maxed out generation

A victory for California consumers against credit counselors.

Following congressional hearings last spring on the questionable practices of numerous agencies within the credit counseling industry, California authorities have settled with two such agencies accused of false advertising and other consumer rights violations. Yesterday, The Mercury News reported that Integrated Credit Solutions and Lighthouse Credit Foundation have settled for $1.9 million, and that California consumers may be eligible for refunds from this settlement.

As this article points out, the rise in consumer debt in this country has triggered the spawning of a new generation of credit counseling companies all over the country, many of which claim not-for-profit status with the IRS while partnering with for-profit management companies. In addition to tax law violations, allegations of excessive fees and false and misleading statements are surfacing in connection with these agencies.

The standard advice given to consumers is that we should check out credit counselors with the Better Business Bureau, the National Foundation For Credit Counseling, the Associaton of Independent Consumer Credit Counseling Agencies. It's a sad state of affairs that we have to be so suspicious when dealing with companies whose supposed mission is to counsel desperate people. But until Congress finally passes legislation to protect consumers against the baser motives of many of these outfits, I'm afraid there's no better advice to give.

A coincidence to prove my point about home ownership

Just yesterday, I wrote about the hazards of home ownership. This morning, I walked into my house and heard the sound of water filling the hot water heater in the basement. I thought it odd because I'd been away from home, so the tank should have been full. As I went to open the door to the basement, a sick, ominous feeling grew in the pit of my stomach. When I turned on the lights, I saw a dirty swimming pool at the bottom of the stairs. Stupidly, I ran down the stairs and started wading through the water. Later, I was informed that you're never supposed to step into a flooded room when the electricity is on. You could get electrocuted (of course). Luckily, as the plumber later told me, a few inches and a couple of hours may have saved me from death by ignorance. There was also gas leakage from the boiler when the water extinguished the pilot light, so who knows what could have happened with that combination.

Water extraction came to $283, but only because the plumber took pity on me, and the new water heater with installation will come to $1,035. This incident illustrates my point that home ownership is not all it's cracked up to be. I wish I could make this point more zealously, but right now, so soon after my close call with true disaster, I'm just grateful to be alive.

This is not my beautiful paid-off house

Most of my friends from my generation (tail end baby-boomer, pre-GenX) own their own homes. The few who don't are mostly divorced single mothers who are of an age and educational background which make the prospect of upward mobility in their careers and comfortable retirements somewhat shaky. We worry about them and want them to do whatever they can to acquire a house because something deep in our American psyches tells us that real stability comes with owning a piece of the land and a roof. The thinking seems to be that husbands come and go, but a house is forever. Of course, recent trends in the real estate market that have seen some of our properties double in value over the last few years have made us feel even more smug in this sentiment. We forget that the market is fickle.

I don't know about the wisdom of counseling a friend who is less than twenty years from retirement and living on a fixed income to buy a home at all costs rather than rent one. Sure, you can get lucky with your investment, even lucky enough to fund your retirement from the equity that builds up. But houses are notoriously unreliable -- roofs cave in, foundations crack, termites invade, heating systems break down, trees fall, plumbing leaks, basements flood, and real estate taxes go up along with market values. If you get into home ownership without a substantial rainy day fund, you could easily find yourself having to empty out your bank accounts and tap into your retirement savings to maintain your house, or even end up losing your property through foreclosure. Many people find that when they total up the cost of maintenance over a period of several years, that amount exceeds the tax benefit from their mortgage interest deductions over that same period of time.

If you buy a house in your forties or fifties, and get a thirty-year mortgage, you won't have paid off the mortgage by the time you retire. I bought my house six years ago, and I know that I'll never live in it mortgage-free because when my daughter is grown, I intend to down-size and live in a maintenance-free apartment. Why? Because home ownership is bloody stressful, and one little body can't possibly need so much space. The goal of living in a home that I own outright and doesn't rob my bank account has eluded me as well as many people I know. Yet, oddly, we still wish home ownership upon all our friends. Old beliefs die hard.

