Case Studies: Juggling Debt

Whether it’s another credit card or one of those creative-financing deals with names like upside-down equity loans, Southern Californians are gorging on a new helping of debt.

The borrowing binge, which is trailing a similar nationwide run-up, started earlier this year as consumers apparently anticipated an end to the recession and started a heavy round of charging.

But alarmed analysts warn that Southern Californians are especially vulnerable because they already carry a heavier debt load than others, and a wavering economy could push many more households over the edge.

Here are the stories of three families who got in over their heads and what they did to get out of the debt bind.

Morehouse Family

SAN DIEGO--Nancy Morehouse got her first credit card, a BankAmericard, during the original plastic boom in the 1960s. Though never comfortable pulling it out, she got used to charging and acquired several more cards over the years.

But her balance has never been as high as in the last couple of years--more than $16,000. “Nothing frivolous,� she said, adding that she used it for car repairs, a new roof, a little here and there to help out her grown-up children.

At 77, Morehouse became more and more anxious about her debts, fearing she might die deep in hock. “Getting older, you think of your mortality,� said the retired secretary at San Diego State University. “I didn’t want to leave these debts for my kids to pay.�

So three months ago, Morehouse and her husband, Robert, contacted the Bankcard Holders of America, a consumer group, and signed up for the Debt Zapper. They paid $15.

The program determined that, under her current repayment practice, it would take her 22 years to pay off her cards. And she would have to pay out $15,447 in interest, nearly as much as her total principal.

Morehouse’s five cards range from a university credit union Visa with an annual interest rate of 13.9% to a Montgomery Ward account that charges 20.4% in interest. Morehouse had never been delinquent, but she had been paying roughly equal amounts, usually a little over the minimum, on each of her cards.

Debt Zapper devised a new repayment schedule, raising her total monthly card payments by $175 to $641, with larger amounts going to pay off higher-interest accounts until each card balance shrinks to zero.

Under the new plan, Morehouse could clear all of her debts in 33 months, paying a total interest of $3,885. That would save her 238 months and $11,562, according to Bankcard Holders.

Of course, the program will work only if Morehouse doesn’t make new charges on any of her cards. (She said she has tied up the cards in a rubber band and stashed them away in a drawer.) And there could also be some variations based on fluctuating interest rates, but that figures to be small.

Morehouse, who with her husband is on a fixed income, thinks they can make it. Their house, she said, is paid off, and they have put away savings of almost $1,000 in case their ’84 Pontiac goes on the blink again. Her son and daughter don’t have any credit cards and have learned from their parents’ experience, she says.

The Morehouses also opened a Christmas club account, so for the first time in many years they won’t have to charge for Christmas presents.

“It was an answer to a prayer,� she said of Debt Zapper, laughing at the name of the program. “We’ll be out of debt in 33 months,� she said, beaming.

And when that day comes? She mused: “Maybe we’ll go to Hawaii--on cash.�

Buck Family

LONG BEACH--Four months after getting married, Jim and Diedre Buck walked hand in hand into the Consumer Credit Counseling Service’s unadorned office here. Diedre was skeptical, but she figured, “What have we got to lose?�

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After an hourlong meeting with a counselor, the Bucks were relieved. “I felt a rock had been lifted off my shoulders, knowing we could do this, pay it off,� she said.

The mid-20s couple had $19,000 in credit card debts. They had 20 credit cards between them, cards they used to draw cash to go out, to buy a stereo, dining set, refrigerator, rug.

“It was pretty easy,� recalled Jim Buck, a program specialist at the Orange County Retirement System. “It began with a jewelry store account and then they all fell in line. . . . It just snowballed.�

The Bucks started the Consumer Credit Counseling program as soon as they got home from that first meeting in October 1992. The couple sent out form letters to all of their creditors, indicating that they had signed up with the counseling service and that their monthly payments would now be coming from that organization.

Most of the creditors waived the interest, which is common for Consumer Credit clients. “Some of the companies were snotty about it,� Diedre said, “but most of the creditors were wonderful.�

The next month, the Bucks sent their first check of $606 to Consumer Credit Counseling, which included a monthly fee of $20 to the service for postage and other clerical work.

For the Bucks, there were three rules: You can’t use credit cards while on the program, can’t apply for new credit and must send in at least $606 a month.

The Bucks stuck with it, and in October they mailed out their last check. “My husband went to the bank and got the money order, and it was a celebration,� Diedre Buck said, her voice rising. “Yes, it’s done. We did it.�

In all, the Bucks paid $23,000 to clear their credit card debts, including about $4,000 in interest payments.

Now the Bucks are focusing on reestablishing their credit. The couple, who live in an apartment in Costa Mesa, want to buy a house in about a year. And they’d like to get a second car soon.

The Bucks’ credit report will indicate that they went through Consumer Credit Counseling, but experts say it won’t mean they’ll be barred from credit.

