It's 1999, the stock market is climbing and a San Francisco hip-hop artist wants to get in. The 31-year-old -- call him "Justin" since he prefers anonymity -- doesn't have any extra cash, but he does have credit cards. He writes a Visa check, opens a Charles Schwab account and gets to work.
At first, he doesn't spend much money. He invests $2,000 in an Internet music start-up, cashing out when it returns almost twice its value. But soon, the easy money of the market becomes too attractive to pass up. Justin ratchets up the stakes. He aims for highflying quick hits -- mostly dot-coms -- and by the middle of 2000, he has used a dozen credit cards to buy $70,000 in stock.
"I'm living proof that even a monkey couldn't have lost money in the market when it was going up," he says, recalling what it was like to see his portfolio's value reach $220,000.
Then the market crashed. Justin, who makes $35,000 a year, held on. He started moving his debt around, switching to credit card issuers with low introductory rates, then bailing to others when the offers ended. He posted sticky notes all over his house to remind him when the deals went from, say, 2.9 percent to 18.5. He kept an elaborate notebook detailing which stocks he bought with which credit cards, and ultimately figured the dip would rise.
"Everyone was saying, 'Stay in, don't get out,' so I'm thinking, 'Let it ride,'" he says. "I did the math and it was like 'Whatever, I'm having no trouble paying the minimum and they all have pretty good APRs of around 8 percent.' It seemed like a small price to pay."
And it was -- until the credit cards pulled the plug. About six months ago, the revolving door of credit slammed shut. Every credit card issuer stopped offering Justin cheap annual percentage rates, or even new cards. Justin continued to pay down his debt, but in March he gave in. Distraught, watching the market dive to ever-lower depths and with no one else to borrow from, Justin contacted a bankruptcy lawyer.
"I found myself with the following choice: Maintain good credit while watching everything I earn go to the credit cards, or declare bankruptcy, ruin my credit but get back my life," he says. After struggling with guilt and "old-fashioned feelings of honor and responsibility," he says, "I chose the latter. It's humiliating. My own stupidity, shortsightedness and greed caused my downfall."
Justin is a member of the (no longer card-carrying) hangover generation -- young, college-educated professionals who charged their way through the boom, only to end up busted in the crash. So far, they've been largely invisible. Public debate over credit, debt and bankruptcy has tended to focus on only two types of people: rich manipulators who use bankruptcy to protect their multimillion-dollar homes and lavish lifestyles, and the middle-aged and downtrodden who go bankrupt because of an illness, layoff, divorce or other unforeseen tragedy. But the ranks of the young and restlessly broke are beginning to swell.
More than 615,000 people under 35 filed for bankruptcy last year alone. That's about half of the nation's total filings, an increase of more than 40 percent since 1991, according to Harvard Law School studies. And with overall bankruptcy rates up 20 percent in the first three months of 2001, their numbers are projected to go higher.
"Generation in debt" or some other negative label might soon supersede labels like "Gen X or Gen Y," says Robert Manning, an economic sociologist at the University of Houston and the author of "Credit Card Nation." And if these wrinkle-free failures -- who have already gone from slackers to high rollers to slackers again -- aren't feeling so exuberant anymore, who can blame them? Their lives are about to get worse. A new bill moving through Congress -- which President Bush has promised to sign -- may make it even harder for them to work their way out of the morass of credit card debt.
Seemingly bought with $37.7 million in campaign contributions, the bill would protect credit card companies by holding consumers responsible for the companies' overgenerous credit lines, essentially providing the companies with an insurance policy for their risky business practices. If it becomes law, everyone who earns more than a state's median income -- about $39,000 in California, far less than the average income of a San Francisco dot-commer -- could be forced to pay at least 25 percent of his credit card debt, and maybe all of it -- regardless of what kind of financial peril that puts the person in. The bankruptcy court, once a place that gave out second chances, could become nothing more than a glorified collection agency.
Because young people are the first fired and last hired, because they came of age in an era of go-go economics and since they're already burdened with record-setting levels of college debt, "they're the bill's biggest losers," Manning says. Even those with high salaries "are fundamentally screwed."
Maybe profligate dot-commers should be forced to do penance for their conspicuous consumption. But doing so, say experts, would burden the overall economy. People paying off massive debts aren't saving for their children's college educations, buying homes, keeping consumer confidence high or saving for retirement.
In the long run, "we'll all end up paying for them," says Elizabeth Warren, a bankruptcy professor at Harvard Law School who regularly conducts bankruptcy surveys. "We won't leave them to die; we won't put them on the streets. We'll put up the money."
