Climbing Out of Debt
Recovery Can Be as Tough As Breaking an Addiction

By Michael S. Rosenwald
Washington Post Staff Writer
Sunday, October 15, 2006

Our mistakes take many forms. Relationships. The dreaded foot in the mouth. Oh, and money. Like the time I found myself in line at my college's student union, waiting for a Western Union money transfer from my father.

A few hours before, the lights in my apartment had gone out. A few days before that, I got a certified letter from my landlord, who was not just saying hello. The problem: I had spent too much of my paycheck on beer and sandwiches at Jimmy John's and failed to account for essentials, such as the electric bill and the rent. I was flat broke.

I called my father and begged for help, telling him I needed lights to study, not to mention a place to study. After some grumbling, he wired $500 to the campus branch of Western Union. When I signed for the cash, the woman at the counter said it came with a message. Stripped of some colorful adjectives, my dad's message was clear: Learn how to manage your money!

That slip-up years ago certainly wasn't my last one involving money, and heeding my father's advice has occasionally been a struggle. But I draw comfort in knowing that I'm hardly alone when it comes to making financial blunders.

Now that we have become a nation of debtors, fixing our financial mistakes has become much harder. Collectively, we carry $11.8 trillion in household debt, including mortgages, car loans and other borrowing. About 75 percent of U.S. families have some sort of debt, but what makes financial planners nervous is the size of debt and how quickly it is growing. Credit card debt alone leaped to $1.8 trillion in 2005 from $69 billion in 1980, according to industry data.

As our borrowing creates more opportunities for error, large financial institutions are prepared to pounce on our smallest mistakes. Late-payment fees on credit cards now average $39, up from $13 a decade ago, according to a government survey released last week. And that's just for one missed monthly payment. A small string of errors can easily spiral out of control, as fees pile up and interest rates jump. For debtors in deeper trouble, a new law that took effect a year ago made filing for personal bankruptcy much harder and more expensive.

Financial planners and credit counselors say money mistakes come in all shapes: borrowing too much against the equity in our homes; buying a pricey house with risky financing; failing to buy enough health or property insurance; and (my favorite) spending beyond our means.

My college-era financial hole was relatively shallow, and my sympathetic father helped me out of it. But for many consumers, financial holes go much deeper, and the consequences of their miscues linger far longer. For these people, digging out requires more-drastic measures.

Addicted to Spending

Take, for instance, Brian Robinson, who works in advertising in New York. He stumbled because of what he later recognized was an addiction to spending borrowed money. His financial mistakes began when he was traveling the country as an independent contractor, lecturing on time management and customer service. He used his credit card to pay for each trip's expenses, typically $1,500, and was then reimbursed by his clients with a check. Or at least that was the idea.

The problem: He didn't apply the money from the check to his credit card bills. He spent the money on dating, dinners out, shopping. Eventually, he maxed out his credit cards, and his mom's, before his debt totaled $50,000. About $20,000 of that came from work-related expenses that he could have paid off had he not spent the reimbursement checks elsewhere. His mother, brother and sister eventually stopped speaking to him.

"A friend of mine finally told me I was like an alcoholic with credit cards," said Robinson, who is 40 and lives in Manhattan. "I agreed with him. I had a real problem. I had to get my sobriety back around numbers."

Robinson's financial epiphany may sound like a cliche, and perhaps it is. But debt-management experts and financial planners say that realizing you have made a major financial mistake is the initial step toward solving it.

"The first thing you've got to do is face up to the problem. You have to ask, 'why did I do that?' " said June Walbert, a certified financial planner with USAA, a Fortune 500 financial services company that caters to military personnel and their families. "But there are people who are not ready to face the music. They think if they ignore it that it will go away. That's not the case. It only gets worse."

Knowing that his problem would not go away, Robinson began attending meetings of Debtors Anonymous, a 12-step program started in 1968 by Alcoholics Anonymous members who wanted to also discuss their financial problems. Founded under the name Penny Pinchers, the organization now has more than 500 regular meetings in the United States and in 13 countries. Like Alcoholics Anonymous, there is a religious bent. The second of Debtors Anonymous's 12 steps is "Came to believe that a Power greater than ourselves could restore us to sanity." The group charges no fees and says that its only membership requirement is a "desire to stop incurring unsecured debt."

Robinson took immediately to the Debtors Anonymous meetings, which quickly taught him that he could not borrow again, ever. He cut up his credit cards. And then he went to work on holding himself accountable and chipping away at his errors. He recorded every purchase he made every day, even if it was a pack of bubble gum.

