maxed out generation

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.

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.

Let's make a deal.

I get alot of emails from people who can no longer make their minimum monthly payments on credit cards due to interest rates that have risen as much as 10% from the original rate they were paying. We live in a culture where we don't bargain for most things (cars and houses are the exceptions). When I travel to other places in the world, I'm always surprised to find that outside of the U.S., the price of everything in the marketplace seems to be open to negotiation. In this country, people tend to think that bargaining is pathologically tacky, unless a lawyer or agent is doing it for us.

From personal experience, I know that the interest rate on my credit cards can go up astronomically within a very short period time if I forget to pay them on time for a couple of months. I finally got smart, and now I pay most of my bills online and get my reminder notices by email. Even though I've been on the straight and narrow for a long time now, I found that my interest rates weren't going down in recognition of my good payment behavior. In the spirit of the cobbler's children who have no shoes, I had fallen victim to inertia about my own financial concerns. So, I recently called one of my credit card companies and negotiated an 8% reduction in my interest rate, reminding the customer service department that I'd been a damned good customer, especially after I got my act together and started paying online.

Now, I'm going to apply my bargaining techniques everywhere (well, maybe not at the grocery store - that might be a little tacky).

Award-winning documentary filmmakers highlight the true price of the American dream.

Earlier, I wrote about Trueworks, an independent documentary film production company that is in the process of shooting a new film called "Maxed Out," about the real lives of people in debt. A previous film by Trueworks, "Parents of the Year," just picked up the Audience Award at the AFI/Silverdocs documentary film festival in the short film category. The film is about an immigrant family from Mexico, the Garcias. The parents finance their dream of putting their three children through college by picking up recyclable cans and bottles in trash cans in Venice Beach, California. The extended version is scheduled to air on HBO this fall.

I went to one of the screenings at this festival and caught up with Trueworks' producer-director, James Scurlock. "Maxed Out" will be shot in various locations throughout the country, and the filmmakers are still talking with individuals who are willing to be a part of this documentary. If you have a story to tell, contact Lee Thompson at trueworks by email: lee@trueworks.us. Or, feel free to send me an email, and I'll pass along your story and contact information.

What is poverty?

In an article in The Boston Globe, America's hidden issue of poverty, Robert Kuttner states" "The great hidden issue in America is the scandal that tens of millions of Americans who work full time -- often more than full time -- barely get by and can't get ahead, while CEOs get zillions. The blue-collar middle class jobs are vanishing; what's taking their place are retail and service jobs that top out at $10 an hour or less. You can't live decently on that."

As I read this, I wondered about the definition of poverty. The U.S. Census Bureau assigns poverty thresholds to families based on the size of the family and the ages of the family members. The poverty thresholds are "statistical yardsticks" reflecting what families need to live on. If your family income falls below the threshold for your family, then you are living in poverty. In 2003, a family of four with two children under the age of eighteen had to make less than $18,660 in order to be considered poverty-stricken according to the Census Bureau.

There are also poverty guidelines put out by the Department of Health and Human Services, which are the numbers used to determine eligibility for certain federal assistance programs. In 2004, a family of four making less than $18,850 is considered to be living in poverty according to these guidelines (unless the family lives in Hawaii or Alaska where the numbers are higher).

I'm not sure I get how these numbers work, but I know that in the D.C. area, as well as many other metropolitan areas of the country, a family of four can't live on less than $20,000 a year, even if the family is living in a tent. No wonder people are living in their cars.

For advice on whether to take out a home equity loan to pay off credit card debt, consult Shakespeare.

Personal finance advisors differ widely in their opinions about whether it's wise to take out a home equity loan to pay down credit card debt. What they recommend depends largely, I believe, on who they assume their audience is. If they assume that I'm someone who, after paying off my credit card debt, will turn around and max out my cards again so that I end up with both credit card debt AND a smaller safety net in my home, then they're going to advise me against it. Certainly, if I'm on the brink of bankruptcy, it would be self-destructive to convert credit card debt (which is dischargeable in bankruptcy) into secured debt against my house (which is not dischargeable).

On the other hand, if the financial expert I consult knows that I'm a highly disciplined individual with a history of a frugal lifestyle marred only by an unfortunate period of high debt due to illness, job loss, divorce, or business failure, then the advice I get might be very different. If I'm in no danger of having to file for bankruptcy, and I pay down my credit card debt with a home equity loan, and then cut up those cards so that I'll never use them again, then I'm actually in a much better position than I was in before I took out the loan. The interest on the loan is tax deductible, and the interest rate will be much lower than what I was paying on the credit cards.

