Buckling under debt

More Hawaii consumers are seeking credit counseling as they fall further behind on paying off their bills

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Lenders and credit counseling services report that consumer debt in Hawaii is growing larger and that loan holders are taking longer to pay off their debts. Delinquencies are on the rise, they said. And, while declines in the housing market have played a role, more often Honolulu's rising cost of living and lagging economy are to blame for the growing problem, they said.

As the cost of basic living expenses in Hawaii continues to swell, more and more Hawaii residents have sought assistance in managing their debt loads.

Isle housing and fuel costs have continued to squeeze Honolulu consumers. During the second half of 2007, overall prices continued rising and ended up 4.8 percent for the year, putting the overall price of living in paradise far above the nation's 2.8 percent increase, according to cost-of-living data released in February by the Bureau of Labor Statistics of the U.S. Department of Labor.

As a result, Consumer Credit Counseling Service of Hawaii (CCCS of Hawaii) has seen its client volume increase 26 percent from last year. According to the nonprofit agency, its caseload is evidence that the number of people in serious debt in Hawaii and the amount of debt that they have is growing.

From January through April of 2008, the total personal debt of CCCS clients in Hawaii jumped 15 percent to an average of $20,700 per family from $18,000 during the same period in 2007. In addition, total client debt has climbed 46.6 percent to $23.7 million from the prior year's $16.2 million. CCCS also saw the amount of money that it managed in client debt plans rise to $2.3 million, an increase of 29.3 percent over 2007 figures.

While some people who are heading into foreclosure or bankruptcy have maxed out their credit chasing a mortgage that they could not afford, most of the people CCCS counsels in Hawaii have simply found that their living expenses have outpaced their income, the agency said. Most debtors that act quickly and realistically and stay in contact with their creditors may avoid bankruptcy or foreclosure even in these trying economic times.

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Kanani Kanhai, a preschool teacher on Maui, used to have a car trunk full of different work uniforms because it took four jobs to pay off her debt.

"We owed about $20,000 on 12 different credit cards," Kanhai said. "We got behind paying off school loans and a wedding. I was working so hard that I didn't know if I was coming or going."

Kanhai and her husband were on the verge of bankruptcy when they turned to the Maui branch of the Consumer Credit Counseling Service of Hawaii (CCCS of Hawaii) for help. Going on a debt-management program in 2003 reduced their monthly debt payments to a manageable $365 a month. By 2006, the couple had paid off the bulk of their debts and now the only balance that they carry is a $1,000 car loan.

"We pay cash for everything now. If we don't have the cash, we don't buy it," Kanhai said. "In today's world everybody wants things immediately, but if you don't want to live in debt, you have to make changes."

As the cost of basic living expenses in Hawaii continues to swell, more and more Hawaii residents like Kanhai have sought assistance in managing their debt loads, said Wendy Burkholder, executive director of CCCS of Hawaii, the only credit counseling agency in Hawaii with nonprofit status that is sanctioned by the Department of Justice to provide bankruptcy counseling.

Honolulu's inflation, which was below 2 percent from 1996 through 2002, began to rise in 2003 when it hit 2.3 percent. It then climbed to 3.3 percent in 2004, 3.8 percent in 2005 and 5.9 percent in 2006, its highest level since 7.2 percent in 1991.

Isle housing and fuel costs have continued to squeeze Honolulu consumers. During the second half of 2007, overall prices continued rising and ended up 4.8 percent for the year, putting the overall price of living in paradise far above the nation's 2.8 percent increase, according to cost-of-living data released in February by the Bureau of Labor Statistics of the U.S. Department of Labor.

"Our client volume is up 26 percent over the same period last year and I know it's going to get worse," Burkholder said. "There has been an exponential rise in housing prices, utilities, water and other living expenses like gas and grocery prices. People are finally going under the wheels of the bus."

CCCS of Hawaii helps debtors get back on track by working with their creditors to negotiate smaller payments and reduced interest rates. The agency does not charge its clients a fee for the service, which is subsidized in part with voluntary contributions from creditors and lenders.

The agency takes over payment for its clients to prevent possible harassment or shaming by creditors. CCCS of Hawaii does not charge for counseling or advice; however, clients on a debt-management plan are asked to contribute $15 per month to help pay administrative costs. In the event of hardship, CCCS of Hawaii will waive that fee.

Both the number of people in serious debt in Hawaii and the amount of debt that they are in is growing, according to statistics from CCCS of Hawaii.

From January through April of 2008, the total personal debt of CCCS clients in Hawaii jumped 15 percent to an average of $20,700 per family from $18,000 during the same period in 2007. In addition, total client debt has climbed 46.6 percent to $23.7 million from the prior year's $16.2 million. CCCS of Hawaii also saw the amount of money that it managed in client debt plans rise to $2.3 million, an increase of 29.3 percent over 2007 figures.

While some people who are heading into foreclosure have maxed out their credit chasing a mortgage that they couldn't afford, most of the people CCCS counsels in Hawaii have simply found that their living expenses have outpaced their income, Burkholder said.

