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March 14th, 2007

An American Boy in Debt: How the Tragedy Happened

Basically I charged things when I made good money and now, because I don't make good money, I'm in dept over my head.  Simple enough.  That's probably how its happened to most Americans so I don't feel special, but I really don't like the whole "told you so" attitude.  How does one know that several years later he will earn -- at most -- a third of what he did when he charged stuff?  Then there's the typical "pay for everything with cash" response.  Well, that's easier to say when one cashes their paycheck or receives tips.  When I was making good money, everything -- and I mean ALL my financial stuff -- was funnelled through my banking accounts.  My salary (at the ripe age of 21, can you believe it?!) was directly deposited; my car loan was automatically drafted, my credit cards were automatically paid; -- the only reason I kept cash on me was for the odd coffee shop that didn't accept debit cards.  Otherwise, all my monies were electronic. 

Well, I learned my lesson on that one.  But even that accounting expert on TV, Suze Orman, says its good to have at least one credit card for emergencies.  Now I have none, and no savings.  I spoke with all three collection agents and my bank.  The loan officer at my bank will be making a decisive choice for my financial future.  I'm not displacing responsibility onto her but if I cannot consolidate my debt into monthly payments over several years, then it will fester into a legal problem.  There is simply no source of income in this small town that allows me to pay the settlements offered by the collection agencies because they each demand that their balances be paid-off within three to four months.  That's ranges from $1800-2300 per month.  Isn't that an enormous amount of money to pay in that amount of time?!  The respective agents didn't sympathize with what their counterparts were simultaneously demanding from my income, as in the total.  Weird.

BTW: here's a few things I've learned from talking to the collection agents.  A "Delinquency of Debt 101", so to say.

A. Personal finance or debt advisors basically do nothing special.  One agent said they talk to her just like you or any debtor talks to a collection agency.

B. The collection agency system is contracted by the credit card issuers, not MasterCard directly but CitiBank, for example, to make settelements on their behalf.  This system has some interesting twinks.
1. A debtor negotiates with the collection agency within the limits imposed by the credit issuer.  These negotiations are called "settlements", and are legally binding (unknownst to me) in the small print that we signed when accepting credit cards.

2. No negotiations can be made directly to your credit card issuer, and it is pointless to pay them.  In the issuer's words, the delinquent account has been "charged off".

3. Settlements are, essentially, reductions in the value owed to the credit card issuer.  Collection agents refer to these via quotes of dollar value and percentages of balance.  For example: I was offered to pay $0.60 on the dollar by one agent and 55% of the balance by another, where the later is a better deal.

4. So settlements a better deal?!  Not necessarily.  First, one has to consider that the credit card issuer is attempting to collect their debt via the collection agency and, I suppose, prefer to be paid money rather than spend money on a civil attorney.  The agency's negotiation guidelines are intended, from the figures I see, to collect the actual payments made by the creditor to other merchants and this amount is usually the reduced settlement.  The dollar quotes and percentage reductions seem to eliminate the interest accrued and fees incurred by the creditor during the delinquency.  AKA: you can't wipe away your original debt.

4. Collection agencies want (aka. demand) payment in full, immediately; although that isn't the only solution.  Hence, consolidation via a loan.

So what's the moral of my story?  Knowledge is empowering.  I left ominous business letters unopened and quickly erased threatening voicemails in the irrational belief that ignoring the problem will make it go away or, to be more honest, let me feel like everything was OK.  By talking to the agents and getting a big picture of my financial state, I am more knowledgeable of the problem and feel better equipped to manage it.  Talking to my sister helped too because she's dealt with our bank more than me.  I believe this is a better lesson to learn that the banal "creditors are EVIL" propaganda; I've always like seeing how the system works rather than fixing every particular bump along the way or avoiding things altogether.

Footnote: I will probably have to find a second job.  That's bad for my incompletes.