When addressing a broad audience, finance experts can't give advice tailored to each individual's personality, so they have to choose whether to take the pessimistic view (which, unfortunately, is supported by statistics which show that people often do charge up their credit cards again after paying off that debt with a home equity loan) or the optimistic view (which is . . . well, optimistic).

So my advice is: "To thine own self be true." I've never settled on what this really means in the context of Hamlet, but what it means here is that if you can honestly and somewhat objectively assess which type of person you are in terms of debt, then you can make a sensible decision about whether to trade in some of your equity for a fresh start and a little peace of mind.

A documentary film about credit card debt from trueworks

A documentary about our relationship with credit cards is in the works at trueworks, an independent film production company based in L.A. I recently sat down and talked with James Scurlock (producer-director) and Lee Thompson (who has a background in reality television shows) about this project, which is in pre-production. These guys are traveling around the country meeting various people in professions that relate to consumer debt (authors, lawyers, "debt eliminators," lawmakers), but mostly they're interested in talking with real people with compelling stories to tell about how they fell into debt. If you want to talk to these guys and contribute your experience to this project, you can reach Lee by email at lee@trueworks.us.

The generation gap keeps seniors from participating in discussions about credit card debt.

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.

When the squeaky wheel gets too noisy, caller ID may be your best friend.

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.

No wonder seniors are in debt up to their ears.

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.

Even if your creditor forgives your debt, the IRS may not.

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.

The difference between personal bankruptcy and business bankruptcy

It's a matter of attitude. It's not uncommon for an individual who owns a business that goes bankrupt to file for personal bankruptcy as well. The reason is simple -- many business owners guarantee the debts of their businesses, and when their businesses go belly-up, the creditors come after the guarantors. But, unlike many personal filers who have little experience running corporations, an individual who is a business owner often has a different approach to his personal finances. He thinks of his own money and debts in much the same way as he thinks of his business finances -- with objectivity. Every business is a gamble, and banks that lend money to businesses partake of the risk in a cool-headed fashion. And here's the thing, when a bank lends money to an individual, it does so with the same objectivity and assessment of risk employed when lending money to a business. The point I'm making here is that as a society we accept that businesses fail for reasons that have nothing to do with morality. At the same time, many people who find themselves in financial straits and heading towards bankruptcy feel the sting of moral judgment. The reason why business-savvy people suffer far less from this stigma is that they understand the way money works and the way the credit industry works, and are much less susceptible to the psychological manipulation that keeps many decent, hard-working people enslaved to their debt when they don't have to be, even when they've been victimized by predatory lenders.

Please email your outrageous/funny/tragic stories of impecuniosity.

I am searching for stories -- about your experiences with outrageous debt collection practices, hideous credit card scams (many of them may be legal but they're still scams on the ethical/moral plane), creative ways of recovering from debt, tragic money situations, run-ins with debt service companies that did not serve you, etc. E:mail me at hk@maxedoutgen.com and if your story might benefit others, I'll write about my take on your situation. It won't be legal advice (you need to consult your own attorney or licensed financial advisor, information in this blog cannot be relied upon, blah, blah, blah), but it might lead to some useful, or at least entertaining, conversation. If you have no interesting story, but just want to challenge me on my use of the word "impecuniosity," be my guest. And, of course, I won't mention your real name even if you give it to me.

Speaking of outrageous stories, there's an article by Barbara Ehrenreich (author of the book "Nickel and Dimed: On (Not) Getting By in America") in the February issue of The Progressive magazine titled "Gouging the Poor," about people being arrested for failure to pay hospital debts. One poor guy, a mechanic with diabetes, was sued by a hospital on a debt of $579, and when he failed to show up for a court date (because he had to work), he was arrested. Bail was set at $2,500. Ehrenreich makes the point that, ironically, in jail, at least you get free health care, even if you've committed hideous crimes. So, if you think somehow the system will come through for you if you get sick without health insurance or other means of payment, think again.

A comprehensive book on surviving debt.