Only 7.5 percent of CCCS of Hawaii's clients were in debt due to housing-related issues in 2007, she said. Most of the clients, 43.2 percent, were in debt due to overobligation or financial mismanagement, Burkholder said. About 33.8 percent of them sought help because they were unemployed or could not get enough hours to make ends meet, she said. As few as 14.5 percent were in debt due to divorce, separation or medical-related issues, Burkholder said.

"The rising cost of living in Hawaii and the economic challenges are beginning to take a toll," she said. "If people were on the verge before, this has been enough to sink them. They have been using credit to keep up with everything - especially gas prices."

Gas prices have not only taken substantial bites out of people's pocketbooks, but in some cases they have prompted job changes, Burkholder said.

"If you live in Kula and you work in Kaanapali, your gas may be $400 or $500 a month," she said. "In some cases, we've seen people's monthly income change because they were forced to take a lesser-paying job closer to home."

In addition, the struggling economy has reduced the number of full-time jobs and overtime available to people and has made it more difficult to find multiple jobs, which has been the traditional fallback for Hawaii people to make ends meet, Burkholder said.

"There was a time when if you needed three jobs you could find three jobs, but that's not necessarily the case right now," she said, adding that the closure of Molokai Ranch and the shutdown of Aloha Airlines and ATA Airlines only will add to the caseload at CCCS of Hawaii.

Falling home appreciation also has turned off access to home-equity loans and lines of credit, Burkholder said.

"The economy is just lagging in general and that's catching up with people," she said. "Most of the people we see have already tapped all of their home equity."

The banks, too, have begun to see the effects of Hawaii's economic concerns on loan payments, said Rose Grace, vice president of consumer recovery for Bank of Hawaii.

"I'm hearing that the fuel prices are one of the biggest hits on someone's budget. They are falling behind on their bills because they can't pay for their everyday living," Grace said. "When gas at Costco hits $4, we are all going to be in trouble."

As a result, consumers who have defaulted on their loans are now taking even longer to pay, she said.

"While most of them used to be 30 days behind, we are now seeing more of them at 60 to 90 days behind," Grace said. "And, many of them aren't paying the overdrafts on their checking accounts as promptly as they once did. Now, they would rather buy gas."

While the number of people in default has stayed about the same, Grace said around the fourth quarter of last year the pace of payments began to slow.

"We've really seen it crash down this year," she said.

However, Grace sees the uptick in clients at CCCS of Hawaii as a positive sign.

"It means people want the help and that they are stepping up to the plate to try and resolve their problems," she said, adding that Bank of Hawaii often refers troubled customers to CCCS of Hawaii for assistance.

If people are willing to work with their creditors, they can often avoid collections or bankruptcy, Grace said.

"The key is to call us before you get behind," she said.

CONSUMER TIPS If you have... ... GOOD CREDIT » If your interest rate is high, call your lender and ask them to reduce your annual percentage rate. It's a good idea to know your credit score when you call and to point out your long- standing history of on-time payments. You may want to tell the lender that you are receiving offers for lower-rate credit cards/loans, but you would prefer to continue to do business with them. » If the lender is unwilling to reduce your interest rate, check with your credit union or bank to see if they have personal loans at a lower rate. But be sure to stop using the card after consolidating or you'll wind up with more debt. » If you make a payment late, perhaps by oversight or you've missed the due date by a day or two, contact your lender and ask them to waive the late fee and to not report the debt as delinquent to the credit bureaus. ... LESS THAN PERFECT CREDIT » If your interest rate is high, call your lender and ask how long (or how many months of consistent payments) it will be for them to review your account to reconsider lowering your interest rate. » If you get notified that the lender is increasing your interest rate after reviewing your account and have determined you are now a higher risk, you have the option to opt out of the increase by closing your account. You will need to notify them by the date indicated in the notice or the new rate will go into effect by default. While it may impact your credit report negatively to close your account, it is likely less costly than paying the usually MUCH higher rate. » If you know you are going to have difficulty making payments to your creditors, notify them IMMEDIATELY. Most lenders have an internal program designed to help their customers who are experiencing temporary financial setbacks. With every payment that is missed, it becomes more difficult for your lender to work with you. » If your lender is unwilling or unable to work with you directly, contact a legitimate credit counseling agency for assistance. A reputable agency will be accredited and part of a national organization. There should be no big upfront fees and you should check them out thoroughly with the Better Business Bureau and the state Consumer Protection Office before submitting paperwork or fees. Source: Consumer Credit Counseling of Hawaii

Depending on the loan type and the person's payment history and credit score, the bank may choose to give them a break from making payments or offer interest only or reduced payment options so that they can catch up, Grace said. Some loans also may be eligible for refinancing, she said.

"There are things that we can do to help our customers; however, we need some time to discuss it with them," she said. "A lot of times they are in the car with their kids or at work and they don't call us back."

While lenders do not want to repossess homes and cars, every missed payment makes it harder for consumers to catch up, Burkholder said.

"People need to act quickly, be realistic and communicate with their creditors, but for many the realization that they are in trouble comes too late," she said.

