The American Way of Debt

By Otto Friedrich

Easy living on easy credit is getting millions into trouble

Steve Brinkley is a sandy-haired lawyer with the amiably innocent look of a Teddy bear; his wife Jane is a teacher's aide at a nearby school. Together they earn $40,000 a year. They live with their eight-year-old son Peter in a handsomely renovated Victorian house in a wealthy suburb of Chicago. They have a new car and a new kitchen, and their lawn has no crab grass. Peter has just learned to do handstands. They look like the All-American Family living the All-American Dream. They are also broke. They are not only broke, but $18,000 in debt. "The question is," says Jane, a pug-nosed brunette in preppy red wrap-around skirt, "shall we eat this week or shall we pay the electric bill?"

Steve is 36 and Jane 34, and their names have been changed because they are trying to keep up appearances while they fight the disastrous consequences of the American addiction to buy-now-pay-later. "Nothing seemed extravagant," says Steve. "We kept thinking, 'We're successful people, we make a lot of money, and we aren't being lavish. Why are we in trouble?' "

For all the best reasons: optimism, ambition, idealism. The Brinkleys decided, after Peter was born, that it was time to buy a house. They wanted to live in a good neighborhood, and the house they picked cost a mortgage payment of $582 a month, twice what their apartment rent had been. "We thought we could handle the increase," says Steve, "but that was wishful thinking."

Because they had bought an old house, they had to do a lot of renovating, and the money started flowing out. "Just for screws and bolts and paint and electric drills," Steve recalls. "All on the Sears credit card." The kitchen seemed "unusable," so they ran up more than $ 1,000 in restaurant bills during the first two months, then borrowed $2,000 to build a new kitchen. In the old apartment kitchen, in what Jane remembers as "the golden age," she had always stuck to a budget and kept separate envelopes for different kinds of expenses on a shelf near the sink, but now "there was no budget envelope for a brand-new kitchen."

Or for a lot of other things. Peter had trouble learning to write and was diagnosed as "learning disabled." The private school where the Brinkleys sent him cost $2,000 a year. Steve's aging Ford collapsed, and even though he replaced it with a $5,100 compact, the $200 monthly payments on the new car were not in the budget either. Two winters ago, the price of heating oil increased by more than 25%, and the utility bill jumped to $175. "Every time things seemed under control," says Jane, "some emergency would blow everything sky high."

The Brinkleys had 14 credit cards--American Express, Visa, Master Charge, department store and oil company accounts--and soon they were getting new loans just to meet the minimum monthly payments due on one account or another. And the debt kept growing at interest rates of up to 26%. Collection agencies phoned Steve both at work and at home. He and Jane quarreled bitterly about who was to blame, but as debts pushed them toward separation, debts also held them together. "I didn't even have the freedom to leave," says Jane. "We couldn't afford the one house we had, let alone pay for another apartment. We were isolated, trapped and desperate."

Steve and Jane eventually got counseling, cut their costs, canceled all credit cards and began climbing out of the swamp. Proof of their success is that credit companies keep soliciting them. "Stores where we haven't charged anything for ages send us cute little notes saying things like 'We miss you,' " says Jane. "It's simply immoral." And now they wonder about how the Joneses are keeping up. "We know doctors, lawyers, accountants, FBI agents," says Steve, "and they're all kiting credit--getting $2,000 from American Express to pay off Visa. We used to think that was what all young couples do. They still think that way, and we can't help wondering--aren't some of our friends in the same mess we were in?"

Yes, they are. Nobody advocates a strictly cash economy, of course, but in a country that once admired Ben Franklin's rule that it was better to "go to bed supperless than run in debt for breakfast," the accumulation of personal debt is staggering. Installment credit grew last year by a total of $20 billion, to $333 billion, and the Federal Reserve Board announced on May 10 that it had grown by another $990 million during March, the highest increase since last October. Adding home mortgages, the total is more than $1.5 trillion, nearly half again as much as the Government's much ballyhooed national debt. Personal debt averages out to $6,737 for every American. And more and more often people cannot pay: personal bankruptcies, 179,194 in 1978, reached 456,914 last year.

