Saturday, February 28, 2009

Personal Economic Bailouts

I've had several interesting discussions lately with acquaintances who lost their jobs in the last few months. Let me preface by saying all of them had good jobs, excellent credit ratings, and worked mostly for their homes. As more than one of them said to me, having their own home was all that mattered and they expected to work and spend most of their income for one.

As do most Americans, they also had several credit cards because without one they couldn't buy an airline ticket without triggering a terrorist alert, couldn't rent a car, and couldn't afford to take a vacation once a year. They also had gas cards, department store charge cards, and various other pieces of plastic that allowed them to buy now and make payments.

Again, I feel it's necessary to say these were not irresponsible people. They paid their bills on time. They didn't overspend. They used credit to buy things just a bit beyond their ability to pay, such as cars, furniture, electronics, and they always paid them off. Many of them paid off their balances each month. And because they were responsible, the mail bought new offers every day, offers they turned down because they already had most of what they needed.

It was a nice, calm, and predictable life. Then the first one lost their job when the company went bankrupt. Then another. And finally, most of this group of people who all knew each other either from working in the same field of through online communities, found that more of them were unemployed than employed. It happened quickly, in a matter of weeks. But they thought it was temporary and the unemployment benefits would carry them through for a few weeks until they found another job.

But another job didn't come along. Then the unemployment benefits ran out. Many of them cashed in retirement accounts to survive and took heavy penalties in taxes and other deductions. And then the retirement accounts, which were often only enough to live on for six months, also ran out.

That left the credit cards. They began to use them to buy groceries, to pay utilities, to pay for doctor and dentist emergency visits. They began to use their gas cards for minor repairs, for cartons of milk for the kids from the gas station mini-grocery. And unlike in the past, they no longer could afford to pay off the balance every month. For several of them, it was the first time in their credit lives that they had to run an unpaid balance. They began to lose sleep worrying about their debts.

But they were still getting by, they were still surviving, but the mortgage was not getting paid. The first missed payment was easy to rationalize, to say they would catch up next month when they got a new job, they would make it up and it would all be a bad dream. But they didn't and soon they were two and then three months behind. The threat of foreclosure became real. Suddenly they stood to lose everything they worked so hard for, everything that meant they were responsible adults.

These were people, as many of us are, who understand that a decent credit rating means a decent way of life. At least a few of them sacrificed buying more than minimal groceries so they would be able to make that credit card payment, even as their homes were going into foreclosure, even as their credit limits were being reached, even as the job prospects grew dimmer and dimmer.

And then one day they found themselves either in a house they no longer owned, or living in an apartment they couldn't afford anymore either. Their cards were maxed out. They missed a payment and the rates skyrocketed, the late charges grew larger, and soon even the possibility of making a payment was beyond their ability to do so. Their stomachs churned, their lives suffered, their relationships began to develop stress cracks, their children stopped applying to colleges and tried to get jobs instead.

I don't know at one point the change happened, the change that took everything they believed and turned it upside down. As one of them said to me: I worked all my life to maintain my credit rating. I worked my ass off for my house. I paid my bills every month. And in a matter of months it was all gone. But, as he said with a laugh, he no longer worried about his credit rating because he no longer had one.

This is something that happened to the rest of them too, and I'm guessing a whole lot of people in this country right now. The holy god of credit suddenly became meaningless. At that point, the realization dawned on them that what little money they could scrape together was going to go to feed their families and not the credit card companies.

Many of them saw the banks and mortgage companies, the auto makers, the big corporate entities who were squeezing them for money suddenly get handouts for their business failures. But no one cared about them, no one was offering them any kind of help.

What I saw happen next may very well be a tidal wave that will sweep the country and which probably drives fear into the heart of credit card companies, banks, oil companies, and any corporation that extended credit for the purchase of their products. These people simply quit paying anything. They gave up. They walked away from their debts.

Many had no choice as I know of three people personally who tried to work out something with their creditors. One wrote several letters to her credit card companies asking them to please work with her, to let her make smaller payments for a few months without huge late fees tacked on or crazy increases in her rates. Their response was to turn her over to collection agencies. She said the most peaceful day of her life was the one when her phone was shut off for non-payment.

Another thing that bears mentioning because it's an important consideration. I'm not talking about young people here. I'm talking about people in their 50's and 60's, people who will draw small social security checks or have taken early retirement at 62 and a cut in benefits, just to survive. These are people who will not buy another home, another new car, or anything more lavish than what they need to survive.  And it won't matter to them if they get another job. As one couple said to me: we're done owning anything. We don't ever want to go through this again.

What this small group of people I've written about mean for this country is that  they may very well be representative of  aging boomers who are simply walking away from their debts because credit no longer matters to them. They have nothing. They will own nothing. The future holds a small social security check, health care provided by emergency rooms or medicare. As the old song goes "Freedom means you have nothing left to lose."

If this becomes an ever widening trend, then the credit card companies are doomed, the housing market won't recover for years, and the consumer-driven society of pretty things and fancy toys is over. It will be interesting to see what happens because I suspect this is the just the tip of a very large ice berg.

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1 comment:

Windyridge said...

It's a crime that this is happening to good and honest folks while the cheaters and liars are being helped. And the credit card companies especially are terrible thieves.