The bankruptcy trend

The bankruptcy trend
The number of personal bankruptcy filings in the fiscal year ended Sept. 30, 2003, rose 7.8% from the same period in 2002, reaching 1,625,813, according to the American Bankruptcy Institute (ABI). Thats twice the number of people filing for personal bankruptcy protection in 1993.

The amount of debt as a percentage of personal income tends to track bankruptcy filings, the ABI said. And the amount of debt payments as percentage of income has steadily increased in the last 10 years, according to the Federal Reserve.

Entering the real world
A cap, a gown, a degree, maybe a hangover and an average of $20,000 in debt: Thats what graduating students are leaving college with.

In the 1999-2000 academic year, about 60% of students graduating with a bachelor's degree from a four-year public college took out a federal student loan at some time, with a cumulative average debt load of $16,100, according to National Center for Education Statistics. Thats up more than 36% from the average amount public university graduates borrowed just four years previously.

For students at private institutions facing larger tuition bills, the debt load tends to be even higher. In 1999-2000, about 66% of students graduating with a bachelor's degree from a private institution borrowed an average of $18,000, up more than 27% from the $14,100 they borrowed on average in 1995-96.

Credit card debt among students is also growing at a fast clip. In 2000, 78% of students had a credit history and credit cards, up from 67% a scant two years before, according federal student-loan financier Nellie Mae. The average credit card debt per student jumped to $2,748 in 2000, up more than 46% from the average of $1,879 in 1998. The percentage of students with four or more cards rose to 32% from 27%.

Is there any evidence at all that America's youth is learning some early lessons about debt? Well, it's not much to cling to, but the average number of credit cards per student fell to three in 2000 from 3.5 in 1998.

And yet, if recent history is any guide, the typical student -- rather than paying off that college debt in the working world -- is destined simply to gather more: The average U.S. household with a mortgage, two college graduates who borrowed money for school and more than one credit card, owes about $112,000. And that figure is only expected to rise.

How deep in debt we are?

All Polonius wouldnt have gotten very far in America today. He's the Shakespeare character in Hamlet who warned, neither a borrower, nor a lender be.

Modern society, as we know all too well, is overrun with both borrowers and lenders. But just how big is the typical family's debt? How fast is it growing? How does your mortgage compare to the Joneses next door? And how might consumer debt -- your debt -- affect the U.S. economy?

We decided to look at the most recent numbers and take a snapshot of household debt in the United States, circa 2004. What emerges is a picture that's both familiar and unsettling. Yes, consumer debt -- encompassing credit cards, mortgages, student loans and more -- is growing like a well-fed St. Bernard puppy. No, there's no sign that the growth will slow. Yes, some economists worry about the ill effects, but no, not many of them are sounding urgent alarms.

It's hard not to be worried when confronted with numbers such as these:

About 43% of American families spend more than they earn each year.

Average households carry some $8,000 in credit card debt.

Personal bankruptcies have doubled in the past decade.

It's not clear exactly where the debt trend will take U.S. consumers or the U.S. economy. But it is clear that both are sailing in uncharted waters.

Consumers owe nearly $2 trillion

American consumers owed a grand total of $1.9773 trillion in October 2003, according to the latest statistics on consumer credit from the Federal Reserve. Thats about $18,654 per household, a figure that doesnt include mortgage debt. The number is up more than 41% from the $1.3999 trillion consumers owed in 1998.he majority of consumer borrowing, about 63%, is represented by so-called "non-revolving" debt such as automobile loans. But "revolving" credit, which most typically involves credit cards, is an increasingly significant part of the equation. Revolving debt currently totals $735.3 billion; that's about 31% higher than it was only five years ago. The figure has more than doubled in a decade.

Among the key drivers of debt expansion in recent years:

Unusually low interest rates.

The rising popularity of Internet shopping, in which credit cards are the currency of choice.

The hot housing market, which has encouraged buyers to stretch for new homes.

The aggressive extension of credit to consumers with weak credit scores.

