Economy puts people on path to unmanageable debt

Six years ago, Mesa resident Julie Ensminger wanted to buy a house high in value and low in cost. Instead, she ended up with an unaffordable mortgage payment and she's been struggling financially ever since.

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"I cut back on food," she said. "I tried to have roommates ... and the last one left me with $3,000 in court costs. And a lot of times, I've been a month behind on my mortgage."

Ensminger, an accountant, relied on credit cards to help make ends meet, and ended up filing for bankruptcy to wipe out that debt so she could care for herself and her 4-year-old daughter, Sarah. She's also taken second jobs to help cover expenses.

Money is a constant concern and Ensminger worries about whether the struggling economy will cause her to lose her job and health insurance. Whenever she's made progress with her finances, Murphy's Law comes along and knocks her back down.

"I've paid for three transmissions on my car and a new air-conditioning unit for my house," she said.

Credit counselors and bankruptcy attorneys are all too familiar with stories like Ensminger's, and have noted increasing numbers of people feeling helpless because of unmanageable debt.

Nationally, consumer debt now stands at an all-time high of $2.5 trillion, according to the Federal Reserve. If divided among the United States' population, that adds up to more than $8,200 in debt for every man, woman and child.

In the meantime, personal saving as a percentage of disposable personal income was 0.2 percent in December, up slightly from zero percent in November, according to the Bureau of Economic Analysis.

An increasingly common scenario is that a homeowner can no longer afford to cover the monthly mortgage payment and regular expenses, so he or she uses credit to offset that budget deficit, said Manuel Navarro, a certified counselor with Consumer Credit Counseling Services Southwest.

"When you're using credit to pay for things that you used to pay cash for - groceries, utility bills, the mortgage payment and property taxes - there's a problem," he said. "They're using their income to pay the mortgage and they're using credit to supplement the income to pay the living expenses, so their balances are growing. They're carrying more debt and they can't pay it down because every time they use money to pay credit, they've got to use credit to pay what the money would have (covered)."

Many people are looking to refinance their homes so they can lock in mortgages with more affordable interest rates, said Steve Pierce, managing member of Tempe-based Credit Help, a credit repair and debt settlement company.

"Obviously, these adjustable rate mortgages are resetting now at the higher (interest) rates, which really cuts into the amount of available cash that people have to spend on different things," he said. "The increase in the interest rates that the credit card companies are charging, too, has been really tough for people. If they fall behind a payment or two on their credit cards, then, all of a sudden, they're paying 30 percent interest."

Other scenarios include people facing financial crises because of a medical emergency or job loss, as well as those who just overspent, admit it, and need to adjust their budgets, said Melissa Griffiths, a financial counselor with GreenPath in Tempe.

"We see people from all walks of life, whether they get $500 a month or $10,000 a month," she said. "If you're living paycheck to paycheck, you're definitely going to be struggling because, if anything more were to come up, you're not going to be able to handle it. If you can only afford to make the minimum (credit card) payments, then you probably don't have anything left over every month."

The number of people seeking bankruptcy relief has skyrocketed so far this year, compared to a year earlier, according to the U.S. Bankruptcy Court of Arizona. Last month, chapter 7 filings - which is consumers discharging debt - were up 73.4 percent statewide and 91.6 percent in the Valley, compared with the same month last year.

Douglas Price, a bankruptcy attorney in Tempe, said he's seeing a lot more people with credit card problems.

"It's not unusual to see somebody with $100,000 or more of credit card debt, and if they lose their job and they can't make payments, they may be a very good candidate for bankruptcy," he said.

Since new bankruptcy regulations took effect in fall 2005, it has become more expensive and complicated to file, Price said. The average bankruptcy now costs more than $2,000. with a $29 filing fee, he said. However, that's not expected to slow the rush as the economy worsens, he said.

"It's called stagflation, when things keep costing more but your paycheck stays the same, and people are using credit cards to bridge the difference," Price said. "It's increasingly difficult to live within your means."

As for Ensminger, her financial situation has improved in recent months, but she worries another major expense will come along and set her back again. She would like to refinance her house, but says the bankruptcy would keep her from getting a better mortgage interest rate. She looks forward to her daughter starting kindergarten, which will cut down on day care expenses.

"Things have kind of turned around for me, so it's not as stressful," she said. "However, should my car break down, I will be in trouble."