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The Divorce Encyclopedia
Debt


Term Definition Debt - the penalty for saving late.
Application in Divorce A few years ago, a television show called Debt enjoyed a brief popularity. To get on the show, hosted by television personality Wink Martindale, a Debt contestant had to be up to his or her ears in debt. Contestants answered questions about popular culture to win money to pay off their enormous credit card debt. Martindale, who called himself "the Duke of Debt" and "the Crown Prince of Credit," offered lame jokes when contestants, as part of the routine, explained how they had overspent themselves to the brink of insolvency entirely by credit card purchases. One young woman, a self-admitted "shoe freak," could not pass a shoe store without a purchase; another explained that he had followed The Grateful Dead around the country, charging air fares and tickets as he went.

Perhaps Debt hit too close to home for too many people, for the show did not last long; but the fact remains that millions of Americans have now all but buried themselves alive in coffins of debt of all kinds -- credit card, mortgages, home equity, auto, student loans.

Easy credit, which drives America’s insatiable consumer economy, also fuels the soaring bankruptcy rates and many of those who escape bankruptcy nevertheless live lives of debt serfdom, maneuvering pillar to post from one financial squeeze to another. It is anyone’s guess how many people live one paycheck from bankruptcy.

The Depression lacerated the generation who lived through it and emerged after World War II debt-averse and solvent. For them, the reward of their suffering was an experience that cauterized them. They would borrow money for a house and a car, but they would never put dinner or a vacation on the tab. Their children, the much celebrated Baby Boomers who grew up on what has been termed "the affluent society," say "charge it" with an ease that shocks their parents.

And for many of these people, debt dues day happens in a divorce. In fact, in many divorces today, the most important issue is not the distribution of assets but assignment of responsibility for paying off the debts the couple have incurred.

An eternal truth about debt remains: "Interest income is the reward to saving early; interest expense is the penalty for saving late," as one financial planner wryly put it.

Debt is a quicksand that swallows many individuals and couples. Very often debt and bad money management stress marriages to the breaking point. A couple being sucked into a vortex of debt lives with a stranger in their homes whose merciless demands for service put their marriage in a vise and crush it. Collecting the mail should not require moral courage, but for the debtor it does because every day may bring another statement from a creditor and more woes and worries about how to meet this month’s bills.

Some financial purists start with the assumption that a person should never borrow money for anything that does not appreciate or pay a return. That high standard, of course, would rule out the purchase of an automobile for most people, but the standard, admittedly a demanding one, is a good one to hold in mind, particularly since most consumer spending is discretionary.

Very often, people carrying a heavy debt load manage to do so until job loss or an accident or serious illness knocks them down. Moreover, easy credit makes indebtedness as easy as sliding downhill. Sometimes people ignore the warning signs: an inadequate or nonexistent savings cushion; using credit cards for small purchases; running up cards to the credit limit; making minimum payments. Sometimes a job loss focuses the grim reality of a financial house build on sand. Usually, people notice when they hit financial neutral buoyancy; that is, when so much of their income today is going to pay yesterday’s debt.

Borrowing money for a house generally is the only way most people can buy one. The rates for a mortgage are lower because the loan is collateralized by the house. But even here, the Debt mentality has infiltrated. Over the next year, many Americans face foreclosure because they purchased homes with adjustable rate mortgages that will soon reset at higher rates.

Credit cards are a particular trap. Paying for goods and services "with plastic" is the most expensive way to purchase them. Most people who buy a washer and dryer on plastic and then make minimum payments do not realize that these items will be have been scrapped before they are paid for and that the total finance costs will exceed the purchase price.

Ruinous consumer spending is a dark monument to the success of the mall culture. And as one cynic said, the mall is the place people go to buy things they do not need, to impress people they do not know, and pay for them with money they do not have.

Creditors are not friends. In fact the people who work at credit card operations call the people zero out the bill monthly -- that is, pay it in full -- "deadbeats." And from the lenders point of view it is easy to understand. For example, $3,000 on a credit card with an annual percentage rate (APR) of 19.8 percent (which is not uncommon) will cost $10,000 in interest and take 39 years to pay off if the borrower makes minimum payments.

About 25 percent of card holders pay the debt in full each month. For them credit cards are charge cards used for convenience. The other 75 percent continue to march down the road to debt serfdom.

See Liability; Bankruptcy; Credit Bureau; Credit Report; CCCS.

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