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Tackling Debt

Monday, February 26, 2007 at 11:17 AM

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At a time when Cleveland has the highest number of foreclosures in Cuyahoga County, the region tops the nation in bankruptcy cases. The economic and financial crisis seems to have already hit us. But, on a recent visit to Cleveland, consumer finance critic Robert Manning has a prediction for a nation consumed by credit: by the year 2020, America will see a sharp decline in our way of living and face a serious financial crisis. ideastream's Tasha Flournoy explores the underpinnings of Manning's doom-and-gloom predictions and looks at how some locals tackle the issue of rising debt and financial uncertainty.

Clevelander Janet Runyon started working for a bankruptcy attorney at 19. By 30, she was bankrupt herself. Three years ago, she had nearly a dozen credit cards and couldn’t make her mortgage payments. Soon she found her bills spiraling out of control.

Janet Runyon: I already, at that point, had credit card debt. And then my one dog got sick. I was racking up vet bills. I was living on credit cards. Until you file, you don’t realize how much you’re not even using cash.

Runyon says aggressive marketing to younger Americans makes it easier to get sucked into debt.

Janet Runyon: They’d come every week. Transfer this balance. Transfer that balance. And it makes it easy. Oh, I’ll get this one at 0% for six months. Then you know you’re pre-approved for a gold card. Yeah, I mean they give credit to everybody.

By the time Runyon filed bankruptcy, she owed $17,000 on her credit cards. Runyon isn’t alone. In 2006, the average U.S. household carried about $7,000 in revolving debt, mainly in credit cards, and $21,000 in total debt. That drives many people into bankruptcy.

The U.S. Bankruptcy Court in Cleveland is one of five courts in Region 9, which includes all of Ohio and Michigan. On this recent weekday, the court hears nearly 50 cases - that’s a quarter of the week’s caseload. Trustee Saul Eisen has an office on the 4th floor. He points to three key reasons why the region leads the nation in bankruptcy filings.

Saul Eisen: It’s usually unemployment, health care and credit cards. Those three or a combination of them. The circumstances may be a little different in each one, but for the most part those are the things that cause most of the bankruptcies.

Court records show a spike in Chapter 7 filings in October 2005, when the laws changed to give creditors more protection against bankruptcies. The new law mandated financial education before and after filing, and lawmakers promoted a repayment plan in place of the traditional Chapter 7. A record 66,000 cases were filed that month. Filings dropped dramatically after that, with only 40,000 the following year. Eisen says it’s too early to see if the drop will continue into 2007.

Robert Manning is a professor of Consumer Finance at the Rochester Institute of Technology and a critic of the finance industry. He says our credit card woes are rooted in the deregulation of the banking industry. Credit card companies to hiked up penalty and user fees, he says, forcing consumers to play on creditors terms.

Robert Manning: Today the best client in the financial services industry is the person who can not pay off their loan. And the reward is if you can’t pay off your loan, let’s dig deeper in terms of your debt capacity and offer you another loan.

Manning says deregulation also spurred new products like payday loans and rent-to-own companies. The products claimed to help low-income and minority families. Instead, Manning says, they’ve put families at a disadvantage, fueling an ever-increasing consumer debt.

Robert Manning: So the promise of deregulation was widespread products that were being offered. The ease of one-stop shopping. Unfortunately the outcome of deregulation has been it’s reinforced the overall trend of rising inequality in America.

Manning says the inequities will continue until people first educate themselves. He’s also calling for reforming the banking industry and the courts. He proposes a national debt relief plan that includes more transparent lending practices and lawyer-monitored repayment plans for bankruptcy filers.

Jay Seaton, who heads Northern Ohio’s Consumer Credit Counseling Services, downplays the industry’s role in producing high consumer debt, and even the notion of a crisis. He says most people pay their bills on time. And less than half of all consumers have ever been over 30 days late on a bill. A longtime credit counselor, Seaton says it boils down to self-control and education.

Jay Seaton: I understand the pitfalls to their use. I understand their marketing can be intense sometimes, but I still think the individual consumer with information and education can control what they decide to do with credit cards.

Today, Janet Runyon, the bankruptcy attorney’s secretary, is again creditworthy. But she says staying within her means is tough. She closely monitors her spending, and make sure pays it off every month. Tasha Flournoy, 90.3.

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