The couple have one credit card between them, a department store account with a $200 limit. But they’re in no hurry to get more credit.

“It changed our spending habits,� Diedre Buck said of the program. “It gave us an idea of how much we were spending and where.�

“We prioritize,� her husband said, “and if we can’t afford it, we wait till we can.�

Calvillo Family

SANTA ANA--Anita Calvillo believes there’s a critical point in every person’s life. Hers came three years ago.

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The recession wiped out her ice cream parlor business. Her husband, Ruben, earned good money as a welder, but the Calvillos, parents of four boys, were struggling to make the $1,600 monthly mortgage and service $10,000 in credit card debts. They had no savings.

“Everybody was calling at the same time,� she said of bill collectors.

So the couple rented out their spacious five-bedroom house in Santa Ana and moved into a condo half that size. That saved them $600 a month.

The Calvillos made other sacrifices. Ruben car-pooled to his job in Irvine. For the family vacation, they camped instead of staying at a high-priced hotel. The boys lived without an allowance, and they all made do with a lot of eggs and rice for dinner.

“We took things for granted,� said Anita Calvillo, 39, who now works part time at the Southwest Senior Center, a community service for the elderly in Santa Ana.

It took a full year of spartan living for the Calvillos to get their debts under control and to move back to their house. But she doesn’t regret a minute of it.

“It brought us more united,� she said, noting that it was a life-changing experience.

Today, the Calvillos live on a strict budget. They don’t employ a gardener anymore, taking care of the yardwork themselves. They don’t eat out two or three times a week as they once did; now they’ll go out once or twice a month.

The Calvillos are saving more too. Ruben, who is 43, now puts 10% of his salary into his company’s 401(k) plan, instead of the 2% he had for a long time.

Anita has put away most of her credit cards. The last charge she made was for $440 for a new television; they paid the balance off in three months.

“I used to just pay what was required, the minimum,� she said. “But we made ourselves a goal: If we put it on a credit card, we pay it off in 90 days.�

“In the past, I just lived a day at a time,� she added. “If I wanted something, I just put it on my credit card. . . . Now I say, ‘If I don’t have the cash, it means I can’t afford it.’ �

She said her family has savings to cover living expenses for three to six months, just in case an emergency strikes. She recently bought life insurance for the first time, and the Calvillos are starting a college fund for their 15-year-old boy, who dreams of becoming a dentist.

And the Calvillos are teaching their children about money management. “I told my 8-year-old, ‘We’re on a budget.’ �

“We still have a lot of work to do,� Calvillo adds. “But we look at things differently now. We’re in better shape than in the beginning of the ‘90s.�

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The Bankruptcy Option

Though it is considered the measure of last resort, overwhelmed debtors can turn to bankruptcy as a way out of their debt binds. While the process is relatively quick and inexpensive, bankruptcy does bear short-term and long-term costs that are often misunderstood. Below is a primer on personal bankruptcy:

Advantages

* Prevents financial ruin

* Prevents foreclosure of your house

* Prevents IRS seizure of property for back taxes

* Provides fresh start

Disadvantages

* Harms credit rating

* Possible loss of assets

* Certain debts cannot be discharged

* Social stigma

* Loss of privacy

Long-Term Effects

* Credit reporting agencies such as TRW list bankruptcies on personal credit records for up to 10 years.

* Those who have filed bankruptcy might be turned down or have to pay higher interest rates for credit cards and loans.

* Landlords often refuse to rent to those with credit problems.

* Some employers consider an applicant’s credit history as criteria for hiring.

Personal Bankruptcy Options

Chapter 13

* Allows debtors to consolidate debts and pay creditors back in full or in part over three to five years.

* Interest on unsecured debt such as credit card borrowing is waived--payment goes entirely to principal.

* Lump-sum payments are made to a court-appointed trustee who supervises the payment plan.

* Protects homeowners from foreclosure by allowing them to make up missed mortgage payments over time.

* $160 filing fee

* No time limit on repeat filings.

* Typical attorney fee: $800-$1,600

Chapter 7

* Also called “straight� bankruptcy.

* Wipes out unsecured debt.

* Debtor has option to return items bought with secured loans, such as a car, and owe nothing, or keep belongings and continue making payments.

* May keep homes and automobiles with a limited amount of equity.

* $175 filing fee

* Can be filed once every six years

* Typical attorney fee for personal filings: $500-$1,000

The Process

* Debtor files petition in federal court claiming insolvency.

* Within 15 days, debtor must file papers listing all debts, assets, income, living expenses and personal information

* Case is reviewed by a court-appointed trustee. A notice is sent to each of the filer’s creditors.

* Within six weeks of initial filing, an administrative hearing is held by the trustee, the debtor and the debtor’s attorney. Creditors may also attend.

* Case is finalized within 90 days of hearing.

Sources: Joseph Weber, attorney; Times reports

Compiled by JANICE L. JONES / Los Angeles Times