Jan. 18 debt reduction

January 18, 2002

Drowning in debt?

Debt-ridden folks are turning to Debtors Anonymous and credit counseling services to recover

Tom had a beautiful life: a wife, two kids, two cars, two homes, a fun job in a major east coast city, money. ... And in the time it takes to scan a credit card, he lost it all.


His credit card debt swelled to $30,000. Divorce and subsequent unpaid child support ballooned to $90,000. Thousands of dollars in parking tickets accumulated.

He lost his job. Mail, including bills, would come to the house and go unopened. Tom owed his parents and companies as business and personal debt spiraled out of control.


Determining that he was a compulsive debtor, Tom went to Debtors Anonymous to address the problem and get his life on track. Like Alcoholics Anonymous and other support groups, D.A. members use only first names to protect their identities.

Tom's experience may be extreme, but pulling oneself out of debt has become commonplace in a society where credit card approval is a phone call away, and loans are required for buying a house, owning a car, or sending a child to college.

"Even if you just have a house and car and good credit standing, you don't want the obligation" of debt, says Dana Pickles, a senior certified credit counselor in the Hagerstown office of Consumer Credit Counseling Service. "Because you're spending money you haven't earned yet by virtue of the debt."

Pickles estimates the average debt his clients carry hovers around $15,000, and can range from $500 to more than $40,000. He says the average pay off plan lasts 48 months.

Carrying debt can have an effect on your ability to obtain loans. A delinquent Visa or MasterCard account can leave a mark on your credit report for up to seven years. In his office, Pickles tries to point clients in the direction of solvency.

"Most people I meet haven't budgeted; those who have, do it wrong," he says. "Most people do not take all of their expenses into account."

Let's say you have a $4,000 balance on a credit card that carries interest of 21 percent. Pickles says most companies require a minimum monthly payment that is two percent of the balance, so in this case $80 should be paid each month.

Paying only the minimum, Pickles says it would take 114 months - 9 1/2 years - to pay off the debt.

The trick is that after a few months the overall balance will drop, creating a new monthly payment lower than the original.

"So payment could easily extend to 20 years," Pickles says. "You always want to pay extra."

And there is a psychological effect of carrying debt. Pickles says many clients would visit him sooner if not for feelings of embarrassment at having the problem. Tom says he felt ashamed at having accumulated so much debt, and overwhelmed by staring at a stack of bills while knowing there was no money to pay them.

Today, he talks to his children about his experience, trying to steer them in the right direction. One child is responsible; the other, to Tom's chagrin, is more like him.

"My kids know I'm in recovery for this," he says. "I encourage him, when I see him acting impulsively with money."

After weaning clients from using credit - Pickles says most have cut themselves off before consulting CCCS - he works with them to establish a budget that takes into account all expenses, and estimates others, like car repair, that are not fixed.

He also works with credit card companies to adjust interest rates or late payment fees to get clients into a position where they can pay back what is owed.

Don Blandin, president of the American Savings Education Council, says recognizing there is a debt problem is just step one. More difficult is using discipline to limit purchases and pay off balances to avoid long-term problems.

Tom, who attends Frederick, Md., D.A. meetings after recently relocating to Maryland, has his cut-up credit cards at home as a reminder of where he has been. Cautiously, he uses two debit cards, taking care to meticulously record every transaction.

Owning a credit card is no longer an option.

"It is death for a compulsive debtor," he says. "It's like putting an alcoholic in the middle of a wine factory."

With a budget in place, Pickles says it takes a few months to see results. Ultimately, the goal is to encourage clients to begin saving so future problems with debt can be avoided.

A healthy savings allows spending in an emergency - unexpected car repairs, loss of employment - without relying on credit.

"Creditors will give and give and give," Pickles says. "At some point, the bill comes due. With interest."

When a D.A. member goes 90 days without incurring new debt - they pay their bills on time, use no credit cards, don't even borrow $10 from a friend - they become solvent, or abstinent.

Tom has been solvent for nearly 600 days, and has erased $150,000 in debt since admitting his problem in 1995.

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