Credit for consumers with fair or poor credit ratings typically comes with higher fees and interest rates, says Lydia Sermons-Ward, spokeswoman for the National Foundation for Credit Counselors. And while that access to capital helps some disenfranchised consumers, the availability of risk-based credit has also greatly increased the amount of debt per household and could lead to more financial problems for families, Sermons-Ward says.

There is a tendency for consumers to take advantage of credit offers without really thinking through the consequences of overspending, she says.

Just one word: plastics

The average amount of credit card debt in households with more than one card is now more than $8,000, according to CardWeb.com. Thats 167% more than the $3,000 average for households in 1990.The average American has 2.7 bank credit cards, 3.8 retail credit cards and 1.1 debit cards, for a total of 7.6 cards per cardholder, CardWeb.com said. About 18% of all personal consumption expenditures in the country are made on bank credit cards. Add in retail cards and debit cards and the figure rises to 24%.

The most unsettling aspect of all these credit card transactions is that many Americans dont see their income as a spending cap. About 43% of U.S. families spend more than they earn, according to a Federal Reserve study. And on average, Americans spend $1.22 for every dollar they earn, according to Myvesta.org.

Are high debt levels threatening to dampen consumer spending, which accounts for about two-thirds of the U.S. economy? Bank One Chief Economist Anthony Chan says decidedly yes. He flatly predicts that consumers will spend less in 2004 because of the amount they are borrowing.

Household liability as a percentage of disposable income is at its highest level ever in the United States, Chan said. Yes, its too high. Next year consumer spending will probably lag growth in real GDP by a percentage point or even more.

To make up for the effect of the high debt burden, job growth will have to soar, he says. We need to see employment picking up and wages picking up before we see the consumer being able to avoid the impact of the high level of consumer credit.

The mortgage rush
Mortgage debt is the next major piece of the debt picture. In fact, the amount owed on mortgages dwarfs the amount owed on credit cards or other loans. The average principal amount owed on a mortgage is $69,227. Nearly 14 million homeowners, about 19% of all homeowners in the country, owe more than $100,000.

American Housing Survey 2001

National Northeast Midwest South West Median years left on mortgage 29 29 28 29 29 Median outstanding principal $69,227 $70,516 $58,966 $59,848 $102,264 Median total loan as % of value 56.40% 50.30% 55.60% 59.80% 57.40% Median cash received in primary mortgage refinance $24,513 $27,839 $19,362 $21,219 $28,431 Number of homeowners with 3+ mortgages 1,008,000 220,000 265,000 301,000 222,000

Source: U.S. Census Bureau

Because of historically low interest rates -- often below 6% for 30-year loans -- many homeowners have been overborrowing, says Mark Zandi, chief economist at Economy.com. Debt loads were already onerous, and they have been borrowing very aggressively in recent years, he says.

Other strategies for debt elimination: 10 steps to elimination

All it takes to fall behind on credit card payments is one month of expenses that exceed your ability to pay. Suddenly, you're in debt. Many people feel overwhelmed at the first sign of trouble. After all, how do you pay bills with money you don't have?

Kerry York, executive director of the nonprofit Consumer Credit Counseling Service of New Hampshire and Vermont, says, "Half of our clients who seek debt counseling are new to this type of financial hardship, and they are embarrassed and uncomfortable. The worst thing someone in debt can do is ignore it." Fortunately, there are constructive steps you can take to turn your finances around.

Prioritize.

Organize your bills so you can see exactly how much you owe and who your most important creditors are. Personal debt is confusing enough without having to deal with paper overload. Unless you are crystal-clear about what you owe, it's easy to continue spending money.

Make a solid plan for attacking your debt.

List everything you owe and the corresponding interest rates you are paying. Pay the most important debt first. Then pay off the debt that carries the highest interest rate. What you're aiming to do is eliminate the debt with double-digit interest rates.

Keep only one or two credit cards.

Remember, every time you use a credit card you are in effect borrowing money. The more cards you carry, the more confusion you'll have when it's time to pay your bills, particularly if you forget which credit card you used.

Also, consider asking your credit card company to lower your interest rate, especially if you have a history of paying your bills on time. You'll never know unless you ask.

