Christine
Nov. 29, 2003, 5:01PM
More seniors facing high debt, bankruptcy
http://www.chron.com/cs/CDA/ssistory.mpl/business/2252581
By SCOTT BURNS
Universal Press Syndicate
CAMBRIDGE, Mass. -- It's a long drive from the South Boston docks to Harvard Law School. One of my brothers, a tugboat captain, is offloading 4,000 tons of cement to feed the seemingly limitless Boston building boom. Only Harvard Law School seems unchanged. Everything else is under construction, new or renovated.
I've come to visit professor Elizabeth Warren because her book, The Two Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, won't politely disappear.
"Americans 50 and older are in much more trouble than anyone is willing to admit," she says.
"The people 50 and older going bankrupt are us -- they're college-educated, had good jobs and owned homes," she explains. She makes it clear that bankruptcy is a bad thing that happens when good people get sick, lose their jobs or get divorced.
"When older Americans go bankrupt at 54, there won't be 50 years to recover. Their bankruptcy is their exit from the middle class. They'll have no way to save themselves because those who can't get bankruptcy protection are left to the mercy of their creditors."
For several years, harsh new bankruptcy legislation has come close to passing. Fortunately, in her view, it has failed. If it passes, people will face draconian debt recovery.
"Do you know who the fastest-growing group in bankruptcy is?" she asks. "It's people who are 65 and older."
"Do you know who the second-fastest-growing group is?"
"It's people 55 to 65."
So much for the idea that personal bankruptcy is for 20-somethings brain damaged by credit cards falling from the sky. Warren knows it is an equal-opportunity event.
"As baby boomers age, a growing number are less prepared for retirement. They are loaded down with loans. And their job prospects are fading. All the data points toward a bad problem that will get worse," she said.
I asked why this is happening.
"In the 1980s, we deregulated consumer lending and created a monster. Now we have a two-tier lending system. For some, borrowing is cheap. But for others, the credit agreements are loaded with tripwires that trap people in debt.
"There is a whole subprime industry that has grown up to take people who are in a little trouble and leave them dead by the wayside," she said.
I asked how that could happen.
"One route is the subprime mortgage. They're sold very aggressively. What you have to remember is that the bad money drives out the good. Banks could make a profit lending at 9 percent, but they can't pay fees to bird dogs and other (loan) hunters unless the rates are 13 percent or 14 percent. So the market splits. Some get low-cost mortgages. Others pay three times as much. It's a bipolar market.
"More important, it's not pricing at the margin for risk," she added.
I asked if she had any advice to help people avoid problems.
"The number one thing is never take out a home equity loan or refinance a mortgage to pay other debts. People are told it will lower their interest expense, but there is a reason: Your house is at stake. It's like putting your house on a roulette wheel and hoping you can take it off."
Is this a bit extreme? Perhaps, but there is a reason.
"Every bit of research shows that families continue to have debt. They get the new mortgage or home equity line and they still have other debt.
"The other thing is risk. Families do their best to make it from week to week or month to month. But most fail to acknowledge how much risk they face. Until someone dies with a terrible disease, until a family breaks apart, most people believe that income will always be there. They say, `Next year I'll get the car paid off.' Or `Next year I'll be making more money.' Well, God bless their optimism! But plan for the worst and hope for the best."
Is Warren a worrywart?
I don't think so. Without wiggle room, without reserves, any one of us is the proverbial accident waiting to happen.
Questions about personal finance and investments may be sent to Scott Burns, P.O. Box 655237, Dallas 75265; e-mail can be sent to scott@scottburns.com. Burns' Web page is www.scottburns.com.
Universal Press Syndicate
More seniors facing high debt, bankruptcy
http://www.chron.com/cs/CDA/ssistory.mpl/business/2252581
By SCOTT BURNS
Universal Press Syndicate
CAMBRIDGE, Mass. -- It's a long drive from the South Boston docks to Harvard Law School. One of my brothers, a tugboat captain, is offloading 4,000 tons of cement to feed the seemingly limitless Boston building boom. Only Harvard Law School seems unchanged. Everything else is under construction, new or renovated.
I've come to visit professor Elizabeth Warren because her book, The Two Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, won't politely disappear.
"Americans 50 and older are in much more trouble than anyone is willing to admit," she says.
"The people 50 and older going bankrupt are us -- they're college-educated, had good jobs and owned homes," she explains. She makes it clear that bankruptcy is a bad thing that happens when good people get sick, lose their jobs or get divorced.
"When older Americans go bankrupt at 54, there won't be 50 years to recover. Their bankruptcy is their exit from the middle class. They'll have no way to save themselves because those who can't get bankruptcy protection are left to the mercy of their creditors."
For several years, harsh new bankruptcy legislation has come close to passing. Fortunately, in her view, it has failed. If it passes, people will face draconian debt recovery.
"Do you know who the fastest-growing group in bankruptcy is?" she asks. "It's people who are 65 and older."
"Do you know who the second-fastest-growing group is?"
"It's people 55 to 65."
So much for the idea that personal bankruptcy is for 20-somethings brain damaged by credit cards falling from the sky. Warren knows it is an equal-opportunity event.
"As baby boomers age, a growing number are less prepared for retirement. They are loaded down with loans. And their job prospects are fading. All the data points toward a bad problem that will get worse," she said.
I asked why this is happening.
"In the 1980s, we deregulated consumer lending and created a monster. Now we have a two-tier lending system. For some, borrowing is cheap. But for others, the credit agreements are loaded with tripwires that trap people in debt.
"There is a whole subprime industry that has grown up to take people who are in a little trouble and leave them dead by the wayside," she said.
I asked how that could happen.
"One route is the subprime mortgage. They're sold very aggressively. What you have to remember is that the bad money drives out the good. Banks could make a profit lending at 9 percent, but they can't pay fees to bird dogs and other (loan) hunters unless the rates are 13 percent or 14 percent. So the market splits. Some get low-cost mortgages. Others pay three times as much. It's a bipolar market.
"More important, it's not pricing at the margin for risk," she added.
I asked if she had any advice to help people avoid problems.
"The number one thing is never take out a home equity loan or refinance a mortgage to pay other debts. People are told it will lower their interest expense, but there is a reason: Your house is at stake. It's like putting your house on a roulette wheel and hoping you can take it off."
Is this a bit extreme? Perhaps, but there is a reason.
"Every bit of research shows that families continue to have debt. They get the new mortgage or home equity line and they still have other debt.
"The other thing is risk. Families do their best to make it from week to week or month to month. But most fail to acknowledge how much risk they face. Until someone dies with a terrible disease, until a family breaks apart, most people believe that income will always be there. They say, `Next year I'll get the car paid off.' Or `Next year I'll be making more money.' Well, God bless their optimism! But plan for the worst and hope for the best."
Is Warren a worrywart?
I don't think so. Without wiggle room, without reserves, any one of us is the proverbial accident waiting to happen.
Questions about personal finance and investments may be sent to Scott Burns, P.O. Box 655237, Dallas 75265; e-mail can be sent to scott@scottburns.com. Burns' Web page is www.scottburns.com.
Universal Press Syndicate