Digging Your Way Out of Debt
Americans used the '90s boom to load up on credit. Now the bill is coming due
Spendthrifts. As the economy and stock market downshift abruptly from fifth to first gear, it's painfully clear that Americans have neglected to buckle up. "The greatest danger for people right now is they can't predict whether they'll be laid off or have other events happen to them," says Teresa Sullivan, coauthor of The Fragile Middle Class: Americans in Debt.
Thus far, unemployment remains near a historic low. But if it returns to the level of the early 1990s, those Americans saddled with debt would be in the most trouble. Yet even for them, it's still not too late to step back from the abyss. Recognizing your problem is the first step. Coming up with a workable plan to pay down debt is the second. The process can be painful, though: Reversing debt accumulated in months can take years, or longer (box, Page 60).
How did America get into this mess, spending away our future earnings? Perhaps it has something to do with our eternal sense of optimism that leads us to believe we will have a better life than our parents. "We are a nation of overspenders, a nation that is into instant-gratification highs," says Olivia Mellan, a Washington, D.C., psychotherapist who specializes in money issues.
Tim Horrigan sure believed in the better future--until last year, when after more than a decade of surviving on credit, he was forced to file for bankruptcy. In 1988, amid flush economic times, he was earning just $100 a week polling and distributing fliers in New England for Michael Dukakis's presidential campaign. To make ends meet, the New Hampshire resident, now 44, used Discover and American Express cards to pay living expenses. "I figured I'd be getting a better job in Washington soon to pay it off," he says. Voters had other plans, however, and Horrigan dragged his $1,000 card balances on to his next job as a computer technician.
Hard times. Horrigan lost that position in a 1991 downsizing, and by 1997 he had accumulated $35,000 in debt spread over 12 credit cards, with interest rates as high as 25 percent. Despite a yearly income of no more than $30,000, Horrigan generally kept up with his bills until last year, when he missed one payment to American Express, which demanded $12,500 within four days. "I finally realized my debt load was unmanageable on my income," he says.
Those who think they are controlling their debt should consider what can easily happen at the tail end of an economic boom. In 1988, Jeanna Smith was earning about $16,000 a year at a nurse-referral service in Cincinnati. That was enough to make ends meet, barely, despite having $7,000 in student loans and $5,000 in credit card balances. But then she lost her job and, along with it, her health insurance. And $2,000 in healthcare bills piled up, for tests on what turned out to be a benign lump in her breast. Smith, now 44 and a third-grade teacher, is debt free but still sees a credit counselor.
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