Make your payments promptly.

Try paying off as much as you possibly can every month. Always pay more than the minimum amount you owe, even if it's a small amount. When you pay a card off entirely, close the account and have a little ceremony as you cut the card in half. The satisfaction is hard to beat. Financial expert, Suze Orman says, "Once out of debt you'll find the pleasure of not creating debt far exceeds the momentary thrill of buying something on credit that you don't really need, can't afford, and won't really care about much beyond the time you get it home."

Cut out luxuries and extra items you can live without.

When tempted to spend money on an item or service you want but may not need, remind yourself of all of your monthly obligations such as mortgage or rent, food, health care and transportation expenses, and the temptation should pass.

If you own a home, look into a home equity loan or line of credit.

You can't borrow your way out of debt, but using an asset like your home is essentially borrowing money from yourself. The interest on a home equity loan or line of credit is generally deductible at income tax time, and you can benefit from the savings.

You should only take out a home equity loan, however, if you are determined to remain debt-free, according to experts. You don't want to run up new debt after you use a home equity loan to pay off the old balance. Since the equity in your home may represent your single largest asset, you might also want to consider refinancing your existing mortgage. There are costs involved, but interest rates are at near-record lows and the overall savings may be worth it.

Borrow from family or friends.

This option makes sense if they can lend you money at a low rate of interest. But more than any other debt-reduction technique, this requires an accurate paper trail to determine how much money you've borrowed and from whom. You will also need to adhere to your agreement. Consider this option only if you are willing to do what it takes to make regular payments until the debt is satisfied.

Renegotiate the terms of your loans with your creditors.

Getting your creditors to rework the terms of your loans is sometimes possible. "Most creditors have heard every sad story in the book and are forced to be pretty hard-hearted," says Mike Whitten, senior counselor at the nonprofit Consumer Credit Counseling Service of Mid-Oregon in Eugene. "Having an impartial third party negotiate for you often gets results. Sometimes creditors will lower the interest rate on a loan just to show support for the debtor and to assure that payments are on time."

Borrow against your life insurance or the savings in your 401(k) account.

Both options offer fast results but carry risk. Again, you are borrowing your own money but with high penalties in case of default. If you borrow against your life insurance and fail to pay your premiums, your policy will lapse. Most 401(k) loans must be paid back within 5 years. If you leave your job before then, you must pay off the entire loan balance at once or you'll pay income taxes and a 10% penalty on the outstanding balance. In addition, your new contributions will be used to reduce the loan, not add to your savings.

Get help.

This sounds simple but most people are not sure where to go when debt has them over a barrel. Professional debt counselors can help you strategize and negotiate lower interest rates. They can also simplify the process of paying down your debt by consolidating your payments into one. This way, your payment is made to the debt-counseling firm, which then disburses it to the various creditors. For information on finding a debt counselor, try nonprofit organizations like the National Foundation for Credit Counseling at www.nfcc.org or GreenPath Debt Solutions at www.greenpath.com.

How to eliminate debt in seven easy steps?

You finally have a good job and a great salary; it's time to start setting some money aside for the future. Unfortunately, no matter how hard you try, you just can't seem to save enough cash to open even a simple savings account.

The problem is that you're stuck knee-deep in debt, and every penny that goes into your pocket comes right out to pay the interest.

Not only are your debt levels not dropping, they're rising. And you're already contemplating borrowing more money just to pay the interest on your current debt. What can you do when there is no end in sight? Follow these seven steps; not only will you reduce your debt, you'll eliminate it.

1. Use common sense

The best way to reduce your debt load is to use some common sense. The No. 1 reason people have so much debt is because of how easy it is to obtain and use credit.

People fail to realize how much they have already spent, and before they know it, they're maxing out their credit cards on a monthly basis. The best way to know just how much money you are spending is to pay for everything in cash.

This means using credit cards only for emergency purposes, such as unexpected car expenses and medical emergencies. By paying with cash, you will gain a higher appreciation for every hard-earned dollar.

