Blog sponsored by Bankrupt-Law.com


More Southland residents owe more than they can afford
BARBARA CORREA, Staff writer


Wondering whether those weekend shopping sprees, the Tahoe ski trip and all
the extras on that "economy car" are making your debt load too heavy?
Here's a simple test: If you earn the median income for Southern California
and have a car loan, chances are pretty good that you are in or are near the
consumer debt danger zone.
"Normally, someone should not have more than 40 percent of their income as
debt," said Richard Pittman, housing services coordinator at ByDesign
Financial Solutions, also known as Consumer Credit Counselors of Los
Angeles.
Forty percent sounds like a lot, until you think about it.
"In California, where average annual income is $50,000, you should not have
more than $20,000 of debt. Unfortunately, that includes the car,'' said
Pittman.
Put another way, it's time to raise the red flag when monthly debt payments
climb above 20 percent of net income, excluding rent or mortgage. "We have
people committing 40-45 percent of their income to a home, so they are well
outside acceptable levels" when taking into account all the other debts they
are paying on, he said. Indeed, many, if not most, people in Southern
California reside within the debt danger zone.
And Southlanders are not alone. American consumer debt excluding mortgages
surged to $2.2 trillion in April, about twice as much as a decade ago,
according to the Federal Reserve.
Heather Thompson started to suspect that her debt level was too high about a
year ago, after she incurred thousands of dollars in medical expenses. But,
thinking her tax refund would take care of a lot of the balance, she didn't
put a tight rein on spending right away.
"I took my daughter to Chuck E. Cheese's," said Thompson, an engineer at
Northrop Grumman in El Segundo. "I bought a laptop. I take a lot of
vacations; they are hugely expensive. I had a party and bought platters at
Costco. It's not that much, but when you start spending $30 here and $30
there, it adds up really quickly."
At one point, Thompson had seven credit cards and about $40,000 in debt.
That's down to about $25,000 now. With her income after taxes and deductions
coming in at a little over $3,000 a month, she's spending about one-third of
that on payments, which puts her on the verge of the danger zone.
Recently, though, she worked out a plan to put herself back on track. She
stopped the $130-a-week contributions to a 401(k) plan. She increased her
W-2 claims to 5. And then, last week, she cashed $3,000 out of her
retirement savings to use toward debt payments.
Many families set off on a borrowing binge in recent years as low interest
rates allowed lenders to loosen standards.
Mortgage payments as a percentage of disposable income topped 11 percent at
the end of last year, a historic high.
Despite new bankruptcy laws enacted last fall to make it harder to declare
personal bankruptcy, filings in California jumped more than 30 percent from
2004 to 2005, the American Bankruptcy Institute reports.
The debt buildup can be blamed largely on the availability of home loans,
and on homeowners spending in many cases under the assumption that rates
would stay low until they could pay them off. Now that they are rising
again, consumers who took out variable-rate loans are getting hit.
"I think they're going to be shocked, particularly in the the area of
mortgages," said Phillip Q. Shrotman, a financial planner in Long Beach. "If
they bought on an adjustable-rate mortgage, they've already seen at least a
100 percent increase.''
Philip Board, a financial adviser at 1 On 1 Financial in Upland, said he's
hearing the same concerns. "I had a gentleman call me yesterday to ask if he
should cash out his retirement to pay off his home equity line," he said.
"He's been going through the refinancing game and he's been having fun and
now he can't sell his house for what he wants. He makes a fair amount of
money but he spends, too, and now he's living paycheck to paycheck."
Advisers urge clients to convert variable home loans to fixed, if at all
possible. Aside from that, professionals say the first thing to do when
there's too much owed after the money has come in is to contact the lender,
and then begin keeping tabs on every expense, no matter how tiny it seems.
"I have them track expenses for a month, including Starbucks, vending
machines, everything that leaves their hand," said Ann Lander, a certified
financial planner in Signal Hill who also teaches a financial strategies
course for women for the Long Beach Parks & Recreation Department.
"Spending patterns come out that they weren't even aware of and sometimes
that's enough."
It's not just frivolous spending that has put a lot of consumers into the
debt danger zone. Less medical insurance coverage is forcing more people to
pay for doctor visits with plastic.
"We're seeing more people with no health insurance putting medical expenses
on credit cards,'' said Percy Bolton, a financial planner in Pasadena. "I'm
getting calls about companies that have eliminated their medical care or
they have higher deductibles.
"With the price of gas as well, we see more of a tightening. I have clients
thinking about leaving L.A.''
Indeed, getting into debt is the easy part, especially when credit is as
easy to get as it has been. Getting out is the hard part, and there isn't
much optimism about how consumers are going to do that.
"I think you're going to see more people in debt,'' said Lander.
barbara.correa@dailynews.com
(818) 713-3662