Consumers in a recession traditionally become worried about the security of their jobs and begin cutting back on the amount of debt they are carrying. The current economic downturn is no exception. As a percentage of disposable income, which keeps increasing, the amount that consumers need to pay their installment debts has actually been shrinking, from more than 18% in early 1979 to less than 15% this year.

The basic fact, though, is that millions of Americans are in trouble. They went into debt because cheap credit made living easy and because inflation seemed to guarantee big annual salary increases and the prospect of repaying debts with cheaper dollars. But now many consumers face very unpleasant consequences. And not just the poor, who have always lived on the brink, but the prospering and hopeful middle class. The recession and high interest rates threaten all its illusions. "When people reach a certain standard of living," says Stan Benson, director of Consumer Credit Counselors in Los Angeles, "they don't want to step down."

Jeanne's problem was that her first husband earned $150,000 a year. When she divorced him five years ago and then married a professor named Jeff, she maintained what she calls "a life-style that my first husband could afford." Clothes, for instance. "It's easy for me to justify spending on clothes," says Jeanne, who is a slim 29 and works as a sales manager near Los Angeles. "To maintain a style appropriate for a woman in business, you can't shop at J.C. Penney."

So Jeanne spent $15,000 on department store clothes last year, she says, "without batting an eye." After all, she earns $38,000; Jeff makes $26,000. That was not enough, though, to buy the $125,000 house they wanted in the pleasant suburb of Agoura, Calif. Jeanne used her $25,000 divorce settlement as the down payment, the bank granted a mortgage for $50,000, the previous owner granted another for $25,000, and Jeanne's parents loaned the final $25,000. The mortgages cost a total of $1,088 a month, and the second and third required "balloon payments"* within five years.

"As soon as we bought the house, credit was easy as pie to get," says Jeanne. By then she and Jeff had more than 25 charge accounts, and they used them all. "I would just walk into a place, and people would bend over backward to give me credit--and they still do," says Jeanne. "I can't remember the last time anyone asked me for identification." When she and Jeff needed more money, they went back to the bank and got a new mortgage for $39,000. "The bank didn't flinch," says Jeanne. That was partly because Jeanne did not report the $25,000 mortgage held by her parents, but she adds her own explanation that "the young man who was the loan officer was getting a commission, so he was happy to make the paperwork look as good as possible."

Once Jeanne had acquired the new $39,000 mortgage, she used a lot of that money as down payments on antiques. When she could not pay the property taxes that were due last year (the credit-card debts by then totaled $22,000), she went to a loan company, Transamerica Financial, and borrowed $2,500 at 20% interest. "I didn't want to tell them I didn't have the money to pay my property taxes," says Jeanne, "so I told them I was building a sauna in my backyard." The real reason that she did not have the tax money was that Jeff had already taken the money allotted for taxes and built that sauna.

"But we never considered bankruptcy," says Jeanne. "We would have sold our home first. We haven't said to anyone, 'We will not pay you.' "

Money is obviously more than just money. It can symbolize work, power, love won or love denied. It can take the form of expensive homes, expensive clothes, expensive presents for the children. What once were luxuries come to be necessities. Going into debt can compensate for all shortcomings. "For people to admit they can't afford the things they want means they are placing themselves in a position of weakness," says Edward J. Khantzian, associate professor of psychiatry at the Harvard Medical School. "They have to say no to themselves, and nobody likes to do that. It all boils down to the inability to accept limits."

That inability leads to "magical thinking," says Daniel J. Levinson, professor of psychology at Yale. "The more anxious we are, the less rational we are, so we don't protect ourselves in realistic ways. We're always thinking, 'Lady Luck will be with me, so I'll get myself out of this.' "

L. Jerome Oziel, an associate clinical professor of psychiatry at the University of Southern California, sees many forms of magical thinking at the psychiatric center that he heads in Beverly Hills. "Nobody feels very secure about money today," says Oziel. "Lots of people in the middle class have given up the idea of budgeting, because it doesn't seem to work. They're earning amounts of money that they thought would give them freedom, but instead of feeling free, they feel trapped. People learn to be angry at the system. They are mad, and they're cheating and trying to manipulate the system."