2. Stop impulse buying

If you want to freeze your debt, you must freeze your spending, especially if you don't have the income to support such high levels of debt.

If you continue incurring more debt, you soon won't even have enough funds to pay for the interest. So unless it's an emergency, stop making impulse purchases.

3. Develop a plan

There is an old saying in the financial world: If you fail to plan, you plan to fail. This advice applies to everyone, including family households.

Start by developing a road plan that will take you to debt-free zone. You need to know how much your total debt is and how long it will take you to pay it off given your current payment plan.

The next process involves establishing a budget. List all your revenues and keep track of your expenses. This will give you a better idea of how much money is coming in, how much money you're spending on different activities, and whether or not you can sustain your current spending habits.

Once you know exactly how much you're spending, it's time to cut back on unnecessary expenses.

Take a close look at each expense and determine which ones can be eliminated. You can then use that extra money to lower your debt.

Cutting back takes a lot of willpower. If you find it difficult to do so, I suggest you set up expense jars. They work in a very simple manner: Set up a jar for each main activity, such as movies, clubbing, restaurants, fast food, gas, and so on.

Every month, put cash into each jar according to your budget. Once the money is gone, stop that particular activity. If there is money left over, apply it to reducing your debt. As rudimentary as it may seem, this technique works wonders.

4. Research money-saving options

Look for money-saving opportunities like low interest rates and credit card offers. Before settling down with a creditor, shop around. Most people are afraid of banks; they think that it is still as hard to get a bank loan as it was in the early '50s. But today, most creditors are eager to lend you money. Don't be afraid to negotiate the rates.

If you don't have time to shop around and compare lending rates, you can always check out BankRate.com. You'll get an instant look at the average rates on various types of cards, as well as links to the best credit card deals.

Carefully look at these different plans. Some credit cards allow you to cut your interest in half simply by paying an annual fee of $20. Imagine that: You pay $20 once a year and your annual interest rate gets cut from 18% to 9%.

5. Take action

Don't be lazy. Formulate your money-saving plan today and follow it to a tee. Just because you know the way home doesn't mean you'll actually get there until you take action.

Most people do develop a debt management strategy. The only problem is that they forget or don't have the willpower to go through with it. Discipline is key, so get ready to whip yourself out of debt.

6. Don't close credit card accounts

When you close your credit card accounts, you reduce your options. As long as your current credit card companies aren't charging you any fees for inactivity, it's in your best interest to hang onto your accounts.

The problem with closing accounts is that you're at the mercy of whatever credit cards you decide to keep. That's the equivalent of having to shop at one store no matter how good the prices are elsewhere.

Plus, when credit card companies notice that you're not using them anymore, they'll generally send you an offer that saves you money.

Always keep your options open and be ready to switch banks once you get a better offer.

7. Always pay on time

The worst thing you can do is make late payments. If you let the deadline pass, you'll pay interest on the full credit card balance as of the purchase date.

The late fees hurt you immediately and would be better used to reduce your debt. They're also a strike against your credit rating and future bargaining power.

By paying late, you also diminish your chances of getting the best rates and deals on a car loan or a mortgage. In the long run -- especially in the case of a mortgage -- that kind of negligence can cost you thousands of dollars.

LIVE DEBT-FREE

Debt management is an important duty. Use common sense and willpower to control your spending habits. Shop around for the best rate before settling with just any credit plan and always pay on time. Remember that knowing is only half the battle.

Common features of Debt Management Programs

After joining a DMP, the creditors will close the customer's accounts and restrict the accounts to future charges. The most common benefit of a DMP as advertised by most agencies is the consolidation of multiple monthly payments into one monthly payment, which is usually less than the sum of the individual payments previously paid by the customer. This is because credit cards banks will usually accept a lower monthly payment from a customer in a DMP than if the customer were paying the account on their own. Some DMPs advertise that payments can be cut by 50%, although a reduction of 10-20% is more common.

