People Falling Deeply into Debt

I recently had the opportunity to view “Maxed Out,” a feature-length documentary directed by James Scurlock.


There are many debtors who are generally innocent, who got tripped into debt by sophisticated and despicable measures used by disreputable creditors, with Congress turning the blind eye.
On the issue of irresponsible creditors, Exhibit A, featured in the movie, was a severely disabled woman who lived in a nursing home. She had no income, but was offered $30,000 in credit through the mail.

Here’s what else I learned from Scurlock’s movie:
1. Credit card companies make 4 billion offers of credit cards every year. Fees for these cards have risen 160% over the past five years. The average household now bears over $9,000 in credit card debt, costing the average household $1300 in interest every year. One analysis of people going through bankruptcy showed that for each dollar in principle borrowed, the average person going through bankruptcy owed two dollars in interest and fees.

2. What is overall problem? According to Elizabeth Warren (a professor at Harvard Law School and a recognized expert on the issue of consumer debt) we are in great danger of turning our nation into a two-tiered society, and none of us is completely safe. A single tragedy can turn any middle-class person into a poor person. Warren cautioned that there is a new type of credit card coming out that is linked to the debtor’s pension fund. If one falls behind on the credit card, the company has access to one’s retirement funds.

3. Many people are driven into debt for honorable reasons. A pawn shop owner featured in “Maxed Out” mentioned that 15 different families came into his store to hock their personal belongings so that they could afford to send body armor to relatives serving in Iraq. In other words, not all debtors are irresponsible. Many of them were thrown into debt because of an illness or the sudden loss of a job. Nonetheless, many people take the view that all debtors are irresponsible. “Maxed Out” showed that the people filing for bankruptcy were tarnished as undeserving of help by President Bush and members of Congress who voted for the Bankruptcy “reform” bill. The bottom line regarding blameworthiness? The truth is that there are debtors who are blameworthy and others who aren’t. As I’ve written before, the willingness to group all desperate debtors together is a sign of a feebleminded intellect.

4. According to Elizabeth Warren, the big banks admitted to her that they don’t want to cut out their most marginal borrowers (those who struggle the most to make the payments). They want to continue handing credit to them. Why? These desperate people are the banks’ most profitable customers. These are the people who end up paying enormous amounts to the banks in fees and penalties, as well as interest payments.

5. Credit card companies can’t wait to offer credit cards to college students who are living away from home for the first time. No job? No problem. Many of these kids run up thousands of dollars of debt quickly, paying off the debt by taking out many new credit cards or by getting help from their families. The film features interviews with the sad mothers of two separate students who had become so desperate at the credit card debt they were amassing at college that both of the students hanged themselves.

6. Our national financial health resembles the financial health of our families. Each American families share of our national debt is now $90,000. By 2005, the United States government had spent every cent of the Social Security trust fund.

7. Once you’re in debt, beware that credit reporting companies are not well motivated to fix inaccuracies in your credit report. Credit reports are rife with errors. Many an innocent person has had his or her credit tarnished by errors that credit reporting companies are ill-motivated to correct.

After the screening of the movie, several consumer attorneys spoke to the audience at the theater (I viewed “Maxed Out” in St. Louis).

One of the speakers, Professor Mike Greenfield, raised the issue mentioned at the top of this post: “Shouldn’t consumers be paying their debt?” The general answer, in his opinion, is “yes,” but the easy availability of credit makes the issue more complex.

For attorneys representing debtors, there is no legal basis for arguing that aggressive marketing by creditors can serve as a defense to the debt. On the other hand, our lawmakers formerly believed in interest rates caps, but no longer. There are now “no limits on what a credit card company can charge, according to Congress.” We need to start having that conversation again, according to Professor Greenfield, and to start re-considering limits on interest rates and fees, as well as techniques that we should allow for hooking potential debtors. We need to consider, on a national level: “What is a fair and reasonable fee?” Greenfield reminded the audience that, for payday loans, consumers can be charged 500% annual interest or more.

