Debt Free Living: How to Get Out of Debt and Stay Out

Chapter One

If you were born after 1950, you don't remember when home mortgages were rare and car loans were for twelve months or less. Prior to that time the local banker was considered the most conservative businessman in town. If someone was approved for a loan, it was generally accepted that he or she was good for the money. The only regular line of credit most people had was with the local butcher or grocer, and those loans were based on honesty and dependability.

The Great Depression made a lasting impact on millions of people who lost a lifetime of earnings in repossessed farms and mortgages. It also left a lasting impact on lenders, who found themselves in the position of having to repossess homes and farms that were virtually worthless to them. The Great Depression forced Americans to conserve again. Bankers began to make loans only with adequate collateral, and borrowers were extremely cautious because they realized the risks.

But after the Second World War, the government found itself with several million ex-G.I.s who needed homes, jobs, and education. With the impact of the Great Depression still fresh in their minds, commercial lenders, such as banks and savings and loans, were reluctant to extend credit to so many men who had virtually no credit history. So, as a last resort, the government became the lender. Congress passed laws allowing the federal government to guarantee loans made to ex-servicemen, and the G.I. Bill was born. This law allowed commercial lenders to extend credit for education and housing to millions of wartime veterans, and it provided government guarantees to back those loans.

The impact on the economy was immediate and spectacular. Millions of Americans went off to college, and millions more borrowed money to build homes and start businesses. The great credit boom of the twentieth century was off and running. Never before in history had our government used tax-generated dollars to support private lending, but the American people supported the idea wholeheartedly and a new idea was born: consumer credit. Soon the government programs were expanded to provide government backed loans to nonveterans through the Federal Housing Administration, the Federal Farm Loan Administration, the Small Business Administration, and so on.

With the stimulus of credit feeding the education, housing, and business sectors, prices went up-the natural outgrowth of the law of supply and demand. Credit allowed more people to compete for the available products and services, which in turn allowed prices to increase. Once the cycle began, others were forced to borrow to compete for those items, and private lenders stepped in to provide the loans. The boom of home loans in the 1950s provided better housing to young couples at a much earlier age than they ever could have realized by saving to buy their homes.

But there was a price to be paid, and that price was inflation. Home prices began to creep up in the late '50s, as more and more families entered the market through a wide variety of mortgage options. But as prices climbed, many couples were forced out of the market because they could not afford the monthly payments. The bankers, still leaning to the conservative side, applied the 25 percent rule to housing loans, meaning that no more than 25 percent of the husband's total monthly income could be dedicated to home mortgage payments.

The impasse created by that policy led to a slowdown in buying, not only in the housing industry but also in related industries, such as appliances, carpeting, and real estate. A parallel predicament was evident in the automobile industry and in education, both of which had become heavily dependent on consumers' use of loans to buy their products and services. The answer came in the form of longer-term loans. By extending the payment period, lenders enabled people with relatively low incomes to afford the monthly payments. Another boom was on.

By the mid-60s the generation of bankers who had been through the Great Depression was retiring and turning operations over to younger, more aggressive people who had grown up with the debt-oriented mentality. The need to expand the credit base meant that even more loans had to be made available to more people for longer periods of time.

By the '70s virtually every segment of the economy was dependent on credit. Even consumer items like food, clothing, medical care, and travel were dependent on credit through credit cards and small loans. Lenders extended long-term loans based on equity in assets. Thus consumers could borrow on the appreciated values of their homes, stocks, and businesses. But since the equity was dependent on the availability of loans to subsequent buyers, this created the need for even more lending. The economy was returning to the pre-Depression mentality of growth through debt.

In the 1970s the government was no longer just the guarantor of loans. It was the stimulator of massive debt. The economy had become totally dependent on consumers' borrowing to keep it going. The traditional requirements for qualifying borrowers fell by the wayside as lenders sought wider markets for their loans. No longer was the rule in mortgage loans 25 percent of the husband's salary. Now it was 40 percent of both incomes. Car loans were extended to sixty months and often had balloon payments of up to 40 percent at the completion of the loan period.

By the '80s and '90s, debt had become the engine that fueled the entire economy, and consumers were forced to borrow even the equity out of their homes in order to educate their children and purchase cars. In the '90s, leasing automobiles, previously a practice for businesses only, almost became a way of life. Is it any wonder that in the midst of this steamroller of debt financing the average family experienced financial problems?

It is interesting that the increase in the American divorce rate can be tracked on a curve that matches the growth of debt in the country. Does the increase in divorce cause the debt to increase, or is it the other way around? I believe that the increased incidence of divorce is a direct result of too much debt. Nearly 80 percent of divorced couples between the ages of 20 and 30 state that financial problems were the primary cause of their divorce.

What can a person do to break out of this cycle? How much credit can an individual or a family handle? These are the fundamental questions that will be addressed in this book.

My intent is twofold. First, I want to help those who are in debt develop a plan to manage their finances. Second, I want to convince anyone that he or she can become debt-free and stay that way, with the desire, discipline, and time.

I believe that we are headed for a massive economic recession (or depression), during which the present debt cycle will be reversed. Regardless of what anyone says to the contrary, we cannot continue to run our economy on borrowed money. Eventually the debt burden will become so excessive that even the interest payments cannot be made.

The government is rapidly approaching that point now. Each year it borrows the equivalent of the interest due, even during relatively good economic times.

Consumers and businesses owe nearly $6 trillion in debt, much of it at floating or variable interest rates. Unfortunately, the rates tend to rise when the economy turns sour. Those who are caught in the debt cycle during any major recession quickly discover that "The rich rules over the poor, and the borrower becomes the lender's slave" (Proverbs 22:7).

