Financial plunge

Credit binge blamed for rising foreclosures, loan defaults

In 1964, Sandra Miller married the man of her dreams, but that dream turned into a nightmare after she realized their finances were in disarray and the only way out of tremendous debt was filing for bankruptcy in 1996.

“Now I can’t buy anything, I am done,” said Miller, 62, of Fort Pierce, Fla. “I am just trying to keep a roof over my head and some food in my belly.”

Miller isn’t alone.

Millions of people are struggling to keep financially afloat. As the already-fragile economy struggles to overcome a three-year stock market nosedive, millions of layoffs, corporate scandals and waning consumer confidence, an alarming trend has emerged from the 1990s, when consumers binged on easy credit.

Personal bankruptcies, mortgage foreclosures, consumer loan defaults and auto repossessions are all on the rise or showing signs of increasing, which is fueling a tide of economic uncertainty.

“The bubble was going to burst sometime,” said Chris McCarty, survey director at the University of Florida’s Center of Survey Research for Consumer Confidence. “With credit cards lowering their standards … lower interest rates on homes and cars … and people refinancing their homes for 125 percent of what they are worth, I could see this coming a mile away.

“We were at the top of our game in 1998 and 1999. Things were bound to crash.”

Staggering statistics

Along with the rise in bankruptcies, the number of foreclosures also is on the upswing. Home-loan defaults nationally reached a record in 2002.

“We expect to see delinquencies fall as the economy improves and generates jobs growth,” said Doug Duncan, senior vice president and chief economist for the Mortgage Bankers Association of America. “But that won’t be for some time.”

Experts say the nation’s mounting debt is reaching critical stages, because consumers have overextended themselves financially with second mortgages and refinancings. In addition, they say, creditors offering unsecured loans to high-risk consumers are contributing to the dire situation.

Some observers think aggressive marketing schemes and the lure of low-interest or no-interest big-ticket purchases such as automobiles, boats and furniture means consumers are digging themselves into an even deeper debt hole.

According to the Consumer Bankers Assn., the delinquency rates on car loans reached an all-time high of 2.88 percent in 2001. The year before the figure was at 2.07 percent. For last year, the delinquency rate was at 2.19 percent.

“The last thing someone wants to lose is a mortgage on a house. The second thing people aren’t going to want to lose is a car because their livelihood depends on getting to and from work,” said Fritz Elmendorf, vice president of communications at Consumer Bankers Assn.

Getting help

Many consumers have turned to credit counselors or debt management experts. In many such programs, debts are consolidated into one lump payment, credit cards are cut and a monthly budget is established to help consumers manage their money.

Consumer Credit Counseling Service, a nonprofit entity accredited by the National Foundation for Credit Counseling, offers a variety of personal money management solutions.

According to the Consumer Credit Counseling Service, here are some tips to keep you from falling into deep debt problems:¢ Pay all credit card bills on time to avoid late fees and higher interest rates.¢ Avoid unsolicited cards, especially those that offer zero percent financing.¢ If you need credit counseling, choose a reputable, certified and accredited agency that doesn’t demand high upfront fees.¢ Keep a savings cushion for emergencies.¢ Organize a spending plan.¢ Make sure your unsecured debt doesn’t exceed 20 percent of your income.¢ Refuse unsolicited increases to credit card limits.

“The average amount of debt we see is about $17,000 to $20,000. Some of our clients have about eight or nine credit cards,” said Gay Watson, communications director at CCCS. “Depending on the amount of debt, we can get them on a program where they can be debt free in three years.”

Veda Lamar, a consultant for the National Foundation for Credit Counseling, said consumers must be careful in choosing the right debt management program because some agencies lacked the training and experience in consumer debt repair.

“Consumers have to make sure they are certified and accredited. Most of the new guys are not, causing even more problems for consumers,” she said.