U.S.: another article on soaring personal debt

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Headline: Americans' debt soaring

Source: Chicago Sun Times, 18 June 2001

URL: http://www.suntimes.com/output/news/debt18.html

We are a nation in debt.

As the economy slows following a boom in available credit, the statistics are piling up like a stack of unpaid bills:

* The second-highest number of personal bankruptcies ever filed.

* Near-record levels of debt as compared with disposable income.

* The lowest rate of savings since 1933.

* Average credit card bills increasing nearly 270 percent since 1990.

* The rate of delinquent bills and mortgages at their highest levels in nearly a decade.

"There is a growing tightening of people's finances," said John Ward, president of First American Bank in Elk Grove Village and chairman of the Consumer Bankers Association, which represents most of the major banks in the country. "People have leveraged themselves up."

The thriving economy of the 1990s led banks to offer credit cards to more and more people and offer larger home loans with smaller down payments, Ward said. But with major companies laying off, cutting overtime pay and reducing wages in general, consumers are having difficulty making ends meet. "It's a major concern for the industry and a major concern for the economy," he said.

With 18,651 bankruptcy filings through March, Illinois ranked fourth among states for the first three months of this year. The total is a 16 percent increase over the same period last year. Some of that increase could be caused by a quirk in the law. Experts say that in addition to the poor economy, in which countless dot-com firms went belly up, some bankruptcies filed this year might have come as lawyers rushed to file before a bankruptcy reform law takes effect.

The law, which was approved by the U.S. House and Senate but has yet to go before a joint conference committee, will make it harder to wipe out debts completely. That law will be bad news for the increasing number of Americans who find themselves wallowing in credit card debt.

Jerome Lamet, founder of the Chicago-based Lawyers United for Debt Relief, said he has signed on 1,100 new clients from across the country in the last four months--a 50 percent increase over similar periods in the past. Lamet said many of those are middle-class citizens who had a change in their financial status and then couldn't keep up with high-interest accounts. "The credit card has caused a very serious problem in this country," he said. "No one is saving anything. They are living on credit cards."

Lamet tells of a student who charged his college tuition and ended up $270,000 in debt. "How could a kid with no income get that line of credit?" he asked. But there also was a woman who called Lamet's office recently sounding suicidal because she owed more than $60,000.

Ward acknowledged that when it comes to credit cards, "there were excesses by offerers and borrowers."

Chris Elizondo, 38, an office manager from Chicago, said she and her husband have more than $30,000 in debts on a dozen credit cards. "They send you the preapproved ones in the mail," Elizondo reflected. "You are doing OK, so you take them. You use them because they have them."

Although she has had several credit cards for years, her family's debts began to spiral out of control when Elizondo's husband lost his job in January. He was forced to take a lower-paying position, and their health insurance premium jumped from $100 to $500 a month. But following a death in the family and a medical emergency, they couldn't keep up with the minimum card payments. The family is in the process of setting up a payment plan through Debt Free Inc. in Chicago, which does credit counseling. They will avoid bankruptcy, Elizondo said.

"The calls are climbing," Debt Free CEO Cyndi Reed said. "More and more people are at the crisis point."

Jody Robinson, 29, is $17,000 in debt. He recently moved to Chicago from Arkansas, where he was laid off from a job installing high-speed Internet connections. "It was kind of a false dream," he said of the tech boom, when he bought a new car and wasn't too worried about his finances. "But a lot of things were based on money that wasn't there. It's back to reality."

Neither Elizondo nor Robinson has a mortgage to pay, but people are falling behind on those payments, as well. The Federal Housing Authority, which makes higher-risk home loans, reported that its delinquency rate had hit a record level, 10.46 percent, at the end of last year. It has dropped slightly since then.

The Mortgage Bankers Association of America, which tracks 30 million residential loans, said the delinquency rate hit 4.54 percent in the fourth quarter of 2000, in part because of high energy costs. But that rate dipped slightly to 4.37 percent during the first three months of this year. "We see some leveling off," said association economist Douglas Duncan. ---------------------------------------- THE NUMBERS ON DEBT

* The second-highest number of personal bankruptcies on record--356,836--were filed during the first three months of this year, according to the American Bankruptcy Institute.

* The average amount of debt per household has reached 14.29 percent of disposable income, the second-highest rate ever, according to the Federal Reserve.

* The Federal Reserve also reports that the personal savings rate nationwide reached a negative level last year--meaning we spent more than we earned--for the first time since 1933; it remained at negative 0.7 percent in April.

* The average credit card debt per household hit $8,123 in 2000, nearly three times the average amount owed 10 years ago, according to CardWeb.com, which tracks the credit card industry. We owe $568 billion to credit card companies, up from $172 billion in 1990.

* The percentage of credit card loans considered delinquent--past due for 30 days or more--as well as the number of Americans behind on mortgage payments at the end of last year hit their highest levels since 1992, according to the Federal Reserve and the Mortgage Bankers Association.



-- Andre Weltman (aweltman@state.pa.us), June 19, 2001

Answers

Why is it that it always takes so long for bull markets to unwind? I've been expecting a Fall market crash for the past 2 years. Bubble.com has been in existence for another 2 years before that. Oh, well, the law of averages has to eventually take care of you. I'm looking--yet again--for a market crash this coming Fall. Otherwise, it's three strikes and you're out, and I will never listen to myself again.

-- Uncle Fred (dogby45@bigfoot.com), June 19, 2001.