Falling into debt at a young age used to be more difficult. Credit was something to be earned, and it usually took time. Moreover, debt was incurred chiefly as a result of major purchases.
"Fifty years ago, if you wanted to borrow money you put on your suit and tie and explained to a banker why you needed to go into debt," says Allen Rosenthal, a San Francisco bankruptcy attorney. "You had to have a good reason. But now, people go into debt one pizza at a time."
Travis Plunkett, legislative director of the nonprofit Consumer Federation of America, puts it this way: "Debt has gone from something long term to the short term," he says. "It's the difference between a washer and dryer and my weekly groceries."
Credit card companies catalyzed the shift about a decade ago. Two men started the trend: Richard Fairbank and Nigel Morris, former consultants who took over the reins at Capital One, a credit card issuer, decided to personalize plastic. Instead of offering one card at a set rate, they experimented with multiple cards and all kinds of offers. Bonus APRs, balance transfers, "lifestyle cards" imprinted with yachts, sports teams and college logos -- Capital One pioneered all of those ideas. And whenever someone with, say, a Jeep responded to a gold Visa card imprinted with white-capped mountains -- as opposed to a forest scene -- it made a note of it, creating an associative database that formed the basis for more mailings.
The experiment worked. In 1988, Capital One claimed about $1 billion in credit card receivables; as of last year, its receivables figure topped $8.9 billion.
The growth, of course, didn't go unnoticed. Fearing for their market share, Citibank, Wachovia, MBNA and all the other major issuers started following suit. At the same time, dozens of new issuers entered the market -- Discover, for example -- and the trend toward extended, personalized credit continued. Today, just about anyone who wants a credit card can get one, including teenagers.
The cultural and economic effects of open access are difficult to untangle. There are some benefits. Credit card issuers, for example, claim to be providing a service, extending credit to deserving consumers who might otherwise be refused loans by banks. And in "Credit Card Nation," Manning argues that the democratization of debt gives people the freedom to rebel against perceived injustices.
"As a source of 'bridge loans' during the contraction of the welfare state and reorganization of the U.S. labor market (part-time, temporary full-time, temps), bank credit cards offer opportunities or political 'space' for Americans to challenge the profit-driven forces of structural change that have profoundly traumatized their lives and the future well-being of their children," he writes. "With the impending conclusion of this 'up' business cycle, Americans will increasingly resort to their credit cards for 'political' purposes such as resisting undesirable employment or intolerable household living arrangements."
Michael Banke, who was recently forced to settle his personal and corporate debts in an Oakland, Calif., bankruptcy court, also argues that credit cards can be a valuable asset. "I started my furniture-building business with two credit cards because I wasn't bankable," he says. And over the course of 15 years -- until the business went belly up this spring -- credit cards saved the company at least three times, paying payroll and covering rent until expected checks arrived.
But Banke says that credit cards also led to his downfall -- to bankruptcy, unemployment and the repossession of everything but five old guitars worth $3,000. Essentially, he came to rely too heavily on credit cards; they encouraged what turned out to be unfounded optimism. For example, when business started to dwindle in the early '90s as cheaper furniture from overseas flooded the market, Banke soothed the slide with plastic. And when his landlord refused to let him sublet part of his 36,000-square-foot warehouse in Antioch, Calif., he used his credit cards to keep the lease instead of closing up the shop.
Every time he charged something, there seemed to be more credit applications in his mailbox. Soon, his credit card debts topped $15,000 -- not much in comparison to the $150,000 he owed before filing for bankruptcy, but still more than he could afford to pay.
"They're like an addiction," Banke says. "The first credit card, like your first nickel bag, is practically free. But then you're hooked and the costs keep rising. It's impossible to say no. If you're drowning and someone offers you a life preserver, you'll take it, no matter how much it costs."
"Bill" is a skinny, Gap-clad 34-year-old bankruptcy filer who also asked that his name not be used. He says he charged everything from trips to fancy dinners -- not for credit or for a business but rather for emotional satisfaction. Credit cards "made me feel powerful," he says. "I was given a $20,000 credit line when I turned 22," he says. "I was living in Los Angeles and working in marketing, making about $35,000 a year. I was using credit cards to keep up with a lifestyle I wanted but couldn't afford."
The sense of power didn't last. The debt quickly became nothing more than a source of stress. By 1996, he owed $30,000 to five credit card companies. He began to wonder if he was addicted to spending. Unsure, he decided to simply change his circumstances. He moved out of L.A., going back to school in San Francisco to complete his bachelor's degree. He told his credit card companies that he couldn't pay, and didn't. But he continued to live above his means, and as soon as he graduated, in 1999, they came calling.
