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Get help for debt trouble before learning costly lesson

Updated: May 3, 2013 12:14PM

Originally published: February 20, 2003

I worry about terrorism. And I worry about the economy. But mostly I try to worry about things I can do something about--or at least help others do something about. So today’s headline scares me: “2002 bankruptcy filings set historic record.” Last year, 1,577,651 individuals filed for personal bankruptcy. That topped the previous year’s record of 1,492,129. Yes, I could round off those numbers. But each one counts. Each is the story of a financial life out of control.

Those big numbers mean that one of every 100 families in this country was affected by bankruptcy last year. Chances are you know someone, or work with someone, who is part of those statistics. Or will be.

It’s a myth to think that bankruptcies are caused by the desire to commit fraud. In the largest percentage of cases, bankruptcy is preceded by unexpected budget-breaking expenses of uninsured medical costs or divorce. With no savings reserve, bankruptcy may be the only choice. But too many of the bankruptcy statistics come from people who just don’t understand the dangers of debt and overspending. It’s a course we don’t teach in school, though a credit card is standard issue on college campuses these days.

The house as piggybank

And it’s not just credit cards that carry the danger. Mortgage delinquencies are on the rise, as well. The easy availability of home equity loans means the family home has turned into the family piggybank or checking account. The people who least understand the problem are most vulnerable. The riskiest--sub-prime--mortgage borrowers have a delinquency rate that has nearly doubled in the last four years to just over 8 percent.

A slowing economy, if it occurs, bringing with it more job losses, will send more family budgets over the edge. That’s something to worry about now.

Of course, it’s not just individuals who are buried in debt. Total American debt owed by individuals, businesses and governments in America now totals $31 trillion. According to a persuasive article in Barron’s by Chicago-based business reporter Jonathan Laing, that debt total equals 295 percent of the country’s $10.5 trillion annual GDP--the nation’s economic output. That’s the highest debt level since the previous record of 264 percent, reached early in the Great Depression.

Individuals have about $5.8 trillion of mortgage debt, notwithstanding the fact that 40 percent of American homes are owned free and clear, according to economist A. Gary Shilling. And individuals have three-quarters of a trillion dollars in revolving credit card debt.

Those are huge debt numbers, even in the context of our huge economy. The ratio of consumer and mortgage debt to after-tax income stood at about 20 percent in the late 1940s, when a generation had learned a hard lesson about the burden of debt during the Great Depression. Today that same ratio of debt to after tax income has jumped to 104 percent! I fear another generation is about to learn that lesson the hard way--by losing their homes.

In times like these, credit repair scams proliferate. Companies promise to pay your bills for a fee. They take the fee--and the bills remain unpaid, leaving irate creditors. Just last month the Illinois attorney general’s office took action against a widely advertised “credit repair” company.

I can’t judge them all, but I only recommend one place to go for help. It’s the national, non-profit Consumer Credit Counseling Services. Its national toll-free number is (800) 388-2227, and it operates in every community, including about eight offices in the Chicago area. In Chicago, call (888) 527-DEBT. Staffers will offer in-person or on-the-phone counseling. And for those really buried in debt, CCCS offers a debt repayment program, negotiating with your creditors to lower the interest rate or waive penalties.

Peace of mind

Since the CCCS is partially funded by the credit card companies (who would rather receive a small payment than none at all), it wields some clout. It can’t make your debt disappear. Only you can do that. But a program of regular repayments will cut the burden far more quickly and with more peace of mind than you may imagine.

Yes, I worry about the economy. I can’t do anything about it, though. And I worry about your debt. But you can do something about that. And the sooner you start, the better. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.

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