Last week, the Senate Governmental Affairs Committee held a hearing on its investigation of debt counseling companies. The 5-month investigation revealed what many people working in consumer rights have known for a long time -- that the non-profit status of numerous debt counseling companies belies the fact that they're entirely in the business to make profit for their founders and/or affiliated for-profit companies. The rise in the number of new debt counseling companies has kept steady with the rise in consumer debt, one man's desperation becoming another man's opportunity for ill-gotten fortune. An executive of AmeriDebt, Andris Pukke, refused to answer certain questions, invoking the Fifth Amendment (the Federal Trade Commission has sued AmeriDebt). The IRS is investigating 50 debt counseling businesses for abuse of federal tax laws, which may lead to revocation of tax-exempt status as well as criminal prosecution. While it would be way too optimistic to believe that when the dust settles, only honest debt counseling companies will be left, these investigations will hopefully serve as a wake-up call not only to participants in this industry of vultures, but to unwary consumers everywhere.
Lately, as I read about the debt crisis among older folks, I'm concerned that this is a particularly vulnerable group because so much discussion among people affected by credit card debt takes place over the internet -- on message boards like creditboards.com and blogs like this one. Not that there is alot of discussion taking place when you consider the vast numbers of people victimized by the credit industry and the taboo surrounding the entire topic, but it seems to me that the conversations that are happening are generally among the under-40 crowd. (This is not to say, of course, that there isn't a visible group of over-40 people participating in these discussions, just that we're in the strong minority.) There was a recent blog entry on Weblogs, Inc. (a Jason Calacanis creation) about how blogs are becoming the new email address, and I posted a comment about my perception of this generation gap. After reading the reactions to my comment, I'm convinced that this state of affairs will change over time, but meanwhile, I believe old-fashioned newspapers are the medium for getting any important message out to more than a small minority of older people.
We all have a compulsion to answer the phone when it rings. It's a natural instinct, like the instinct to pick up a crying baby or to catch a ball thrown in your direction. So, even if you're someone who's just lost a job and you need some breathing space to figure out what you're going to do, when bill collectors call, you naturally pick up the phone. It's hard to keep your composure and fake good humor in front of your family when the voice on the other line gets more hostile with each call. And if you fail to answer the phone one day because you happen to be in the shower, you come back to this message on your answering machine: "Mr. Jones, this is a very significant phone call" -- collection people have been trained to substitute the word "significant" for the word "urgent" once in a while so as not to bore you, a very nice touch -- "and you must return this call within 24 hours." Most of us experience a strong Pavlovian response to the word "must," and deadlines are scary things. (I still have nightmares about missing the deadline for turning in my paper in Greek mythology, a course I never even took.) What will happen, though, if you don't return the call within 24 hours? The roof will not cave in after the 23rd hour. The next day, or the day after, the collector will call again with the same charming message.
The squeaky wheel gets the grease in this Darwinian battle for survival of the most annoying. Collectors know that they're competing with other creditors who are harassing you and trying to squeeze that last dollar out of your bank account. So, if you've already talked to the same collector twice this week, and nothing has changed in your circumstances, what's the point in having the same conversation for the third time? It's counter-productive to take every one of these calls because it takes some time to recover from them emotionally so that you can resume the business of getting your life back on track. It would be alot easier if collectors didn't have their IDs blocked, which is precisely why they have them blocked. These callers show up on your display as "Private" or as "ID unavailable." An unidentified caller could be anyone, right? -- your mother, your sister, your best friend. Not really. Most likely, your close friends and family have not blocked their caller IDs because they're not trying to trick anyone. In my house, I invite all unidentified callers to leave a message after the tone.
Alas, I am an ignoramus when it comes to technology and am wholly dependent on the generosity of others. I'm a part of the over-40 crowd -- we just got the hang of using emails not long ago, and most of us don't even know what a blog is. My (much younger) sister, who has a graduate degree from NYU in interactive telecommunications (or something like that) is helping me to expand this site to include information pages and links and message boards. Through her, I've hired a designer to design my logo and webpages, and he's given me some sample designs that look very nice. Now, I have to do the hard work of getting the content together. How do other people do this sort of thing while holding onto their day jobs?
