In the grip of debt

Dean Zellers had just closed the deal on his new Sonoma house when the real estate market went bust.

He was stuck with two mortgages, including one on his old house that he couldn't sell, and racked up thousands of dollars in credit card debt covering expenses.

By the time he freed himself of one house payment in a short sale last year, his credit score plummeted 200 points and he owed more than $80,000 in consumer debt.

The comfortable life of taking ski vacations with the kids and buying flat-screen TVs was over.

"It's devastating," said the 42-year-old insurance broker. "Here I am giving people retirement advice and I'm $80,000 in debt. I can't even control my own finances."

Zellers' case may have a familiar ring to the thousands of North Coast families dealing with mounting debt, partly caused by plummeting home prices and the economic crisis but also from unchecked consumption.

When it comes to the monthly household budget, the first necessity is to pay for food on the table. But the bigger bill often comes in the form of debt -- house payment, car payment, credit card payment and sometimes an equity loan, line of credit or student loan as well. The interest rate alone can reach into double digits.

Today, household debt, including mortgages and credit cards, represents 19 percent of the average family's total assets, according to the Federal Reserve Board, compared with 13 percent in 1980.

It can seem like an endless cycle, but there are ways to dig out.

Simple budgeting, reaching out to creditors for lower rates and more complex loan restructuring are a few methods.

Zellers sought the advice of Sonoma debt counselor Joanne Nagel, who showed him how to pay off one credit card at a time and use cash for all discretionary spending. He's cut $30,000 off the balance he had last year and is regaining peace of mind.

"It's something you think about every day," he said. "I have never been in that situation before and never want to be again."

Experts agree the first step is determining the scope of the problem.

Sit down with your spouse and lay out all your bills. List outstanding balances, interest rates and minimum payments.

Review your income and determine if there are ways to curtail spending. Make a priority list with food and welfare at the top.

The next step could be to contact your creditors, in writing, said Rob Waller of the nonprofit Consumer Credit Counseling Service in Santa Rosa.

Explain circumstances like a job loss that could prevent you from paying your bills on time and suggest a plan such as freezing your balance.

A creditor may be more willing to work with you before your account becomes delinquent. Writing a letter allows you to be more articulate and establishes a paper trail, Waller said.

"Be specific," he said. "Explain your situation and what you're doing to correct it. And what you want from them."

Or you can enroll in a debt-management program for a fee. Other options include debt-consolidation loans, borrowing against the equity in your car and paying off high interest credit cards, Waller said.

He warned against programs that promise to cut debt in half and require you to pay them instead of creditors.

"People who go there often are pushed up against a wall and are taken advantage of," Waller said.

He said about half of his clients were stung when the value of their home dropped below the amount of their loan.

No longer able to draw lines of credit, they finance everything using high-rate cards, some at more than 30 percent interest.

Nationally, credit card debt has soared to a record high of nearly $1 trillion, according to the Fed. The average household owed $9,840 in 2007, up from $2,966 in 1990.

Last week, Waller talked to a professional couple in their 30s who bought a house with an interest-only loan at the peak of the market.

Their payment jumped by $1,000 about the same time the market crashed. They were unable to refinance and began using credit cards to pay their mortgage.

After accumulating $68,000 in debt, they missed a credit card payment and their interest spiked to 29 percent. They had no savings and one partner's commissioned job tapered off.

Credit experts and even legal advisers lay out three options in such an extreme case: debt management, personal appeal or bankruptcy.

Ultimately, Waller said the couple leaned toward a debt-management program in which the agency would, for a small fee, negotiate with creditors to reduce interest rates and get payments down. Another option would have been to speak directly to the people they owed money to, Waller said.

"They're up the proverbial creek," said Waller, a debt counselor. "That's what we're seeing a lot of now."

"Because people don't have savings to cover expenses, if something traumatic happens, the only recourse they have is to fall back on credit cards," Waller said. "Unfortunately, you see people living off credit cards. They have no other options."

A home loan modification can help people who have been denied refinancing, said Peter Robertson, chief executive of Santa Rosa-based Priority Lending Mortgage Corp.

For an upfront fee of about $3,500, Robertson said he can prevent foreclosure and a credit ding while reducing payments, sometimes by thousands of dollars.

More lenders are realizing that settling for less is better than the alternative, Robertson said.

"The lenders are saying, 'We might lose $100,000, but we're going to keep a good borrower and give him something he can afford instead of taking the house back and losing $300,000,' " said Robertson, whose office gets about 50 calls a day. "It's a win-win situation."

Some credit card companies offer their own programs for people in financial distress.

Discover spokeswoman Laura Gingiss said customized payment programs are available for people having trouble with bills. The company identifies and calls customers who could have problems and stops promotional offers, including balance transfer and check mailings, to accounts that it deems to be high risk.

Customers who become delinquent can get assistance to bring accounts current again, she said.

Other debt counselors advise cutting up the cards and turning to an all-cash system.

Nagel, co-founder of Creative Cash Control in Sonoma, teaches people to pay off all their debt and save money for things they will need.

Start by listing all balances, interest rates and minimum payments. Then focus on the one with the lowest balance to pay off. For example, if you owe Macy's $2,000, pay the minimum payment plus $100. All other accounts receive the minimum payment until you pay off Macy's, Nagel said.

Then, apply the amount you were paying Macy's to the next card. The next card will be paid off at a faster rate, but you won't notice any change in your monthly expenses, she said.

She calls it piggybacking. Each time your payment gets larger and eliminates a ton of interest.

"That's how I got out of debt in 1984," Nagel said. "I had $94,000 in unsecured credit card debt. I blamed everybody else. I even said it was the economy's fault. One day I had an ah-ha moment and understood it was my fault."

You can reach Staff Writer Paul Payne at 762-7297 or paul.payne@pressdemocrat.com.