In search of students to interview about credit card debt

I am in the process of writing a book about students in debt, focusing on the cultural and economic forces that have brought about the current crisis in which vast numbers of young people are starting out their lives loaded down with unmanageable debt. The dream of upward mobility in this country endures despite tuition costs having risen far beyond the reach of middle-class families while, at the same time, the availability of financial aid has declined. Upon graduation, students often find that entry level jobs in their fields come with low salaries and few benefits, and that the cost of housing in desirable urban areas is prohibitively high.

Inevitably, in this climate, students are drawn to rely on credit cards to get them through tough times. The loosely regulated credit industry has seized upon this vulnerable group to profit through high, volatile interest rates, late fees, and early dependence on credit.

I'm interested in how students are managing to survive in this environment, what strategies have proven successful, whether students believe that our educational system is working for the middle-class, what drastic measures some have taken to escape the tyranny of debt. I know from my participation in discussion forums, particuarly the ones at at www.creditboards.com, that some individuals have had success in dealing with their debt head-on by educating themselves about their rights as debtors, negotiating with creditors and sometimes filing for bankruptcy protection.

If you'd like to share your story, please email me at hk@maxedoutgen.com. Interviews can be conducted by email or telephone, or both. All identities will be kept confidential.

Personal bankruptcies follow business failures

In an article in the July issue of Entrepreneur magazine, "Down and Out," Joanne Cleaver reports that between 13 and 14 percent of people who file for personal bankruptcy do so as a result of failure in their small businesses. This information is based on findings of the Consumer Bankruptcy Project, a study of 2,000 households that filed for bankruptcy (one of the directors of the project is Elizabeth Warren, co-author of The Two Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke). Cleaver points out that even though small business owners generally have higher incomes and more assets, when they fail, they fail in a much bigger way. The study shows that credit card debt is a big part of the reason that small businesses fail because of "the degree to which high interest rates outstrip the business growth."

The fact of the matter is, it's difficult for small business owners to refrain from resorting to personal credit cards to fund their businesses during difficult times. When you risk losing your home because the bank has taken it as collateral for your guarantee of company debts, and you still have hope (perhaps foolishly) that the business will survive and succeed, there's an inevitable sequence of events that often take you and your business to the bankruptcy court.

On a brighter note, true entrepreneurs always find a way to come back into the game. Being in this rather grim profession, I can't help but admire someone who, months after financial catastrophe, is already starting another business.

Understanding extended warranties on cars

When I take my car in to the dealership where I bought it, I expect the service department to let me know if a needed repair is covered under my extended warranty. Recently, someone shared with me an experience which makes me wonder whether, along with the paperwork evidencing my warranty coverage, I've also misplaced my trust. This individual took his car in for a major repair and was given an estimate of $1,500 and told that his warranty did not cover the repair because his vehicle mileage exceeded the maximum warranty mileage. Later, thinking back to the time of purchase, he recalled that the very same dealer had sold him an extended warranty that covered repairs for a much longer period of time. In fact, he was "persuaded" to purchase an extended warranty for almost $2,000 when his credit report proved to be less than stellar. Along with a higher interest rate, financing was made contingent upon his purchasing the extended warranty. I can understand the higher interest rate, since that arguably relates to the greater risk assumed by the financing company. However, I don't understand how the purchase of a supposedly optional warranty reasonably relates to a customer's credit rating. In my opinion, requiring a customer who is already required to pay a higher interest rate to purchase a warranty as a condition of financing is equivalent to charging a double penalty. My question: Is this practice permitted by law?

Of course, the dealership's failure to recognize the extended warranty a couple of years later, despite its sophisticated computer records, only added insult to injury. It's hard for me to believe that a dealership that would coerce a customer to purchase an extended warranty in the first place would then innocently forget about its existence later on.