"It was a reaction to depression," says Rebecca Marsh Lewis of the buying spree that started after her divorce in 1975. "I wasn't dating anybody steady. If a woman wants to go out and doesn't have the opportunity to go on a date, she can always go shopping. That's what I did."

Lewis, who is now 32 and works as an editor and art coordinator at the Vought Corp. near Dallas, moved into a new apartment and filled it with new furniture--bought on credit. "It's really easy for a single woman to get credit now," she says. She sold her old car and bought a new Oldsmobile Cutlass Supreme--on credit. She bought a diamond necklace, new stereo, a new washer and dryer, two fur coats, and a lot of designer clothes--all on credit. She also bought expensive Christmas presents for her family--on credit. The season of cheer ended with January's bills.

"I was making about $1,300 a month, which means that I was bringing home about $900, and the monthly bills came to more than $750.1 had about $5,000 in bills, not including my car payments. And I was raised in a family that even paid cash for cars. I knew I was getting in over my head."

To pay off some debts, Lewis took a second job as a part-time restaurant hostess. She moved into a two-bedroom apartment that cost $125 more a month but was shared with a roommate. She sold her car and some of the furniture. But that was depressing, so she bought a new car, which cost her another $170 a month, and more new clothes. Then her roommate moved out and left her with a higher rent bill to pay. Then she got mononucleosis and lost her second job. Then she began looking in the yellow pages for help. . .

People who could not pay were once sent to debtors' prison, where, since they could not work while locked up, they sometimes spent years. Charles Dickens' father was once in such a place, and the nightmare recurs in the novelist's works. Thomas Jefferson, Ulysses S. Grant and many other leading figures of American history were tormented by ruinous debts. A few debtors' prisons lingered on in the U.S. until the 1870s.

Today, a creditor generally cannot imprison his debtor, nor can he garnishee his salary without a court order. The creditor cannot even pursue and harass him with the traditional rudenesses of the bill collector. According to the Fair Debt Collection Practices Act, which took effect in 1978, a bill collector cannot:

> Tell the debtor's boss, family or neighbors about the debt.

> Telephone the debtor at home between 9 p.m. and 8 a.m.

> Falsely identify himself as a lawyer or any kind of official.

> Use obscene, profane or abusive language.

While creditors can still sue their debtors for nonpayment, the law also permits debtors who feel harassed to file suits and win up to $1,000 in penalties. The statute further empowers the Federal Trade Commission to impose fines of up to $10,000 a day per violation against overly aggressive bill collectors.

That leaves creditors with only the honeyed tongue of someone like Gary Golditch, 31, manager of the Financial Collection Agencies in Maiden, Mass., who calls himself "a diplomat." The key thing, says Golditch, is not to let the debtor hang up. Start by being polite: "I'm sorry to inconvenience you but..." Impress on the debtor his moral responsibility: "You received the merchandise you wanted, but my client has not been paid ..." Golditch calls these opening gambits a means of "captivating" the debtor. "After that, I'm sure you'd talk with me," he says, leaning back in his chair with a satisfied smile. "I can convince anyone I want to help them."

Financial Collection Agencies has 85 branches around the world, and Golditch's Maiden office reaches out over much of New England. It takes on about 45,000 cases a year, involving $20 million, and recovers about 20% to 30%, of which it may keep as much as 50%. Once Golditch has "captivated" his quarry, he proposes various forms of payment to his client--like a new credit-card loan, or a co-signed bank note. "I will never advise anyone to incur debt they can't handle," he says, "but I have a moral commitment to work out an equitable agreement."

"If someone shouts at me, 'You're all bums!' I don't let that bother me," says Golditch. "In this business, you take nothing personally, you know what I mean? I don't know that person and he doesn't know me. I think most people want to pay their debts, really. It's just that most Americans don't know how to budget their money. They just need to be told how to fix the problem, and that's where I come in. I go home rewarded because I'm able to help people."

