April 10, 2005
Debt Is Something To Fear
By Froma Harrop

The era of happy borrowing is over. Americans might as well know it.

The death bell now tolls for low interest rates. And he who doesn't hear that chime, can't miss the siren of bankruptcy reform. The federal bankruptcy bill, sure to become law, will turn many exuberant borrowers into lunch for debt collectors.

Fear does have its uses. If the sight of a tighter noose warns people away from piling up debt, all to the good. Americans will understand that credit cards are a potential enemy -- and that even the friendly home mortgage can come back to haunt them.

The bankruptcy bill in a nutshell: If you get in over your head in debt, and still have a decent income, you can't wipe the slate clean with a Chapter 7 bankruptcy. Instead, you will be shunted into what's called Chapter 13. There, lawyers will find a way for you to pay back what you owe. That means you will write your creditors checks month after month and, if necessary, year after year.

To be honest, the bankruptcy bill leaves me with mixed emotions. The Puritan in me likes the part about personal responsibility. People who borrow have a moral duty to pay back their debt. And there are bad people who work the system. They do a Chapter 7 on Monday, then drive off in a new BMW Tuesday.

The liberal in me, however, thinks that the weak deserve protection. Many people fall into bankruptcy owing to medical bills or other bad luck. And the legislation does nothing to stop credit-card pushers from luring the innocent into obligations they barely understand.

Most everyone gets those come-ons offering 2.99 APR (annual percentage rate) in big letters. Take out the microscope for the fine print, and you see that the deal is good for only a few months. Should you miss your payment by even a day, the credit-card company can hike the rate to, say, 29 percent. Many people are too lazy to figure it out -- or they just don't get the technical lingo.

Mortgages are also part of the danger. Borrowing off one's house has become a common way to pay off credit cards. Consumers take out bigger mortgages and use the freed-up cash to pay off credit-card balances. (After all, mortgage rates are lower and the interest is tax-deductible.) The home-equity loan, a kind of mortgage, works by a similar principle.

The problem with this arrangement is that every time homeowners increase their mortgage, they end up owning less of their house. A fall in real-estate values could leave them owing more money on the house than the house is worth. It's happened before.

When interest rates rise -- and they're doing it now -- things get dicier for many mortgage holders. That's because more and more Americans are taking out adjustable-rate mortgages. With an adjustable-rate mortgage, the interest rate goes up and down with other interest rates. It's a nice thing to have when you think interest rates will head south. But when rates go up, the monthly payments get only bigger.

You'd think that when interest rates are rising, people would avoid adjustable-rate mortgages like the plague. But no, they do not. In recent months, 36 percent of new or refinanced mortgages have been the adjustable-rate type.

Why are people still getting these mortgages? Because the lenders hook them with very low starting rates. The rates will soon take off, and with them, the monthly payments. But who's thinking about tomorrow?

In a better world, government regulators would stop such abusive lending practices. Consumers would be smarter. But since this is not a better world, then perhaps the bankruptcy law can do the job by scaring people away from debt altogether.

Others, sadly, will not hear the alarms until too late. Many reckless borrowers don't know there is a new bankruptcy law, much less what's in it. They will end up in Chapter 13 -- making monthly payments unto eternity for things they forgot they ever bought.

As Dear Abby once said, "If we could sell our experiences for what they cost us, we'd all be millionaires."

One way or another the lesson will be learned: Debt is something to fear.

©2005 Providence Journal Co. Distributed by Creators Syndicate

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