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Why millions of people in the United States are...
Drowning in debt

February 13, 2004 | Pages 6 and 7

EVERY 15 seconds, a family in the U.S. files for bankruptcy. This year, 1.6 million families will file for bankruptcy, and 9 million more will be in for "credit counseling"--which means negotiating lower interest rates in order to keep from defaulting on loans and credit cards. Not including mortgages and student loans, Americans owed nearly $2 trillion--mainly in credit card and car loan debt--as of October 2003. That's a whopping $18,700 per U.S. household.

In other words, working people in the U.S. are drowning in debt--and the worst is yet to come. NICOLE COLSON looks at the hidden crisis facing millions upon millions of people in the U.S.

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WHO'S TO blame for the consumer debt crisis? Ask the politicians, and they have a simple answer: consumers. Increasing numbers of people in the U.S. are living beyond their means and spending too much money on too many frivolous things, say the "experts."

But as Elizabeth Warren and Amelia Warren Tyagi point out in a new book, two-income families today actually spend 21 percent less on clothing, 22 percent less on food and 44 percent less on appliances, compared to one-income families a generation ago. The problem is what these families are forced to spend more on--in many cases, much more.

Decades of slashing the social safety net--from Ronald Reagan's attacks on federal programs in order to increase military spending, to Bill Clinton's dismantling of welfare, to George W. Bush's plan to wreck Medicare--has meant that workers and the poor are increasingly forced to shoulder huge economic burdens.

According to Warren and Tyagi, the average family today spends 69 percent more in inflation-adjusted dollars on their home mortgage and 61 percent more on health insurance than their parents spent a generation ago. Add in the fact that real wages have stagnated or declined slowly since the 1970s, and it's clear that the debt crisis isn't due to greedy consumers, but to the fact that massive numbers of people are struggling to get by on less.

"Despite the fact that it is now over two years since the economy began growing after the downturn that lasted from March to November 2001," the Economic Policy Institute reports, "the U.S. economy has yet to achieve significant or sustained job creation. In fact, 33 months into this business cycle, there are 1.8 percent, or 2.4 million, fewer jobs than when the recession began."

Considering that 24 percent of the official unemployed have been without a job for more than six months--and that an additional 4.8 million people in the U.S. are "underemployed"--it's no wonder that consumer debt has reached epidemic proportions.

Nowhere is the debt crisis more apparent than credit cards and personal loans. Credit card debt alone stands at $735 billion--more than 11 times what it was in 1980.

Of the more than 78 million credit-card users in the U.S. today, approximately 60 percent don't pay off their monthly balances--and they carry an average debt of close to $12,000. Much of this debt reflects the trend of cash-strapped middle-income families turning increasingly to credit cards to pay for basic necessities like groceries, or even rent.

But banks and credit card companies are also increasingly targeting the people who are the most desperate--the so-called "sub-prime" market of the poor, working poor and financially strapped people that they count on not being able to make their payments. Overall, sub-prime mortgage lending has grown more than 500 percent in just a few years, from $34 billion in 1994 to $213 billion in 2002. Meanwhile, there are more than 25,000 payday lender operations--which offer small "paycheck advance" loans, often in poor and minority communities, with exorbitant interest rates, sometimes as high as 500 percent.

But why would a company lend money or give a credit card to someone they think won't be able to make their payments? Like loan sharks, for one reason only--to squeeze more money out of them.

"Credit card issuers," write Warren and Tyagi, "make their profits from lending lots of money and charging hefty fees to families that are financially strapped. More than 75 percent of credit card profits come from people who make those low, minimum monthly payments.

"And who makes minimum monthly payments at 26 percent interest? Who pays late fees, over-balance charges, and cash advance premiums? Families that can barely make ends meet, households precariously balanced between financial survival and complete collapse. These are the families that are singled out by the lending industry, barraged with special offers, personalized advertisements, and home phone calls, all with one objective in mind: get them to borrow more money."

Last year alone, credit card companies charged more than $7 billion in late fees--quadruple what they charged less than 10 years ago. These companies ruthlessly gouge consumers that they know will never be able to claw their way out of debt.

The same is true for other lending schemes as well--banks specifically target poor and working-class people with high-pressure tactics that throw many consumers into deeper debt. Citigroup, for example, has been accused of deliberately targeting thousands of people they know can't afford their loans, using high pressure tactics to make them sign up, and then jacking up interest rates or forcing customers to buy "insurance" on loans later.

Martha and Arthur Hairston, for example, borrowed money from Commercial Credit--which was later taken over by Citigroup--in the mid-1990s. "They just said, 'Sign this, sign this,'" Martha Hairston told Southern Exposure magazine. The Hairstons wound up paying $1,164 for five kinds of insurance on a $5,001 loan.

Others who got loans from Commercial Credit were routinely charged an annual interest rate of more than 40 percent. Banks and credit card companies see gold in people like the Hairstons--who they can lure into indefinite massive debt, and then slam the door shut on any hopes of recovering financially.

Banks making money off of vulnerable people is certainly nothing new. But today, the size of the debt hammer coming down on the heads of workers and the poor is a despicable reminder that the system is set up to lock people into a miserable existence--where most people are just barely able to make ends meet. We need an alternative to this rotten system.