Chapter Two

Paul and Julie were from middle-income families. They grew up in the suburban area of Chicago and had the normal amount of chores around the house. Julie's father was a realistic person who kept the household records and distributed the money. He gave Julie's mother a housing allowance to manage. He paid all the other bills and gave Julie a strict allowance. Julie was required to work for a portion of her clothing and entertainment money.

In Paul's family the distribution of tasks was different. His mother kept the checkbook and paid the bills. His father never got involved with family finances, except when he wanted to buy something. Then he simply wrote a check for the amount he needed. That caused some terrible fights, since he never bothered to record his check amounts. Paul could almost always go to his dad and get money when he needed it. When he did this, Paul's father usually told him not to tell his mother, because she would have a fit. Paul's father worked a great deal of overtime on his job and believed that the money was his to spend as he wished.

Paul held several part-time jobs while he was growing up but rarely stayed at any for longer than a few weeks. The money he made was his to spend as he desired. When he was in the twelfth grade, his father bought him a nice car, and his mother blew up about it because she hadn't been consulted.

When Paul started college, he was encouraged to apply for student aid and government loans. By falsifying the credit reports, he was able to qualify for both. He completed two years of college while living at home but never really decided on a field of study. He took a summer job at a large auto assembly plant and received an offer to stay on permanently, which he accepted.

He and Julie dated for nearly a year after they met in college. When Paul took his permanent job, he asked Julie to marry him, with the understanding that she would complete her education in teaching-a field to which she was very strongly committed.

Neither Paul nor Julie received any detailed instructions from their parents about marriage. It was assumed that the pastor of Julie's church would provide the instruction they needed. Indeed, the pastor did require several hours of counseling on sex, communication, and spiritual values. Once he asked Paul if he would be able to support a family, to which Paul replied, "Yes, Sir, I'll be making $13.50 an hour at the plant. We'll have plenty of money."

Since that was as much as the pastor was making himself (not counting housing or car allowances), he never pursued the subject further. So having completed what they thought were the requirements for marriage, Paul and Julie were married.

Julie reread the notice:

"Dear Mr. and Mrs. Averal, Our records show that your VISA account is seriously overdue. We have made numerous attempts to contact you about this matter. This letter is to notify you that your account has been turned over to our collections department. You need to clear this account in total to avoid serious damage to your credit rating.

"Sincerely, "Robert Bowers, Credit Manager"

I don't think I can stand much more of this, Julie thought. I work hard all day long, and yet there never seems to be enough money anymore. I don't feel like I can ever go out and buy myself a new dress. And the day care said they're going to increase Timmy's fees. She remembered the embarrassing experience in bankruptcy court before the baby was born and the bad advice Mr. Moore had given them. After all that trouble their financial problems were no better. She groaned. I wish I were dead.

Julie was convinced that, emotionally, she was at the end of her rope. She resented having to work and felt guilty about leaving her son with strangers every day. She felt trapped.

Meanwhile, Paul was trying to cope with feelings of inferiority and with overwhelming financial pressure. Unfortunately, his method of coping tended to amplify Julie's anxieties.

"Hey Paul, we're starting the new company bowling league. Are you interested in joining?"

"No, I guess not. I don't know where we'd get the money right now," Paul replied dejectedly.

"Ah, what's the matter, Paul? The wife won't let you have enough to go bowling? Man, I told my wife that I do what I want with my money, and if she doesn't like it, she can find herself another meal ticket."

Maybe that's what Julie is thinking about doing, Paul thought, as he punched out for the day. It seems that all we ever do anymore is fight about money. I feel awful about our fight last night, but she acted like it's my fault that she has to work. That's so stupid If she had taken her pills like she was supposed to, she wouldn't have gotten pregnant and we'd be doing fine. Women are supposed to know about those things. I can't help it if she can't go to college now. But Paul knew his marriage was in serious trouble.

As Paul walked to his car in the employee parking lot, his stomach felt twisted in knots. He thought about going to a doctor, but the company's insurance plan didn't pay for office visits, and he knew he and Julie didn't have the money.

Paul got into his car and turned the key. All he heard in response was a low growl and then a click.

"Oh nuts," he said as he looked around the nearly empty parking lot. "Now what am I going to do?" Paul got out of his car and went back into the plant building. He saw one of the second shift maintenance crew and asked if he would help him jump start his car.

"Sure, I'll be glad to, Paul," he replied. "But you need to do something about that old clunker of yours. This is the third time in the last month it has done this."

I wish I could do something about it, Paul thought as they headed out the door. But we seem to get further behind every month. I had a better car when I was in high school than I do now.

In a few minutes they had Paul's car started, and he headed home. "Boy, Julie's going to be mad again," Paul said out loud. "This is the second time I've been late this week." Then he thought, It seems like she's always mad these days. I work as hard as I can, and she keeps nagging about how she always has to do without things. I wonder what she thinks I do?

As Paul was driving by the Simmon's Auto Sales lot, he saw a sign that read, "Why put up with that old car? We'll put you in a new car for $222 a month, no previous credit necessary."

Paul thought, I know we can't buy a new car, but it won't hurt to look. I spend more than that on this old pile of junk now, I'll bet.

An hour later Paul was on his way home, driving a brand new Plymouth. He had signed the contracts, but the salesman had assured him that if there was a problem with the car he could trade it back in. Paul was excited to show it to Julie. He knew they could work the $295 a month into their budget. It cost more than the advertised price, but the car was loaded, and he was sure Julie would like it.

Continues.