Another attorney on the panel, Diane Thompson pointed out that there is a scientific basis for a cognitive obstacle experienced by many people who simply don’t understand the meaning and consequences of borrowing money over time. It is this cognitive inability to understand that allows people to refinance into new subprime adjustable rate mortgages (ARM’s) that are much more dangerous than the ARM’s of previous years. In the new explosive versions of ARM’s, the interest people pay on their home loan does not potentially rise or fall depending upon the cost of credit. In these new explosive ARM’s, the interest rate can only go up, and it can do so dramatically in a short period.

What is that cognitive limitation? It was discussed in detail in the bestseller written by John Paulos, Innumeracy: Mathematical Illiteracy and Its Consequences (1988). Paulos introduced the term “innumeracy” to refer to “an inability to deal comfortably with the fundamental notions of number and chance.” Paulos bemoaned that innumeracy “plagues far too many otherwise knowledgeable citizens.”

On the issue of consumer debt, also note that Danny Schechter has also produced movie “In Debt We Trust.” The following excerpts are from a review of Schechter’s movie:
massive market meltdown, a collapse of the sub-prime mortgage market, bankruptcies by leading financial lenders, billions of dollars in losses by top banks and financial lenders, and predictions of more pain to come for nearly two million Americas facing foreclosures.
Centuries ago, we had debtors prisons. Today, many of our homes are similar kinds of prisons, where debtors struggle for survival with personal finance pressures.

It is urgent that our media push these issues from the business pages to the front pages and humanize them so we can try to wrestle our lives back from the ravages of a relentless debt machine.

Here’s another predatory lending issue: Payday lending. See if you can pick the bad guy in this revealing debate, Mike Calhoun, Center for Responsible Lending or Lyndsey Medsker, Community Financial Services Assn.. Go to C-Span, then put the word “Medsker” into the “video search” box. Look for the show dated, 3/24/2007, Then click on this 31 minute video For more on payday lending, see the Center for Responsible Lending. The CRL focuses on many other debt issues too. Here is what CRL predicts as the result of the onslaught of subprime lending over the past few years:
finds that despite low interest rates and a favorable economic environment during the past several years, the subprime market has experienced high foreclosure rates, and we project that one out of five (19.4%) subprime loans issued during 2005-2006 will fail.

The reason for this net loss? From 1998-2006, only 9% of subprime loans went to first-time homebuyers, but over 15% of subprime loans ended (or will end) with borrowers losing their homes through foreclosure. Why should we care about foreclosures? First of all, many of the people losing their houses have been the victims of predatory lenders “flipping” real estate loans. Second, Here’s what happens to neighborhoods where foreclosures are common:
People living near to these homes in and must suffer from the conditions. Foreclosed homes fall into disrepair and are abandoned. They become magnets for a host of problems and dangerous conditions. According to the this website from the City of Buffalo, such neighborhoods
become locations for people to hang out free of charge, such as gangs, prostitutes and squatters. As such there is likely to be drug activity, violence, unsafe conditions, unsanitary conditions such as rodents, and arson.

Flipping scams lead to high foreclosure rates and abandoned homes and thereby destroy neighborhoods. Abandoned homes are at a greater risk of a variety of dangerous conditions. Arson, vandalism, illegal activity, unsanitary conditions such as rodents, stripping and selling of housing materials and demolition cost the City, and ultimately taxpayers of Buffalo, a high cost in providing these services.

What is true in Buffalo is true everywhere. Irresponsible lenders (and those debtors who are irresponsible) are throwing entire neighborhoods into blight. They are exploding the dreams of many people who would like to own their own homes. The irresponsible lenders have been getting away with what they are doing thanks to winks and nods from Congress and payola to Congress.

All of this is so very depressing.

But back to the screening of Maxed Out in St. Louis. According to the panel that spoke after the movie, the many horrible examples of predatory lending leading to millions of people drowning in debt offers a thin silver lining. That silver lining is the new attention that is now being paid to these predatory lending issues by some media sources.