Too poor to get sick?

CAN YOU afford to get sick? A growing number of Americans can't. Skyrocketing co-pays and premiums are putting health insurance out of the reach of many working class and middle-income families--and forcing millions of Americans every year into the ranks of the uninsured.

With an estimated 44 million uninsured, and tens of millions more underinsured, health care costs are one of the largest causes of bankruptcy in the U.S. According to Warren and Tyagi, over the past 20 years, the number of families going bankrupt following a serious illness has multiplied by a staggering 2,000 percent.

And as Donald Bartlett and James Steele reported in a recent Time magazine article, the disgusting reality is that people who can least afford high medical bills--the uninsured--are charged more for health care services.

Take the case of the Wester family. Jim Wester, owner of a Las Vegas welding business, had a health insurance policy that covered--for a $3,000 yearly deductible--himself, his wife Richelle and their daughter.

But when Jim's 9-month-old son Hunter spent 18 days in the hospital following a brain aneurysm, it turned out that the family's policy didn't cover him.In the end, the Westers ended up owing the hospital $135,000--and an additional $45,000 to various doctors.

A judge knocked some $80,000 off the bill, and a family friend was finally able to negotiate the total down to $40,000. The Westers have had to take a loan against their house to pay for it. "I work my butt off practically every day," Jim Wester told Bartlett and Steele. "I don't buy things I can't afford, and I basically save every penny I have."

But the truly sickening fact is that because Hunter Wester lacked health insurance, his family was billed at higher rates for the exact same medical services. Medicare, for example, would have paid less than $10,000 for the same services that the Westers were initially charged $135,000 for.

Washington's bankruptcy "reform" scam

IF SOMEONE picked your pocket every day for 10 or 20 years, it would be considered an outrageous theft. But when credit card companies and banks do it, it's "business." And if these crooks get their way, they will be able to fleece people indefinitely.

That's the truth about a bankruptcy "reform" bill that would make it much harder for individuals drowning in bills to erase their debts. Currently, Chapter 7 of the bankruptcy code allows people to default on credit-card debts, while under Chapter 13, people are forced to repay debts over time in a court-approved plan.

Under the new law, if a person declaring bankruptcy has "sufficient income" to repay at least 25 percent of the debt over five years or earns the median income for his or her state, he or she would be forced into a Chapter 13 repayment plan--with possibly decades of repayments lying ahead.

"Even its supporters say the point of this bill is not to ensure that fewer people file personal bankruptcy," Chicago Sun Times columnist Cindy Richards wrote. "Instead, it is to make sure that when people do file, the credit card companies that helped them get into trouble in the first place get as much back as possible."

In the past, the bankruptcy "reform" bill failed to pass because Senate Democrats blocked it--but only because they wanted a provision to ban abortion protesters from using bankruptcy to avoid paying court fines for blocking clinics if they knowingly violated the law. Now, however, House Republicans are threatening to cut the extension of bankruptcy help for farmers if Democrats don't accept the bankruptcy legislation without the abortion provision.

As it turns out, the Democrats could stop the legislation--they have enough votes to filibuster. But don't count on the Democrats. Both parties have their hands stuck deep in the corporate credit industry's cookie jar.

According to the Center for Responsive Politics, so far in 2004, the commercial banking industry has given more than $7.7 million in contributions from political action committees and individuals to both the Democrats and Republicans. Democrats sucked up about one third of the cash.

John Kerry, the frontrunner for the Democratic presidential nomination, is one of the worst when it comes to stuffing his campaign pockets with cash from the banking industry. According to the Center for Public Integrity, top contributors to Kerry's past senate and current presidential campaigns include FleetBoston Financial Corp, which has bankrolled his career to the tune of $182,387, and Citigroup, which has shelled out $111,356.

Trials of the needy super-rich

JUST HOW does the other 0.01 percent live? In a stomach-turning study commissioned by Elite Traveler--a magazine dedicated to the "needs" of the spoiled super-rich--New York-based consulting firm Prince and Associates conducted a telephone survey of 431 people with a net worth of more than $1 million.

The study divided the rich into three segments, based on the size of their wealth--$1-5 million; $5-10 million; and more than $10 million. According to Doug Gollan, president and editor-in-chief of Elite Traveler, it turns out that the stinking filthy rich are different from the merely filthy rich. They're more arrogant about their ability to keep the money rolling in, for one.

While "only" 27 percent of the $1-5 million group, and 40 percent of the $5-10 million group think that their finances are going to get better in the next six months, 56 percent of those in the top category--the so-called "elite affluent"--said they believed things would be coming up rosy.

The explanation? "People in the lower net worth group have a weaker safety net," Palm Beach accountant Richard Rampell, had the nerve to tell the Palm Beach Post. As if any of these people have to worry about what millions of working and poor people do--not being able to afford health care, rent or food.

It turns out that the filthy rich are extra lazy, too. The survey of the "elite affluent" found that just 25 percent dusted their own mansions, 23 percent opened their own mail and 12 percent paid their own bills.

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