Today's story on bankrate.com, "A night out on the cheap," talks about a book on frugality, The Penny-Pinching Hedonist: How to Live Like Royalty with Peasant's Pocketbook (apparently to be retitled as Frugal Fun(. The author is Shel Horowitz. The tips on having fun without spending alot of money are familiar from my college days -- bird prices at restaurants, eating ethnic, going to bargain matinees, seeing local shows with local artists. Some other suggestions are fine for college students with lots of time on their hands -- call in to radio stations for free tickets, write art and music reviews for local newspapers for extra money -- but are a little unrealistic for grownups. Afterall, time is money, and if you have time to write reviews for a few bucks a piece, you can probably get a second job that pays real money. Not to be a curmudgeon -- if you enjoy doing it anyway and would do it for free, then by all means, you should do it.
A friend gave me this tip about buying clothes -- go to the Good Will store (or I suppose any thrift store) that is supplied by affluent neighborhoods. She finds designer clothing for herself and her kids this way, and no one would ever know except that she's so amused and proud of herself for being frugal that she tells everyone.
Being somewhat risk-aversive when it comes to health, when I became self-employed, I bought an expensive health insurance policy. But then I read somewhere that if you're healthy and relatively young, and money is an issue, you should get a high deductible, low premium policy. As I go through the information on ehealthinsurance.com and insure.com, I see that there are short-term policies, and I'm wondering who gets those types of policies? They're cheaper than long-term, but do they really protect you in the event of serious illness? What I've heard people say is that if you get sick during that short policy term, the insurer won't renew your policy. Your illness is then a pre-existing condition so I'm guessing that no one else will insure you either. So, how is that any better than having no health insurance? The only situation in which it might work, as I see it, is if you break your leg or something like that -- a short term health problem that will resolve itself during the policy term. Can somebody explain this to me, please? I know I'm missing something here.
Is there a fine line between being frugal and being cheap? Are these two sides of the same coin? I don't think they are. I've met people who are frugal but not cheap, and people who are cheap but not frugal. In law school, I knew this girl who had an absolute rule about never going to the ATM. She took out $40 or so at the beginning of the week and that was the maximum she would spend no matter what. At first, I admired her self-discipline, but then I saw the character flaw behind it. When we went out as a group for pizza, and she was down to her last 2 dollars, did she decline to go? Nope. She went out with us, and when the check came and each person's share was 5 bucks, she offered up her 2 bucks, all in pennies and nickels and dimes. The rest of us made up the difference. Was she both frugal and cheap, or was she just cheap through and through, both with herself and with others?
On the other hand, I knew this other guy who was saving up for law school, and he rarely bought more than a hot dog at the corner vendor for lunch. But when he went out with a group, he paid more than his fair share. He's successful now and doesn't usually eat hot dogs, but he's still the same about money as he always was. He'll buy a used furnace from a neighbor rather than get a new one, but he doesn't pay for his frugality with other people's money. He's one of the nicest guys I know on this planet.
What gets me are those people who are cheap in the name of frugality. A cheap person will blithly ignore the fact that a ten-dollar meal, after tax and tip, is more than ten dollars, that as a result of his tight-fistedness, his companion has paid twice what he's paid for the same meal. In the end, this personality flaw is not about the money. It's a sign of a deeper lack of character-- what's really missing underneath is honesty and generosity of spirit.
Don't get me wrong, I really admire frugal people and I aspire to be one of them. They're the ones with all the good tips on travel discounts, the ones who aren't afraid to buy used things. They'll never lead me and my wallet astray because they're just as watchful of other people's money as they are of their own. Truly frugal people are generous.
Now and then, I stupidly long for the simple days just after college graduation -- before I took on a heavy debt load going to law school, before I got married, before I entered a crazy, hours-pushing profession, before I bought this house which eats up most of my money. I got rid of the marriage, but I'm still stuck with alot of its paraphernalia.