"It's all part of the poking the head in the fan thing. We rarely see people who are current on their bills."

And, once the realization sinks in, everything else goes downhill fast, Burkholder said.

"By the time we see clients, their lives are falling apart," she said. "Their marriages are strained, they are working multiple jobs and they still don't have enough money to pay the bills. The frustration levels go over the moon, and if they have kids, the problems start bleeding over to them. Debt is a recipe for disaster."

One of Burkholder's current clients, a mom who works at a clerical job in Maui, said it took her more than a year to decide to participate in a debt-management program. The client, who had roughly $30,000 in debt, did not want to give her name because of the stigma associated with debt.

"I thought I could do it on my own, but I was working seven days a week and I didn't have any time with my family," said the client, who is part of CCCS of Maui's active case load. "The stress in my life was just overwhelming."

She and her husband, who had been living with relatives, incurred most of their debt after they decided to move out on their own. At the same time, the husband's job hours were reduced.

Participating in the program reduced the woman's monthly debt payments from between $800 and $900 a month to somewhere in the $500 to $600 range, she said.

"I'm hoping to be debt free in another four years," the woman said. Successes like the one shared by Kanhai give her hope, she said.

While Kanhai's family has experienced the same cost-of-living increases as everyone else, credit counseling has made them better prepared to survive the onslaught. They have learned how to establish slush funds, bargain shop and budget, Kanhai said.

"We have three money jars now to help raise money for the things that we want," she said. "Talking about how to spend the jars has helped our communication and our marriage. It's so nice that everything is back on track."

Are you knee deep in debt? When it comes to whittling down debt, generally there are four different advised courses of action. Read the following actual debt cases from Consumer Credit Counseling Service of Hawaii to determine which situation is closest to your own. CCCS of Hawaii is a nonprofit advisory service from which consumers can obtain advice and counsel about the wise use of credit and about handling debt problems. After reading these case studies, you may use the information to determine your best action plan. For free to modest cost assistance in addressing your own needs, make an appointment with Consumer Credit Counseling Service of Hawaii by calling 532-3225 on Oahu or toll-free on neighbor islands at (800) 801-5999. Self-administered relief Family: Homeowners with two children Debt: $10,000 credit card debt at 20 percent interest Situation: Despite a good income, the family lives paycheck to paycheck and is having trouble getting ahead. At tax time, the family gets a $4,500 refund, which they use to reduce their $10,000 of credit card debt. However, due to tight cash flow, they return to using the credit cards again with an average 20 percent interest rate. Recommendation: The counseling session revealed that by increasing their payroll deductions to better reflect the size of their family, the couple's net pay would increase by $350 monthly, enabling them to stop using their credit cards for household expenses. After they took this action, they were able to reduce their debt throughout the year. Debt Management Plan Family: Active duty military husband, stay-at-home mother and small child. Debt: $20,000 owed on credit cards, department store cards and loans. Some of the payments are two months behind. Situation: Small child keeps the mother from working. Each month, they overshoot their budget by several hundred dollars. Recommendation: Counseling session became an exercise in deciding wants versus needs. Grocery and entertainment budgets were reduced. The new budget freed up enough monthly income to put the couple on a debt-maintenance plan. Each month, they give Consumer Credit Counseling Service of Hawaii one check to cover payments to creditors, and if they stay on the plan, they will be debt free within four years. Action Plan Family: Husband, wife and two children. Debt: They are about $30,000 in debt, including a $21,000 debt-consolidation loan that they made a year ago with their credit union. Situation: Husband is a journeyman mason, but was laid off in May 2007. He now has a job, but not in construction and his hourly wage dropped from $28 per hour to $13 per hour. Counseling revealed they are running about $1,000 a month short on living expenses and debt payments. Recommendation: They need to decide, as a family, whether she should return to work full time during the day, which will trigger child care expenses. Or, perhaps she should look for a night job, thereby eliminating child care costs as Dad could be home with kids. Or, they may want to move in with family, reducing or eliminating their current rent expense of $1,100 per month so that she can continue to be a full-time Mom. They will weigh their options and advise their counselor of their decision. Bankruptcy Option Family: Husband and wife, who own one primary home and two rental homes. Debt: At the time of counseling, one rental home was in foreclosure, the other rental house was 90-plus days delinquent and their residence was 30 days delinquent. The couple also had substantial credit card debt. Situation: A couple who had owned their home for some time refinanced in order to add on to their residence and buy two other homes as investment/ rental properties. With small down payments, the mortgage balances on the rental homes were substantial and on an adjustable rate terms. They had unfortunate experiences with tenants not paying rent, which exhausted the pool of refinancing funds. They then started tapping credit cards and made loans in an attempt to keep all of the mortgages current. When the mortgages reset they were no longer able to keep up with the payments on the investment properties, despite solid tenants, and because they bought the properties at the peak of the market, they now owed more than the amount the properties could be sold. Recommendation: Bankruptcy was their best option as it enabled them to keep their home, but obtain relief from the obligations of the rental properties and some of the debt they had incurred trying to maintain payments. Source: Consumer Credit Counseling Service of Hawaii