By then, Bill had found work at a San Francisco ad agency, which paid him $35,000 a year. He tried to pay down his debts. But strapped with an additional $20,000 in college loans, and living in a city where the cost of living rivaled Manhattan's, there was only so much he could do. Seeking help, he started going to the 12-step program Debtors Anonymous. But when his company laid him off in March, Bill did what he'd always hoped to avoid doing: He filed for bankruptcy.
These days, Bill uses only secured credit cards, debit cards essentially. He's selling his 1995 Ford Ranger to pay the rent, spends at least one night a week at D.A. meetings and works hard to resist credit card temptation.
"I ask God for help, but it's hard not to want them," he says. "I get offers twice a week, at least. I see ads on television, on billboards and on the Net. I don't even answer my phone because I don't want to talk to telemarketers who might offer me a credit card."
You might think credit card companies would learn to stop enticing people like Bill. Since they've extended credit to all comers, including admitted addicts, shouldn't these firms be hurting from having to swallow the debt of broke cardholders? In fact, they aren't. Credit card companies are taking consumers to the bank. Profits are up nearly 50 percent from two years ago, according to analysts' figures. The industry hasn't upped the intensity of its marketing -- sending out 3.3 billion mailings in 2,000 -- for altruistic purposes, argues Plunkett of the Consumer Federation. The customers who continue to pay monthly minimum payments on huge debts more than make up for those who forfeit.
Nothing in the bankruptcy reform bill headed toward President Bush's desk addresses the industry's marketing bombardment. It essentially attempts to deal with the problem of overspending by creating harsher forms of punishment solely for the consumer. The idea is to keep people out of debt by letting them know that bankruptcy won't protect them from their own mistakes. Call it tough love for the credit-addicted.
Will it work?
"Yeah, right," says Warren, speaking from her office at Harvard Law School. "Changing the bankruptcy laws will not change who goes into debt; it will change where the money goes. This debate is ultimately about an allocation of wealth. If the banks can squeeze 35-year-olds harder, the banks will get richer and the 35-year-olds will get poorer."
Harsher bankruptcy laws won't do much to deter filings because most people don't consider bankruptcy until they have no other choice, Warren adds. Filing for bankruptcy carries both a social stigma and the financial consequence of limited credit for years to come. But the median debtor who files for bankruptcy owes one-and-a-half times his annual salary to credit card companies. Unless the person wins the lottery or inherits a windfall of cash, "the alternative to bankruptcy is not paying their debt slowly over time, the alternative is staying in a hole for the rest of their life," says Warren.
To actually stem the tide of debt, which is higher than ever before -- and which seriously threatens the economy's ability to grow -- government needs to change the habits of both consumers and credit card companies, experts say. Responsibility needs to be shared.
Congress could start by forcing credit card issuers to include information on the terms of what are essentially high-interest loans. "It would take 30 years to pay off $2,500 in credit card debt if you pay the minimum 2 percent," Warren says. "Credit card statements should contain that information."
Limits on distribution must also be put in place, she and others insist. Credit card companies are arguing for a contradictory and unreasonable privilege: "They want an unregulated market for distribution, but they also want the government to act as a collection agent when their customers get into trouble. It's wrong. They can't have it both ways." Lois Brady, a trustee in the Oakland, Calif., bankruptcy court who handles about 50 cases per month, couldn't agree more.
"I see retired people in here, people on welfare -- how is that possible?" she asks. "Why can they get $50,000 credit lines when they make less than $20,000 a year? It's just criminal."
Is the credit card industry primarily to blame? Justin isn't so sure. He accepts the blame for ending up so far in debt, and says that the current bankruptcy process seems far too lenient. His case has yet to be heard by a trustee, but chances are good that all of his debts will be wiped away. He simply has to prove that he intended to pay his debts and didn't make any rash purchases before filing for bankruptcy. When that's established, Justin will be able to walk away.
His total cost: a few years of damaged credit and about $7,500 -- $500 to a lawyer who filed the paperwork and the $7,000 he paid to credit card companies over the past two years. And the bankruptcy trustee appointed to his case might even let him keep his stock portfolio.
"I can see where the credit card companies are coming from," says Justin, referring to their attempt to enlist Washington in their collection efforts. But he also believes that it's not fair to focus only on debtors' culpability.
"Who in their right mind would extend $100,000 in credit to someone who makes a third of that?" he says. "You have to wonder why a company that knows what I earn kept giving me more credit. They have computers; they know what's going on. If you had all that information, would you give your friend a loan? I wouldn't. They shouldn't either."
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