azcentral.com
Arizonans crushed by debt
Yvette Armendariz
The Arizona Republic
Dec. 14, 2003 12:00 AM
They walk into court one by one from all walks of life. Their faces are long. Their body language exudes nervousness and shame.
They are filing into U.S. Bankruptcy Court because they can no longer pay all their bills.
Many are from middle-class, two-income families that have lost one income. Even one month out of work can trip up finances and spark a cascade of problems.
They hope another job will come soon. But slow job growth has made it tough to find work at the same income level.
Pressures mount as households try to delicately balance bill payments so they don't lose their homes, cars and furniture. Arguments about who's at fault tear families apart as letters and phone calls from bill collectors bombard them.
These problems are growing in Arizona. A record number of Arizonans are seeking bankruptcy protection - nearly 125 every day. Through November, bankruptcies in the six-county Phoenix district were up 7.9 percent compared with the same period last year. That's more than triple the rate of population growth.
In fact, nearly as many bankruptcies were filed through November as were filed in all of 2002, which had been the worst year for bankruptcies. A vast majority are personal bankruptcies, and most of those are Chapter 7 cases, which clear the debtor's slate of most debts.
Neil Pitchel, who counsels couples dealing with financial problems at East Valley Bible Church, said most troubles develop from a reliance on two incomes to buy the lifestyle that is wanted rather than needed.
"The lure of the materialistic society is too great," he said. "Unless you establish the discipline early on. It's so easy to get in that trap."
Attorney Mark Lischwe blames the availability of credit for the growth in bankruptcy protection.
"I have some clients with $100,000 in credit card debt, and they're still able to get $200,000 and $300,000 homes," he said.
Interest rates are at historical lows, and more people than ever have been able to buy homes.
Families convinced themselves it was OK to go with something bigger and more expensive, because they thought their incomes would eventually catch up.
The motivation to buy a more expensive home sometimes goes beyond the square footage.
A growing number of filers wanted to be in better school districts, said Bruce Markell, a University of Nevada-Las Vegas law professor with an expertise in bankruptcy.
It's a point asserted by Harvard law professor Elizabeth Warren in the book The Two-Income Trap. Her research indicates that 90 percent of filers are considered middle-class. And if current trends continue, Warren writes, as many as 5 million families with children will file for bankruptcy by the end of 2010.
"Security costs," Markell said. "It's the desire not only to get to a place with a better school but to a place you can feel safe with your kids."
The people filing have household incomes far above the median for the Valley. Families making $100,000 or more a year are seeking bankruptcy protection. A spouse loses a job and the replacement job, if there is one, doesn't pay enough to cover expenses of a lifestyle to which they have become accustomed, said attorney Claire Black of Black & Portney PLC.
"The unfortunate thing is most people live paycheck to paycheck," she said.
To worsen matters, homeowners are pulling equity out of their homes for remodeling, vacations and cars. It has kept the economy chugging along, but it has left many families without an important source of emergency cash.
"There isn't a buffer for when things go wrong," Lischwe said.
Nationwide, consumer debt had spiked up to a whopping $1.98 trillion as of October, up 4.3 percent from December 2002, according to the Federal Reserve. Average credit card debt is $8,940, according to Cardweb.com, up from $3,275 in 1992.
Meanwhile, personal savings, as a percentage of disposable personal income, remained a paltry 3.4 percent as of the third quarter of 2003, according to the Bureau of Economic Analysis.
These financial trends could slow the economic recovery if it's combined with a sharp spike in interest rates, said Tracy Clark, associate director of the Bank One Economic Outlook Center. Already, mortgage refinancing and tapping into equity are declining because of interest rates inching up. "So one of the forms of financing has been cut off," he said.
Balancing debt
Bankruptcy isn't pain-free. The black mark remains on credit records for up to 10 years. With that on a credit report, borrowing becomes far, far more difficult. And some companies are using credit reports as a criterion for employment.
Attorneys say just a fraction of filings are fraudulent, submitted by people who lived it up on credit just to wipe away the debt when it got out of hand. That has created an ongoing push primarily by creditors for bankruptcy reform, which would force filers to reorganize debt rather than wipe the slate clean. The latest effort is House Resolution 975, but with an election year upcoming, few believe it will become a reality in 2004.
Most filers recognize the problems and stigma associated with bankruptcy and try to avoid it. Sometimes it's by transferring credit card balances to lower-interest cards, and sometimes it's by tapping into home equity to make ends meet.
After a while, they run out of options.
Carla and James of Phoenix, who asked that their last names not be published, never thought bankruptcy was in their future. They moved to Arizona with $50,000 in the bank and set up a business, which quickly ate away their financial cushion. Carla found a part-time job, but they had to use credit cards to make ends meet.
"When you move here, you feel you can make it because it's such a big city," Carla said. "But what you make here, it's just awful for a huge city, and the cost of living isn't any cheaper."
A year later, with $35,000 in debt, they began to sell off jewelry and other assets before deciding to file for bankruptcy.
"It makes you feel pretty low when you've always been successful," she said. "I would say when we left (Bankruptcy Court) it wasn't a feeling of all right, we're debt-free. It was sad. I didn't pay things. We weren't raised that way."
Dealing with emotions
Besides the stress of creditors calling, bankruptcies also put huge pressures on a marriage.
"Next to unfaithfulness, the most significant problem in a marriage is when finances are a problem," said Pitchel, pastor of administration at East Valley Bible Church. "I've seen a lot of marriages struggle as a result of it. What you see is one or the other blaming each other for the situation rather than trying to work it out."
He advocates living on one income and thinking of the second, if there is one, as a bonus. But he understands most families are overwhelmed by the societal pressure to have the latest gadgets, slick cars and big homes. At the same time, their children beg for the latest toys and clothes so they don't feel like outcasts at school.
"It's (society) allowed us to elevate our expectations and our lifestyles to a place that keeps putting pressure on," he said.
He points out that the perfect home isn't always what it seems.
"If people could see what's behind all of those things. You have people that owe more on their car than it's worth, (and) they don't have anything in savings."
It's not just family arguments, but outside stress that put households on the edge.
"There are people that give you the 'Shame on you that you were so stupid that you didn't manage your finances,' " Carla said. "It hurts you emotionally, and it makes you feel like you're not worthy."
Carol of Phoenix, who asked that her last name not be used, keeps her financial struggles private because she doesn't want to be viewed as a loser.
"Not even my family knew I had the electricity turned off," she said.
She turned to bankruptcy as a last resort after losing a Web-related job just before Sept. 11. She needed to make $45,000, but all she could find was a part-time job making $20,000, and the bills mounted.
"I'm really uncomfortable talking about it," she said. "You're a failure."
Some seek out alternatives to filing because of the stigma.
"It's a big stab in your pride," said Erin B********, 23, who considered bankruptcy when debts piled up after a layoff. She lost an airline job as a result from cutbacks in travel after the Sept. 11 attacks.
"For three weeks I wasn't working at all, and then I ended up with financial stress of being late. . . . I ended up getting really sick, with asthma, and I ended up going to the hospital twice. And I didn't have insurance."
She found two part-time jobs, but by then her credit debt had ballooned to about $12,000 from $7,000 because of the medical expenses and late fees on credit cards. She was about to lose her car when she finally sought help from her family, who steered her to consumer credit counseling.
KJC |