Back in those days, I worked as a paralegal in a small branch of a New York law firm (this was supposed to be a temporary detour from my plans to go to art school for my masters degree). I made a whopping $13,500 annually. I seem to recall bringing home about $800 per month after tax. My rent for a large, newly renovated studio apartment in a nice rent-controlled building in a great neighborhood downtown, which was a 5-minute walk to work, was $260, including utilities. My only other bill was a $60 monthly student loan payment. So, I had $540 for everything else, like food and clothing. I guess I didn't eat much because I always had money for fun, my idea of fun at the time consisting of going to museums, really cheap restaurants, free concerts, and the occasional bookstore. I had one credit card that I used for travel and emergencies, and it never occurred to me that I could pay less than the entire balance each month. What happened? Now, $800 pays for my monthly health insurance premium and my gas and electricity, that's it.
A couple of years ago, it seemed that all of my friends were on this simplicity kick - everyone was giving me books on the subject, and the books suggested methods and materials that I should initiate and purchase to make my life simple. After awhile, I couldn't ignore the irony of a shelf full of books on how to live simply that I didn't have the time to read (one of the suggestions was to get rid of books I wasn't reading), and the other stuff I'd accumulated to aid in my journey towards simplicity (color-coded boxes to store all the garbage I could't bring myself to get rid of, note cards to remind me of where I'd stored the color-coded boxes -- but how would I remember where I'd stored the note cards?). The whole project ended up being one more thing on my to-do list that made my life complicated. In my opinion, the only useful tools for reaching simplicity are scissors and trash bags. I need the scissors to cut up my credit cards and the 85 discount/frequent buyer cards dispensed by friendly retailers in my neighborhood (who has a wallet that big and who can keep track?), and the trash bags to throw out everything I haven't laid eyes on in the last year, including all those self-help books on simplicity.
Maybe, instead of feeling stressed about how busy and unsimple my life is, I should just resolve to embrace complexity. The beauty of that approach is that I already have all the methods and materials I need to get there.
So, I'm planning this trip to London, and it turns out that some of the online hotel discounters charge in British pounds, not in dollars. No problem, right? I'm thinking, reasonably, that whatever the exchange rate is on the day the charge is registered to my account should apply. But something makes me hesitate (paranoia induced by -- well, the reality of this blighted world), so I decide to research whether this is yet another area where the credit card companies get me when I'm not looking. (I readily admit that for someone who works in a debt-related field, I can be astoundingly naive. I can hear the seasoned veterans from creditboards.com tsk, tsking. "Of course, there's is a hidden charge, you idiot.") It turns out that there are actually several possible layers of hidden fees, depending on the type of card I use, the bank it goes through, and the type of transaction. If I buy a pork pie at a pork pie stand or whatever, and I charge it to my Visa, a 1% fee is tacked on as a currency exchange fee. But it doesn't stop there. The issuing bank might charge another 2% (maybe more, how do I know?). Then, there are the additional fees for withdrawing cash from a foreign ATM -- some charge a 4% cash advance fee on top of the 2% transaction fee.
According to an article on bankrate.com, some credit card companies and banks don't charge these outrageous, hidden fees. But, people are warned to call to confirm this before taking a trip because companies have a tendency to change their policies. Here's what surprised me -- according to this same article, this information shouldn't discourage travelers from using credit cards overseas because the fees charged to consumers exchanging cash or traveler's checks are even higher (can be 5% to 8%). Credit card companies get wholesale rates (which they try hard not to pass on to us). At least when I walk into a bank with dollars in hand and exchange them for pounds, I know what the fees are. What exactly is the service provided by my bank for the 2% it charges on foreign credit card transactions, given that the conversion has already taken place by the time it reaches the bank? The answer is -- nothing. It's like being pick-pocketed, only I won't even know how much they've taken.
As bad as it is to hear about students graduating from college with huge debt loads that insidiously creep up on them over four years, it's even sadder to hear about retired grandparents facing unmanageable credit card debts and the prospect of bankruptcy in what should be their years of tranquility. But this is what's happening, and older folks who grew up in a culture where borrowing for normal household expenses was considered extraordinary, are even more plagued by shame than those of us who can barely remember a time when we didn't owe money to faceless credit card companies. The reasons, of course, are the obvious ones: health care has become prohibitively expensive (what's wrong with this country that we can't take care of our elderly in a civilized way?), retirement savings have dwindled courtesy of the bear market, and life expectancy has risen (this should be good news, right?).