Bubble.com already burst a year ago. Now the flight is to the old economy. I can't figure out just how long it will take for investors to see that the old economy is no safe haven either, because the huge debt bubble still exists.

-- Wellesley (wellesley@freeport.net), June 19, 2001.

Did everyone catch those dates? The negative savings rate of 0.7%, first times since 1933. That is a spooky correlation: today, with the depth of the Great Depression. I certainly hope there is no particular significance to that.

-- Big Cheese (bigcheese@multimax.net), June 19, 2001.

I can't understand why more people who love plastic money don't switch from credit to debit cards. It's the only practical solution.

-- R2D2 (r2d2@earthend.net), June 19, 2001.

There could be no 'crash', I have given up looking for a 'crash'...

It probably is more of a *process* ie grinding ever lower..

-- Will (righthere@home.now), June 20, 2001.



"switch to debit cards"

R2D2, for the same reason I drink gallons of full-strength espresso and not Maxwell house decaf...I'm addicted to the caffeine and get a thrill out of each cup; and they're addicted to the easy credit. As Too Much Coffee Man* says, "You can't escape addiction...choose yours carefully!"

*Cartoon character by Shannon Wheeler, see www.tmcm.com

-- Andre Weltman (aweltman@state.pa.us), June 20, 2001.


Headline: Consumers paying price for 1990s buying spree

Source: Cleveland Plain Dealer, 20 June 2001

URL: http://www.cleveland.com/business/plaindealer/index.ssf?/xml/story.ssf /html_standard.xsl?/base/business/993029416241290.xml

NEW YORK - The bills are coming due for the shopping spree of the 1990s, and Americans are having trouble paying up.

Personal debt is at an all-time high, and the amount of income Americans are dedicating to making payments on it is at levels unseen in 15 years. Mortgage delinquencies and write-offs by credit card companies are rising, and personal bankruptcy filings could hit a record this year.

That translates to serious financial pain for families that are overextended at a time when unemployment is rising, experts say. "Consumer debt isn't a problem unless and until people lose their jobs, and that has started to happen," said David Orr, chief economist at the First Union Corp. in Charlotte, N.C.

"It's not the cause of the economy's problems, but it can make the snowball roll downhill faster."

The Bush administration hopes lower tax rates and the tax rebates to be mailed to Americans starting in July can help revive consumer spending, considered a major engine of the economy.

But will debt-burdened Americans rush out and spend their $300 to $600 rebate checks, or will they use them to pay off existing bills? Marcia O'Duggan of Lewiston, Minn., says that at least half of her family's rebate check will go toward debt payment, which she called "our family priority."

O'Duggan, 38, a teacher, and her husband John, 35, an inspector at a die-casting plant, went $30,000 into debt for schooling and medical bills. With five children to support, it became harder and harder to make even minimum payments, she said.

Since getting help from credit counselors three years ago, the O'Duggans have whittled their debt down to $15,000 but figure they've still got 2½ more years of tight budgets to be debt-free.

"It used to be that if someone needed pants and we didn't have $30 in our account, we just charged it," she said. "We don't do that anymore. We don't use credit. And you know what? We're OK."

But many families aren't OK.

Durant Abernethy, president of the National Foundation for Credit Counseling, a nonprofit organization that helps families with debt problems, said that the number of people seeking assistance is rising rapidly.

"Our average client - the policeman, the firefighter, the teacher, the nurse - is carrying more debt than they've ever carried, and they're in trouble," Abernethy said. "If their overtime is cut back, or a husband or wife is laid off, they have virtually no savings, so they go over the edge."

The national balance on credit cards, auto loans and other consumer loans rose to a record $1.58 trillion in April, according to the Federal Reserve. Mortgage debt totals about $5.2 trillion.

Americans are spending 14.3 percent of their take-home pay on debts - the highest percentage since 1986, Fed figures show.

Credit card delinquencies - accounts at least 30 days past due - have been hovering at about 5 percent, up from 4.3 percent a year ago.

In April credit-card issuers wrote off uncollectible balances at an annual rate of 6.7 percent, according to statistics compiled by Standard & Poor's. That was the highest loss rate since February 1997 and even exceeded the 6.2 percent peak following the 1990-91 recession.

Mortgage delinquencies rose to 4.5 percent of outstanding loans in the final quarter of 2000, according to the Mortgage Bankers Association of America. That was the highest since 4.6 percent in the third quarter of 1992. There was a slight improvement in the first quarter this year.

Perhaps the strongest measure of American debt distress is the rise in bankruptcies.

The number of bankruptcy cases filed in the first quarter rose to about 367,000, up 17.5 percent from a year earlier, according to federal figures. Most of the debtors were consumers.

If the trend continues, filings this year will exceed the record 1.44 million in 1998.

Some of the activity is believed to be by debtors worried that Congress soon may change bankruptcy laws to make it considerably harder for people to clear their debts.

But Gwen Reichbach, an adviser to the GE Center for Financial Learning, says that in some ways Americans are victims of their own success.

"People were lulled into a false sense of security," she said. " Oh yeah, I can take on another loan payment. I can take a vacation, buy a new car, buy a boat. I can put it on my credit card. I've got a good job.' "

Too few, she said, saved for emergencies.

"Unfortunately, it doesn't take much for that house of cards to fall," she said.



-- Andre Weltman (aweltman@state.pa.us), June 20, 2001.


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