By now the diagnosis for the consumer’s role in the financial crisis, and the subsequent financial upheavals, are obvious. Consumer spending has long been the driver of economic growth, growing faster and stronger until the consumer was over 75% of the overall economy. Saving essentially ground to a halt, consumers took advantage of loosened lending criteria and exotic new loans and houses became a revolving source of cash through refinancing. Total debt and the percentage of income required to service that debt far outpaced income growth, and the house of cards fell hard.

Now the great deleveraging, or reduction in debt, is underway. But how exactly is that going to happen?

For one thing, the consumer is paying down debt and being more cautious with spending. The savings rate has turned on a dime and is well over 5% and total consumer debt has declined by around 2%. The percentage of disposable personal income needed to make debt payments has also dropped after a steady 15-year increase. New car sales have plummeted nearly 40% and despite stimulus dollars overall consumer spending adjusted for inflation has fallen for the last year.

But with unemployment at 9.5% and still heading up, simply hunkering down has not been enough. Consumer delinquencies and defaults hit 10% of total liabilities in June, for a staggering $1.15 trillion, leaving many borrowers scrambling for other ways to reduce their debt.

The administration announced its foreclosure-prevention plans in February to much fanfare and high expectations. The program has been plagued by confusion about who qualifies and delays by mortgage servicing companies in training staff and responding to borrowers. The refinancing provisions only apply if the mortgage balance is no more than 105% of the current estimated house value and steep declines in values have left many homeowners owing far more. If homeowners are having trouble making payments because the interest rate has risen or their income has shrunk, they must be able to make all modified payments over a trial period of three months or more. The original goal for modifications and refinances was 4 million mortgages; only 200,000 have been completed. And 40% of borrowers fall at least 60 days behind in payments within six months after their loan is modified.

Millions of desperate consumers actually create an opportunity, as illustrated by endless ads claiming to have the secret to solving debt problems. Many of these offers are cloaked in language which implies some government-sanctioned status (although the fine print disclaims that), or try to create some common ground (Debt Christian Solutions proclaims that “accepting help is NOT a sin”), or offer for a fee simplistic but highly promoted advice that is readily available for free. Even property taxes are in the mix; we received a solicitation to have our 2009 assessment lowered (and taxes reduced by $2,210) for a filing fee of only $189. Never mind that a tax appeal is easily done through the Pima County Assessor’s website, there is no charge to the property owner, our own recent appeal was denied and the appeal process for 2009 has ended.

As reported in USA Today, Chase Card Services forgave the debts of more than 13,000 credit card holders who were allegedly defrauded by debt-settlement companies which were sued by the Florida Attorney General. Customers were reportedly told to send their payments to the debt settlement firm rather than the credit card companies. Rather than reducing customers’ debts or sending the money to the credit card companies, the companies used it to pay attorney and processing fees.

The Treasury Department has issued a Consumer Advisory warning of common scams.

• A “guarantee” to prevent foreclosure (a third party cannot make such a promise)
• A requirement for upfront fees (any fees should be tied to results).
• An offer to allow you to stay in the home as a renter and eventually buy it back (the terms of this offer are usually impossible to meet and the likely result is the loss of the home and your money).
• A claim that debt settlement won’t affect your credit report (it will).
• A claim to protect you from lawsuits (it won’t).
• A claim to eliminate all your debts (often nothing more than a worthless document based on illegitimate legal arguments that the original loan was illegal or the borrower is not obligated to repay).

The Advisory emphasizes that the first contact should be with the lender or mortgage service company, and that all payments should be made directly to them and to no other firm. Get all promises in writing, do not rely on an oral explanation of a document and never sign any document unless you have read and fully understand it. Never sign over title to the property without consulting a lawyer of your choosing.

Rather than falling prey to someone looking to profit from your misfortune, look to legitimate counselors. The Department of Housing and Development (HUD) can be reached at (800) 569-4287 or www.hud.gov and also has a HOPE Hotline (888) 995-HOPE to reach a nonprofit HUD-approved counselor. This cooperative effort of mortgage counselors and lenders is organized by HOPE NOW, www.hopenow.com.

To begin to take control of your own debt issues, try www.powerpay.org. Among other features, this site lets you compare your spending to levels recommended by financial experts and create your own spending plan. It also includes calculators that help determine the impact of various payment strategies to reduce debt. Another website with a variety of information and resources is www.extension.org/personal_finance from the University of Arizona Cooperative Extension. For some specific counseling, consider the non-profit Consumer Credit Counseling Services Southwest at 795-2227.

Facing a heavy debt load can cause real stress and often requires making sacrifices and very difficult decisions. But acting out of panic or without being fully informed could simply force consumers from the frying pan into the fire.

August 2009