In debt? You're not alone

Value Judgments

Your Money

March 28, 2004|By JANET KIDD STEWART

THE 45-year-old Illinois woman told a frank story about how she squandered a significant inheritance with addictions to alcohol and uncontrolled spending.

She ran up credit card bills entertaining friends at restaurants, drinking and compulsively buying books.

After various 12-step programs, the loss of a lover because of the spending and a personal bankruptcy filing, she is applying for jobs and getting back on track.

But days after we spoke, she called back to ask that I not print her name. If you're wondering whether the stigma of bankruptcy has indeed been lifted, this woman is living proof it has not. Though obviously proud of her comeback, she couldn't risk losing out on a future job if she were identified publicly as bankrupt.

Curiously, though, debt's dark closet is more crowded than ever.

The Federal Reserve reports consumers held a record $1.9 trillion in debt, not including home mortgages, in October 2003. That's $18,700 per U.S. household.

"I think a lot of people live with cognitive dissonance. They believe debt is dangerous and yet they have lots of debt. Among families in bankruptcy, more than 80 percent said they were too embarrassed to tell their families they had filed," said Amelia Warren Tyagi, co-author of The Two-Income Trap: Why Middle Class Mothers and Fathers Are Going Broke.

Tyagi and her mother, Harvard law professor and national bankruptcy expert Elizabeth Warren, wrote the book based on results of their research going back to the mid-1980s. The pair focused on the stunning increase in the numbers of women who file for bankruptcy protection, and learned that most often it is dual-income parents of young children who stumble because of a catastrophic event such as illness or job loss.

The woman I spoke with didn't have children. Her fall into debt had to do with addiction.

Whatever the reason, though, there is clearly something dark and obtuse about our relationship with debt. Biblical and philosophical texts almost uniformly talk about debt as enslavement - or worse. Which begs the question: Is there a healthier way to reconcile our thoughts about the mountain of bills piling up on our shoulders?

For starters, not all debt is inherently bad.

Americans' debt-to-income ratio is about the same as that in the United Kingdom and Germany and is well below the Japanese, according to David Wyss, economist for Standard & Poor's.

And borrowing to acquire an asset with a long shelf life - say a car or a house - is far easier to justify than high-interest credit card debt used for food or clothing that won't last as long as the payments, Wyss said.

Good debt, financial planners say, can allow your assets to grow at a much faster rate and pay dividends later in life.

Where to set the boundaries?

Howard Dvorkin, president of Consolidated Credit Counseling Services in Fort Lauderdale, Fla., recommends keeping unsecured credit card debt to no more than 10 percent of your take-home pay. Mortgage payments shouldn't exceed 25 percent to 30 percent of monthly take-home pay, he said.

(A free Internet calculator at www.moneytoys.com lets you evaluate the relative costs and merits of putting extra money into your home mortgage debt payoff or into more liquid investments.)

Dvorkin does believe modern marketing and easier access to credit have made excessive debt loads and bankruptcy more acceptable.

"When I was growing up, [filing bankruptcy] was the worst thing you could possibly do," he said.

For all the hand wringing, some economists believe, like Wyss, that there are smarter ways of thinking about debt.

One example: In a September 2002 paper, Fed senior economist Francois Velde argued that rising personal debt levels aren't worrisome when considered against total household net worth. In other words, total assets have grown even while debt-to-income ratios have worsened.

Maybe there's even a new book in there somewhere: How I Learned to Quit Worrying and Love Debt.

E-mail Janet Kidd Stewart at yourmoney@tribune.com.

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