We live in a cruel society, no question. Perhaps the only good news is that if you have nothing, there's not much that can be taken away by the debt collectors. What stands between a senior who is drowning in debt and this realization that when he's past the point of desperation he should just tell his creditors to take a hike? -- a moral code that tells him that it's wrong to leave debts unpaid. What moral code dictates the behavior of credit card companies that prey on the elderly just like they prey on students, that charge this highly vulnerable group in our society interest rates that should be illegal (if our lawmakers cared at all)?
By and large, seniors don't do research on the internet, they don't participate in the discussions on creditboards.com, and they don't read this blog. So, they're ripe targets for the vultures in this world. Those of us who are in the process of wising up should reach out to our seniors.
The amount of debt a credit card company writes off may end up counting as taxable income to you. So, if you have a credit card debt of $15,000 (the principal amount), and the creditor settles for a payment of $5,000, the $10,000 written off or forgiven may show up on a 1099-C you receive at the end of the tax year. This doesn't happen if your debt is discharged in bankruptcy, and the write-off is not income to you if you were insolvent before the settlement (i.e., the value of your debts exceeded the value of your assets). If you meet the insolvency test, you have to file Form 982 with the IRS when you file your tax return.
Take a look at the nolo article about this subject. IRS Form 982 is available online as well.
Dishonest debt counseling and consolidation companies are in the news all the time, and their growing presence overshadows the presence of those companies that have been around for awhile and are reputable. In most instances, debt "counseling" is a misnomer. Most of these businesses (even those with a good record) are no more than repayment services that take your credit card debts, consolidate them (often at a reduced interest rate), and pay them for you on a monthly basis from the money you pay to the service. Given that this is what they do, and that this is how they make their money, their employees are not trained to analyze whether you should be consoidating your debts at all. In some instances, the best advice may be to pay nothing to most of your creditors, but you're not likely to hear this kind of advice from a debt counseling company.
Still, debt counseling is going to become an important resource for consumers if bankruptcy reform legislation is enacted because fewer people will qualify to have their debts immediately discharged in bankruptcy. Existing companies and those that haven't even emerged yet will be poised to take advantage of more innocent people who believe they have nowhere else to turn.
So, how do you find the good ones? There's no rating system that I've ever heard of, so individuals are left to choose by process of elimination. You can go to discussion forums like creditboards.com and post an inquiry and get responses from people who've been through it. At a minimum, you should check with the Better Business Bureau to see if a particular company is a member (don't deal with any that are not members), and to see if there are any bad reports. You'll find that many of these outfits are not even registered with the BBB, and that they have negative reports which have not been responded to. So, you do your process of elimination by knocking off your list any companies that spam you incessantly, checking with the BBB, and asking lots of questions. And if you feel hesitant about moving forward with debt consolidation, that may be your instinct for self-preservation kicking in. Pay attention to it.
As promised, I looked into two major credit forums, creditboards.com and creditnet.com. Creditnet, as I mentioned before, is an industry site, but creditboards is run by real people and I highly recommend it as a place to go for practical advice about your credit. I've been carrying on an email conversation with the original owner of the site, who is now one of four owners. Interestingly, creditboards is a spinoff from creditnet. When creditnet was taken over by "credit industry trolls," this group created its own email group on yahoo and then, as interest grew, expanded into the new discussion forum format. Creditboards pays its expenses through donations from ordinary people. It gets no funding from credit card companies, banks or debt consolidation outfits.
I've been impressed by the level of discussion on creditboards. There's a minimum of unpleasant postings from judgmental types, and a sense of a collective effort to help those in need of guidance in the predatory world of credit. There are forums on credit, student loans, auto financing, and mortgages. If you go into the main listing of forums, you'll see a page for "Newbies" which contains several introductory postings on how to get started in understanding your credit reports and correcting errors, and how to participate in the forums to get answers to your questions. Regular posters report on how they're doing on paying off debts, repairing their credit reports, and dealing with nasty collectors. It's a large, supportive community. I'll be there regularly putting in my two cents and looking for good tips to pass on. The credit industry is so poorly regulated that "professional" advice may not be as good as the information you get from the street, from the people who've been through the battles that you may be fighting.