There are about 5,000 collection agencies in the U.S., all with varying methods and successes. One of the largest law firms in the business is Long Island's Sharinn & Lipshie. At any given moment, it is trying to get about 20,000 debtors to repay about $10 million to such clients as Citibank and General Electric Credit Corp. It starts with a series of three warning letters that cost the creditor $5.50. Eventually, it claims collections of 30% to 50%.

Roxie Betts remembers the bill collectors as "the rudest, most arrogant people." Says she: "For six months, it was a living hell. What got me most was the harassing of the kids."

Roxie, who has flaming red hair, gives her age as "29 and holding." She has been married for 32 years to William Betts, 57. The two of them were earning more than $35,000 at three full-time jobs in Miami. Bill's early retirement forced them to face the $11,925.55 they owed to 22 creditors.

Bill once had hopes of becoming a broadcaster, but he found security as a switchman with Southern Bell. In 1960, when the Bettses moved from their first $5,500 house to a larger $ 19,000 house, Bill got a second job as an auditor for the state racing commission. The Bettses had four daughters, but Roxie worked as a night desk manager at a bowling alley, and credit cards smoothed the financial bumps. Weekend fishing trips to Key West could always be charged, and when the minimum payments got to be a problem, Betts refinanced the house in the mid-1960s with a new $35,000 mortgage.

"We sent Master Charge a check for $948.64, and the guy almost didn't want my check," says Roxie. "He was worried that I was closing the account. We only had one card of everything, and now they threw two cards on us." "We started moving up in cars," adds Bill. From "a junker, tied together with a sheet," they progressed to a newer used car and then their first new Ford Galaxie in 1965. "Of course, all this was on time," says Bill. all this was on time," says Bill.

The Bettses wanted to move out of Miami, and since two of the four daughters had been put through college, Bill decided in 1978 to take early retirement. The Bettses bought a new $39,000 home near Orlando, with no down payment on a Veterans Administration mortgage, and they used their $8,000 net on the Miami house to buy some luxuries. "I guess we could have paid off everybody," says Bill, "but I said, 'Let's get a fireplace. We've never had a fireplace.' " They also ordered more than $1,000 worth of furniture, on easy terms.

Bill thought he could find some kind of work in the Orlando area, but jobs were tight in the tourist belt, and as he soon found, "salaries are stinko in central Florida." When he did get a job as a shop foreman for an engineering firm, he earned only $7,800. Roxie took to selling Tupperware and cut back expenses, but she could send the credit companies only token monthly payments of $ 10 to $30.

"When you get a month or two behind," Bill recalls with a grimace, "some of the charge people begin to say, 'We don't want any partial payments. We want the whole thing--now!' Naturally, I could never meet that commitment."

It was one of the bill collectors who told the Bettses to go to the Consumer Credit Counseling Service, which put them on the road to recovery. The C.C.C.S. was also what Rebecca Marsh Lewis found in the Dallas yellow pages and what has rescued many others like her.

C.C.C.S. is a nonprofit organization sponsored by banks, loan companies, retailers and other businesses that grant credit. It has some 200 offices a11 over the U.S. and deals with about 110,000 cases a year. Its method is very simple: it makes the insolvent debtor give up all his credit cards and promise not to do any more borrowing without permission. Then it works out a survival budget that will enable the client to pay back part of his debt every month. It persuades the creditors to wait for their money and then assumes responsibility for dividing and distributing the repayment it gets from the debtor.

Perhaps the most striking fact about almost every debtor in real trouble is that he has no idea how much he owes--much less what exorbitant interest he is usually paying. "The first thing we have to do is sit down and figure out what actually gets spent in the home," says Mel Stiller, head of the four advisers who process 1,700 cases a year at the C.C.C.S. in Boston. "People will figure the major items like rent and food, but they don't stop to consider the dinners out or the haircuts or the newspapers. Those add up. It's not unusual, even with people you think would know better, to find $1,000 coming in every month and $ 1,300 going out. They all want the American dream, but you know--that's just what it has turned out to be, a dream."