The second feature of a DMP is a reduction in interest rates charged by creditors. A customer with a defaulted credit card account will often be paying an interest rate approaching 30%. Upon joining a DMP, credit card banks sometimes lower the annual percentage rates charged to 5-10%, and a few eliminate interest altogether. This reduction in interest allows the counseling agencies to advertise that their customers will be debt free in periods of 3-6 years, rather than the 20+ years that it would take to pay off a large amount of debt at high interest rates.

A third benefit offered by credit counseling agencies is the process of bringing delinquent accounts current. This is often called "reaging" or "curing" an account. This usually occurs after making a series of on-time payments through the debt management program as a show of good faith and commitment to completion of the program. For example, a client with an account with a monthly payment of $50 which has not been paid in two months might be considered by the creditor to be 60 days past due. After joining the DMP and making three consecutive monthly payments, the creditor could reage the account to reflect a current status. Thereafter the monthly payment due on the statements would be the monthly payment negotiated by the DMP, and the account report as current to the credit bureaus. This process does not eliminate the prior delinquencies from the credit bureau reports. It merely gives a fresh start and an opportunity for the client to begin building a positive credit history. Like all derogatory credit information, the passage of time will lessen the impact of the negative marks when credit scores are calculated.

Many educational facilities have begun to incorporate credit practice into the curriculum. Schools have been incorporating the Charge Large Board Game. Players or students now learn and practice using credit paying-off in cash. The different level credit cards and upgrading system (in the Charge Large game) makes for an incentive for players to use their credit card and paying them off in full. It is said by 2011, the Charge Large Board Game will be in 70% of colleges practiced during orientation and in the classroom setting. In addition, by 2011, the Charge Large Board Game will be in 65% of high schools throughout the United States. Therefore, students receive credit counseling prior to receiving any form of credit.

Are you in danger? Can you control your credits? What do you need to watch out for? Check it!

So let's make this clear: If you're able to pay your bills and are current on all your accounts, you almost certainly don't need credit counseling. If your interest rates are too high, you usually can negotiate a lower rate with your credit-card companies just by asking -- or threatening to move your account elsewhere.

Here's when you might think about full-scale credit counseling:

• You can't pay the minimums on your credit cards.

• You're consistently late paying one or more of your regular bills.

• You're being hounded by creditors and collection agencies.

• Your efforts to work out reasonable repayment plans with your creditors have failed.

Be warned: If you're too far in debt, credit counseling may not be able to help. There are limits to how little your creditors will accept, and a credit counseling service may not be able to cut your payments enough to either give you breathing room or get you out of debt. If that's true, bankruptcy may be the best of bad options.

Your payments also shouldn't stretch on for years. The typical plan takes two to four years to complete. Responsible credit counselors say bankruptcy is usually the better option if the repayment would take more than five years.

WHAT TO WATCH OUT FOR?

Once you've decided you want credit counseling, you should investigate the company or service carefully before signing up. Red flags to avoid include:

Big upfront fees. Consumer Credit Counseling Services typically charge a $10 set-up fee. If you're paying a lot more, you may be the one who's getting set up, unless you're getting extensive and personal money coaching that could justify the fee.

No accreditation. Legitimate credit counseling firms are affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

Delayed or missing payments. Some companies pocket your first months' payments as a fee, rather than passing the money on to your creditors. Missing payments can hurt your credit rating. Find out how much of each monthly payment is going to your creditors, and when it will be sent to them.

Unrealistic promises. Some companies falsely promise that you can settle your debts for little or no money, without hurting your credit rating. Legitimate credit counseling services help you pay back what you owe, albeit at lower interest rates, and acknowledge there may be some affect on your credit rating and ability to obtain new credit.

Who needs credit counseling?

Obviously, all these outfits are finding plenty of eager customers. Americans' debt loads have been running at record levels, and bankruptcies are high.

It's hard to get an accurate bead on how many people signed up for debt repayment plans through credit-counseling services. Of those in debt repayment plans, said Lydia Sermons-Ward, spokeswoman for the National Foundation for Credit Counseling, about half were expected to successfully complete their plans. The other half were expected to drop out, with some of those filing for bankruptcy.