"What you really have to do is take a deep breath" and start tracking where your money goes, said Clare Stenstrom, a certified financial planner who is advising Robinson. "It doesn't matter what you spend, you need to write it down. People are shocked to see how much money they drop away in Starbucks or lunch."

After acknowledging a problem exists, the next step is to figure out how to stop the financial bleeding. Stenstrom suggests making a budget -- she prefers calling it a spending plan, which sounds less intimidating -- and dividing it into three categories: necessities, livable, and comfortable. You spend money here and there on livable and cut back heavily on comfortable. You move the comfortable money, for the time being, into necessities, and use that money to pay down debt.

Many financial planners say you should take on the highest-interest debt first, then move your way down. But some financial planners, including Walbert, have more counterintuitive advice. She thinks paying down debts with the smallest balances can motivate people to pay the remaining debts faster.

"For a lot of people, debt is a very emotional situation," Walbert said. "Many people find it psychologically pleasing if they take care of the smallest balances first because they are getting to a zero balance faster and they are like, 'Yes, I knocked one out and I can do another!' "

Breaking the Cycle

When it comes to money, not all mistakes are created equal. While many mistakes result from purely selfish choices -- such as recklessly spending on nonessentials -- many people get backed into a financial corner by relying on credit to take care of their family's most basic needs.

J. Eddie Coon, a church administrator in Georgia, relied on credit cards to pay for basic necessities after high out-of-pocket health-care expenses drained his cash reserves. Coon and his family watched as their non-medical bills spiraled out of control. They piled up nearly $16,000 in bills -- much of it on eight credit cards -- and found themselves unable to make the minimum payments.

"We were falling behind so badly that we just had to do something different," Coon said.

After researching on the Internet, Coon contacted Consolidated Credit Counseling Services, a Florida organization that helps financially strapped people manage and pay off their debts.

Consumer credit counseling groups typically operate as nonprofit organizations, helping debtors work out payment plans and lower interest rates with creditors, usually for a small monthly fee of about $10. Once a plan is arranged, consumers make one monthly payment to the counseling organization, which distributes the money to creditors.

The new bankruptcy law requires people to seek credit counseling before they can file for court protection from their creditors. The Justice Department, which supervises the nation's bankruptcy courts, maintains a list of approved organizations on its Web site.

But credit counseling groups have generated hundreds of consumer complaints over lofty fees and high-pressure tactics. Consumer advocates charge that some firms have abused their nonprofit status and seek to profit from the fees charged to their debt-ridden clients.

Some financial planners question the wisdom of paying someone else to make arrangements with creditors. Walbert, the USAA financial planner, said Coon could have done everything that Consolidated Credit did for him.

"You can call all of the credit card companies and tell them you have every intention of paying off this debt and paying in a timely manner," but that a lower interest rate would be of great help, Walbert said.

Of course, when you have six kids and numerous bills to deal with, perhaps the monthly fee is worth having someone else wait on hold with the credit card companies. Coon set up a monthly payment of $550, and his debt is down to about $8,000.

"I got a lower payment and lower interest rates," he said. "They began fielding the phone calls and managing the payments for me."

Regaining Control

After a decade spent struggling with his finances, Coon is starting to feel control over his mistakes and says his credit rating is improving.

"It's still not where I want to be, but I'm better off than I was a couple of years ago," he said. "I don't live in fear of opening the mail or answering the phone."

I know that fear well. Since my father's learn to manage your money message, I have had varying degrees of success. I am not ashamed to say that I have bungled my credit rating at one point or another. I have forgotten to pay bills on time, and, yes, I have answered the phone to find a creditor on the other end.

Luckily, I have always been able to quickly recover from my mistakes, paying bills off before they totally wrecked my credit report. My wife and I bought our first home last year, landing an excellent interest rate. The mortgage payment is deducted directly from our bank account, assuring that we won't be late. In the past few months, we have talked several times about how much we spend and where we could cut back. To control our spending, we each get a certain amount of money every month to spend on ourselves. If we run out -- tough. And we'll be crunching the numbers again when it comes time to have kids.

When it comes to his new financial life, Coon thinks one of the most important steps he has taken is to involve his children, now teenagers and 20-somethings, in what the family is going through, so they can avoid making similar mistakes down the road.

"They understand this is a family matter," Coon said. "Hopefully it will pay off in the long run and give them a better perspective on their own financial lives. They seem to get tired of hearing me saying that they need to control their expenses and watch their money."

He tells them: "I already went through that. I'm trying to teach you better."

That sounds like a message I should deliver to my own kids one day.