There's alot of information out there on how to manage debt, and if you had time to go through it all, including reading this blog on a regular basis, you might have time for a second job. If you only have time to read one source, I would recommend the NCLC Guide to Surviving Debt. This is published by the National Consumer Law Center, a non-profit organization which provides education to lawyers and consumers on consumer rights issues. It's a comprehensive guide with practical advice on dealing with debt collectors, paying down credit card debt, consolidating student loans, saving your house from foreclosure, and deciding between bankruptcy and non-bankruptcy alternatives. For a detailed description of the book, click on the link above. Even if you're seeking the advice of a lawyer or other professional, it's always good to know what your options are so that you can ask the right questions.

Start at the Federal Trade Commission for help with debt.

There's alot of advice out there on how to get out of debt, but sometimes it's hard to tell whether any particular source is reliable. Some debt counseling companies may provide useful information, but since they make money through their debt negotiation services, you have to take that information with a huge grain of salt. The Federal Trade Commission publishes information for consumers on its website. Check out Knee Deep in Debt, which provides a good overview of your options if you're drowning in debt, but also cautions you about what to watch out for in dealing with companies that say they want to help you. To see a full list of FTC publications for consumers, go to the consumer menu on the FTC website.

Retirement account? -- I can barely pay the rent."

Everybody I know over the age of 35 is obsessed with planning for retirement, whether they've done anything about it or not. Even twenty-somethings are admonished to start saving NOW or else. With warnings of a dire future screaming out from every personal finance magazine and book, not to mention from the mouth of the ever-reproachful Suze Orman (she scares me), how do you face the issue? And what, if anything, can you do if you're barely able to pay your current living expenses as it is? Alot of people I know, especially friends of mine in their twenties and thirties who got caught up in the tech boom and crash, are in that boat. I have to confess that I'm ill-prepared myself. When I look at the savings milestones I was supposed to have reached by age 30, 35, and 40, my response is to -- well, bury my head in denial and hope I don't live long enough to have to worry about it.

There's never, ever any good news on this topic. I've checked. One website, www.fiftysomething.com, reports that "Americans Face Serious Risk for Outliving Their Retirement Savings." According to this site, even Baby Boomers who have managed to save alot have no idea how to make it last. Take a look, if you can stand it, at the 2003 Retirement Confidence Survey results put out by the Employee Benefits Research Institute, at www.ebri.org/rcs/2003. Apparently, most of us don't know how to calculate how much we'll need to retire on. Only 68% of us claim to have even saved for retirement. Other tidbits from this study are (1) Baby Boomers are postponing retirement (not surprising); (2) Many people who are working today will not be eligible for full Social Security benefits until the age of 67 (most people still think it's 65); and (3) If you save $20 a week, that comes to $1,040 a year, and if you do this for 25 years (assuming an annual rate of return of 5%) you'll have saved over $50,000. The survey results do show a bit of optimism, though. Among Generation X survey participants, 49% reported feeling "somewhat" confident about their prospects for a comfortable retirement, and 19% reported feeling "very confident."

I'd like to hear from anybody who knows how other cultures deal with retirement. Is there a kinder system out there in the universe?

Introduction to Maxed Out Generation

There's a heavy silence around the subject of personal debt, a silence which defies the common truth that misery loves company. If you're maxed out on credit cards, you know who you are, but more likely than not, you don't go around sharing that information and striking up rousing conversation about it. So much is written on the subject of the consumer debt crisis, yet the voices of those affected are rarely heard because of the shame and stigma of being in debt. While there are organizations that purport to help people who are in debt over their heads, most of us do not participate, and for good reason. When advice is sought, we are often patronized and made to feel ignorant and immoral. We are judged.

In order to improve our situation, we need to know who we are collectively and as individuals, how the credit card industry manipulates our spending habits and creates consumer guilt, and what our real-life options are for escaping the tyranny of debt. If we can understand the cultural and economic forces that brought us down this path, and see that our behavior as consumers is carefully predicted and measured by the corporations that count on our money, perhaps we can better control the outcomes in our individual lives.

As a bankruptcy lawyer, I hear many different stories about how people got into unmanageable debt, and, invariably, every person I meet, no matter how well-educated, believes that his/her situation is more dire than it is, suffers from deep embarrassment and shame, and feels isolated from society. In my own experience, as a struggling law student, then as an underpaid government lawyer with a pile of student loan debts, and finally as a single parent starting all over again, I have felt these same emotions. So, with this blog, I want to share some of the stories I have heard, bring to light the truths about the credit industry and what they know about us that we may not know ourselves, and provide useful information for navigating through the myriad of debt problems that plague our daily lives. But mostly, I hope to participate in opening the doors to conversation and through that, peace of mind.