Linda Patscot, 27, a director of Callahan Research Associates in Manhattan, who earns about $30,000 and owes $ 10,000, argues that younger people do not share their parents' belief in delayed gratification. Says she: "The 'me' generation doesn't save for the future; it borrows to spend today. People are more hedonistic, and hedonism and debt are like brother and sister.

"At the same time, some basic expectations are declining from one generation to the next. Children expect to have less than their parents, but they have different priorities: a foreign car rather than a Chevrolet. People spend more on trendy items but delay in buying a home.

"My parents had more stability in their lifestyle, more independence. By the time they were 40, they had children, a home, a bank account, and were beginning to plan for retirement. At that age, I will have five times their nominal income, but I will be able to afford less for it. Perhaps I will own a Manhattan coop, but I will be tremendously in debt. But the things that satiated them will not satiate me.

For those who have truly gone bankrupt--roughly 10% of those with serious debt problems--about the only solution is to go to court and file a bankruptcy petition. This was once considered scandalous--like, say, getting a divorce--but now it is almost respectable, even a shrewd move. Moreover, the Bankruptcy Reform Act of 1978 makes it easy: the standard filing fee is $60, and creditors must hold their fire while the details are worked out. The ease of filing personal bankruptcies is considered a key factor behind the great increase of them since 1979. hind the great increase of them since 1979.

There are two kinds of personal bankruptcy. Under chapter seven of the bankruptcy law, the court sells the debtor's assets, pays creditors as much as possible from the proceeds and cancels most remaining debts. However, federal law permits the debtor to keep certain assets for his own survival: up to a $7,500 equity in his house, for example, and up to a $1,200 interest in a car. The list of exemptions even includes up to $500 worth of jewelry. Some states are still more lenient; California allows the head of a household to keep up to $45,000 in his home. On the other hand, the debtor cannot again declare insolvency for six years.

The other form of bankruptcy under the law, chapter thirteen, is even easier. It resembles the C.C.C.S. method and provides for the debtor to pay all or part of his debts over a period of three years under a plan approved by the court.

Banks and other creditors claim they could recover at least one-quarter of their $6 billion annual losses to bankrupt debtors if the rules were tightened up again, and they have been lobbying hard for just that. They ask, among other things, that chapter seven bankruptcies be restricted to those who can prove their inability to make future repayments, and that the exemption of assets be reduced. The Senate is expected to pass such a bill this summer, though the House may well delay action.

The vast majority of America's debtors never declare bankruptcy, however. They just go on borrowing, scrimping, stalling off payments and trying to survive until, somehow or other, their prospects improve. Sometimes, of course, the prospects do improve. Sometimes, on the other hand, something cracks--health, sanity, marriage. For those who struggle along somewhere in between, the seeming necessities of the good life can prove not to be necessities, and the limitations that once seemed impossible come to seem bearable after all.

Steve and Jane Brinkley, with whom this report began, started reorganizing their lives in their Chicago suburb and have survived. They even found that their son preferred public school to the private institution that had cost them $2,000 a year. Rebecca Marsh Lewis, near Dallas, finally paid off her last bills in March. She and her new husband make "limited use" of their credit cards. Jeanne, the California businesswoman, is still paying but looks on her situation as "one of those life crises we will have to overcome together." One of the hardest parts, she says, was "the attitude that, gee, if I'm working, I deserve $400 suits and expensive dinners. No more. Now we plan a night together watching television. Or we go jogging."

--By Otto Friedrich.

Reported by Ken Banta/Chicago and Frederick Ungeheuer/ New York

* For those who have not been involved in "creative home financing" lately, a balloon mortgage includes a relatively low schedule of monthly payments, but then requires a large lump sum after a few years.

With reporting by Ken Banta, Frederick Ungeheuer

This file is automatically generated by a robot program, so viewer discretion is required.