Typically, counseling services negotiate lower payments with credit-card companies and other lenders, then make the payments using a check or electronic funds transfer sent to them by the consumer each month.

Most of the counseling services' fees are paid by the lenders themselves, which send back to the services a portion of the payments received. This has led some critics to charge that credit counseling is just a tool of the lending industry.

The payment system, known as "fair share," has certainly encouraged the growth of credit counseling services. And some agencies, driven by competition, are now openly courting consumers who haven't fallen behind on their debts by promising lower interest rates. This development has angered credit-card companies and often hurts consumers, who may find out too late that such plans can hurt their credit ratings and are often unnecessary.

How to choose a credit?

Bank credit has to do with the amount of funds that an individual or a business may be able to borrow from one or more lending institutions. In effect, bank credit is a measure of how much in the way of cash loans may be issued, based on the credit history and the assets of the company or person. Here is some information about how bank credit works, and why knowing your bank credit rating may be very important.

Because bank credit focuses on the borrowing capacity of the individual or business entity, the premise is a little different than the extension of a line of credit. First, bank credit has to do with loans that are taken out for specific purposes, rather than general purposes. Second, they often involve some sort of collateral that helps to ensure the repayment of the loan in the event of default.

A basic philosophy of the banking system is that when money is loaned out, there must be a reasonable expectation of repayment of the loan, plus interest. This means that looking at the overall financial status of the applicant is important. Assets such as property, savings and stock accounts, current indebtedness, employment status and annual net salary or wages, and overall credit rating are all components that factor into determining the bank credit of the applicant. This is a far more comprehensive approach than is normally used for the issuing of a credit card.

Understanding the importance of bank credit often becomes apparent when applying for a mortgage to finance the purchase of a new home. Depending on the overall financial health of the prospective homeowners, there may or may not be a sufficient level of bank credit to allow the approval of the mortgage. This may be true even if the applicant can demonstrate a steady source of income and is not in arrears on any current financial obligations.

There are some ways to improve a bank credit rating. First, look at credit card debt and eliminate it if at all possible. Also, cut down on the number of open credit card accounts. The combined worth of your lines of credit will impact your bank credit rating. Fewer credit cards means less potential to incur large balances that would hinder repayment of a loan or mortgage. Keep one or two credit cards and pay them off each payment cycle. This maintains a healthy credit record and will reflect favorably on your bank credit and will increase your borrowing power with your local financial institution

What is bank credit?

The borrowing capacity provided to an individual by the banking system, in the form of credit or a loan. The total bank credit the individual has is the sum of the borrowing capacity each lender bank provides to the individual.

Description

This section is from the book "Banking, Credits And Finance", by Thomas Herbert Russell. Also available from Amazon: Banking, credit and finance (Standard business).

Practical Features Of Bank Credits

We are a practical people who are more given to consideration of improving our methods than to reflection upon our existing greatness or that of our predecessors. For that reason I have up to this time devoted your attention to progress in methods and means of credit research. I will now turn your attention to some practical features of the business we are doing based on bank credits. I have been much interested in determining the relative volume of bank loans on commercial paper to the various classes of borrowers. While this relation undoubtedly fluctuates widely it is my conclusion that the following statement reflects about the average condition:

Per cent

Commercial loans by banks to manufacturers . .......50

Commercial loans by banks to commission men .....15

Commercial loans by banks to jobbers........30

Commercial loans by banks to retailers........5

This was ascertained from the distribution of 186 different loans, aggregating upward of thirteen million dollars. The average distribution of some sixty million dollars of loans placed through brokers in New York gave the following relative proportions:

Per cent

Commercial loans through brokers to manufactures...........................................................................45

Commercial loans through brokers to commission men........................................................................15

Commercial loans through brokers to jobbers ....30

Commercial loans through brokers to retailers ...10

The striking preponderance of loans from banks to manufacturers is evident from both of these statements. It becomes of interest to us, then, to study further these various classes of borrowers, and I have prepared from the statements of some one hundred concerns a set of typical balance sheets that will bring before us some credit features, which it will be of profit to us to study with care.