Sobering times: How Hawaii handles its debt

HONOLULU—The economy is slowly recovering, but are you? After a year in which many households came apart at the dreams, several grantees of The Hawaii Community Stabilization Initiative are trying to teach consumers in trouble how to climb out of debt, reevaluate their financial picture, and make better choices in future. Launched in December 2009 by the Hawaii Community Foundation, the prebankruptcy, homeownership, and debt counseling nonprofits are equally stressed trying to service the many clients clamoring for aid.

“Usually the Housing Counseling Program services 200 to 300 clients per year. Last year, there was a 900 percent increase in calls related to foreclosure,” says Ryker Wada of Legal Aid, adding that counseling is an ongoing process, which may happen over months or even a year before the situation gets better—if it gets better. While there are federal funds available to help stem foreclosures, Wada says they are only starting to help people in Hawaii.

Dennis Oshiro of the Hawaii Homeownership Center now sees both the pre and post ends of the purchase spectrum. Although his organization’s primary mission is pre-purchase education with potential home buyers with good credit, in early 2009 the Center also saw the necessity for a foreclosure prevention program. With three accredited counselors, they figured the Center could help 108 clients. In just about a year, the Center has seen over 300 people in danger of losing their homes. Fifty to sixty percent are in their present circumstances due to job loss or income change.

“In past years, folks who were distressed due to underemployment accounted for less than 10 to 12 percent of the families we saw,” says Wendy Burkholder of Consumer Credit Counseling Services. “Now, in almost half of the families we work with, their income has taken a hit or multiple hits and they’re struggling with debt that prior to the income loss they were fine with.”

Clearly the picture has changed. It’s not the deadbeat debtors who knew they couldn’t afford what they were buying and racked up credit card, mortgage, and loan debt and now need help. This is not a case of good spenders versus bad ones, but often consumers who lack budgeting education and financial savvy.

Burkholder believes her first responsibility is to teach better management skills and only negotiates with creditors on behalf of a client about 25 percent of the time. Usually she helps clients make the plan to free up cash to better manage housing or debt.

In April, RealtyTrac, a national real estate research firm, reported one in every 347 Hawaii households received a foreclosure notice. The national rate is one in every 386. Add to that almost $3,000 in credit card debt for an average Hawaii household according to Americans for Fairness in Lending, plus this year’s upswing in bankruptcies and there are a lot of people are having trouble making ends meet. Burkholder says the situation is worse with her clients: On average each has $24,000 in debt and 45 percent of Consumer Credit Counseling Services’ clients are already in bankruptcy. She’s also concerned that many teens are launching into college and getting a first credit card—perhaps even several—with very little education about credit.

Many young and older adults also don’t realize a credit score may be a key to getting a rental. Wada says landlords do take credit scores into account and even if you have a great job and great income, you may be denied because of bad credit. Reverse mortgages also take credit scores into account and as for the old saw that a credit score doesn’t matter for a senior, Oshiro and Wada agree times have changed.

Increased longevity means lenders don’t much care if a 65 year old wants a mortgage if she has the qualified income and good credit to make the purchase.

Even with good credit, many credit card holders are witnessing rising APRs and decreased spending caps. If you think your credit card company has treated you unfairly and you can substantiate your good payment history, you have nothing to lose according to Burkholder by contacting the lender and making your case. The worst you may hear is no. As for that finance charge, Burkholder says it’s legal—even if you pay your balance in full every month.

Despite last year’s Credit Card Accountability, Responsibility, and Disclosure Act, which mandates disclosure of the minimum payment scenario, many of us still don’t realize what carrying a balance will cost over time compared to the original purchase.

“A balance of $1,000 at 21 percent with a minimum $20 payment will take 15 years to pay back and will ultimately cost you in excess of $3,000,” Burkholder cautions. “The Credit Card Act has made it more difficult to be in denial and force education on consumers, but the real time to start financial education is when kids are in grade school.”

But for adult consumers in trouble now, there are all too many ads promising debt forgiveness and mortgage refinancing or loan modification—for a price. Oshiro, Burkholder, and Wada agree that cost should be the first warning sign that the company may be up for a scam.

“If a firm contacts the person and offers to help for an upfront fee and says they’ll ‘guarantee’ a loan modification, they’re probably equity skimming and then the homeowner is out another $3,000,” Wada says.

Adds Burkholder, “Debt settling scams are rampant. People are getting inundated by very official looking documents that seem to intimate that they are from some branch of the government and these folks are doing serious damage. If they are finding you, that’s a red flag because they have obtained your name and are looking to make money.”

Oshiro puts it simply. If you are approached by any company promising it can help you cut or restructure your debt:

1. Don’t pay any up-front fees.

2. Don’t sign any papers

3. Call 211 to connect with Aloha United Way to be directed to a nonprofit that can help you, likely for free.

Behind much of the financial disaster we’re living through is a difference in spending philosophy: Many older generations would counsel living within one’s means, buying only what you can afford to pay back and only going into debt to buy a house or finance an education.

“That is still good, sound advice,” says Wada.

More straightforward tips include asking family friends and colleagues for their opinions about what credit card or mortgage companies are easiest to talk to—and who listens. Ideally, Burkholder favors local banks or credit unions, though always doing business with one may not always be possible.

Above all, Burkholder, Oshiro, and Wada say no one has the luxury of remaining in denial about finances whether or not she is currently under fire from creditors. But Burkholder is concerned: “I’ve seen really intelligent people glaze over and do nothing. None of us can afford to do that.”

Ten years from now when we look back at 2010, will we see a consumer lesson learned and a more mature attitude toward spending or a public suckered back into its evil spending ways? “I see short term benefits,” says Wada, “but this type of credit issue is cyclical. It’s a matter of putting into place education.”

Burkholder is hopeful: “This has been a very humbling period. I’d hate to think we came through this and didn’t learn something.”

Me, too.

The entire interview with Wendy Burkholder, Dennis Oshiro, and Ryker Wada is on the Town Square archive at www.hawaiipublicradio.org.