
Budget and Credit Counseling Services: Call (212) 675-5070 in New York
City and (516) 293-3831 on Long Island.
How About You? Do you have an idea for getting fiscally fit? Call toll
free, (800) 288-3733, and leave a recorded message with your suggestion.
Or you may write to Christine Dugas at the address below.
Copyright 1994, Newsday Inc.
~ ~ ~ ~ ~