Saying No to Bankruptcy, She Chooses to Try Paying Off Debts

Kay Larsen is more than $50,000 in debt, and her life is on hold.

Larsen, a deeply religious person who also considers herself careful, ended up in this position through an all-too-familiar double whammy. After a brief (and, for her, uncharacteristic) period of out-of-control credit card spending, she was injured on the job and couldn’t work for several years.

Before long, $11,000 owed on credit cards and in personal loans multiplied almost fivefold as she charged groceries and gasoline and borrowed thousands of dollars from family members just to survive.

For Larsen, 40, who lives in Glendale and now makes $24,960 a year as a secretary at Glendale Adventist Medical Center, the quick, obvious solution would be to declare bankruptcy. But she’ll have none of that. Defaulting on a debt is simply not right.

“I should have declared bankruptcy years ago,” she mused, “but I try to be a good person, and I pay my debts.”

It won’t be easy. Another quick and obvious suggestion would be for Larsen to make it easier on herself by reducing the tithe she pays the Seventh-day Adventist Church. She’s currently contributing $2,544 a year, or more than 10% of her gross pay.

But Larsen regards that expenditure the way a working parent would child care–it’s not optional, it’s necessary.

“I consider it my responsibility as a Christian to return to my church as much as I can,” she said. “It’s something I need to do to remind myself I’m part of a community, part of a greater whole, not just in my own little world.”

A Dream Deferred

Sharon Rich, a fee-only certified financial planner in the Boston area, believes that from a strictly practical point of view, Larsen is being overly generous, but “her spending reflects her personal values, really nice values.”

“If she follows a bare-bones budget for six or seven years,” Rich added, “she can avoid declaring bankruptcy.”

Larsen’s unexpected health problem and the spiraling debt that grew out of it have stalled the plans she had for her future.

When Larsen graduated from Walla Walla College in Washington state and moved to California in 1982 to live with her sister and divorced mother, she had a mission: to get a job that would help her pay off her college loans and then to move back to her hometown. Larsen was reared in the village of Stanwood, Wash.–where she attended a church elementary school that had four grades in one room–and she wanted to return as soon as her financial situation was stable.

Through a combination of strict budgeting and a little help from Mom, in two years’ time Larsen had repaid her college loans.

“I never spent a dime on myself until two days before my next paycheck,” she said. But before Larsen could pack up her debt-free status and move back to Washington, all that penny pinching gave way to a spending binge. She qualified for several credit cards and started using them willy-nilly.

“We were so poor growing up that we always made our clothes,” she said. “When I got my credit cards, I stopped sewing, because it was just so wonderful to buy clothes.” One wardrobe, a bedroom set and a computer later, she owed $11,000.

Recognizing that she was in over her head, Larsen began doubling up payments in 1991, but it was only a few months before she was confronted with the medical crisis that would sink her financially.

In early 1992, she suffered a repetitive-motion injury–tearing the cartilage in her right wrist–while opening tuition statements at the private school where she worked. Administrators denied that the injury was work-related and fired her, arguing that she was ineligible for the workers’ compensation benefits she would need to have her wrist repaired surgically.

She went to a workers’ comp attorney, who took her case for a percentage of any judgment she might receive. Thus began a four-year odyssey of unemployment, pain and courtrooms as Larsen waited for her lawsuit to make its way through the system and for her wrist to be mended.

In the meantime, Larsen had to deal with her debts.

She began by calling her credit card companies and other creditors, telling them she’d been fired and asking to have her monthly payments reduced. The interest on those debts would continue to compound, however.

All creditors but one–ironically, the credit union that serves members of the Seventh-day Adventist Church–were willing to work with her. That’s nothing unusual, since a creditor would rather get something than the nothing at all it might if the debtor declares bankruptcy.

If you are drowning in debt yourself and find that asking your creditors for easier terms doesn’t get results, you can go to a nonprofit consumer credit agency such as the Consumer Credit Counseling Service or Debt Counselors of America. These agencies often negotiate with creditors to grant a debtor reduced interest rates and lower monthly payments on obligations–and they can be more persuasive than debtors usually are on their own. If you decide to go this route, be aware that it will show up on your credit record.

Larsen quickly went through her $1,200 in savings and the $5,000 severance from her job. Her mother and stepfather paid her rent and gave her meals, and her sister lent her money to live on. Larsen made little headway in her efforts to help herself. She applied for food stamps but was turned down because of the help she was receiving from her family. She was willing to enter a government work program, but the officials she contacted wouldn’t consider her for work that would not require the use of her wrist, she said.

“If it hadn’t been for my family, I’d be living in a cardboard box somewhere,” Larsen said.

Larsen would use loans from family members to keep up her reduced credit card payments, then tap those same credit cards to buy groceries.

She did get a bit of a break in all this: She didn’t have keep paying her Bank of America and Chase Visa credit cards while she was unemployed because she had bought credit card insurance.

But although it turned out to be a good investment for Larsen, most financial advisors consider credit card insurance a waste of money because the circumstances covered tend to be very narrowly defined and the benefits limited. A better alternative, Rich said, is to make sure that you’re properly insured for disability.

Life After Debt

Larsen finally won her workers’ comp case in 1994, which meant she would receive disability payments for the next 4 1/2 years. Her wrist was operated on, and she received physical therapy. In 1996, doctors gave her the go-ahead to work again, but she put off taking a secretarial job for another year so that she could care for her mother, who had undergone surgery to replace both knees. Which meant Larsen still had to depend on family and her credit cards, although to a lesser extent. Since going back to work last September, she’s only been able to pay the minimums to her creditors and negligible money to her relatives.

Today’s tally: $18,729 owed on charge accounts, $14,000 owed to mother and stepfather, $17,600 owed to sister. Total debt: $50,329; total assets: $981.

Financial planner Rich respects Larsen’s desire to avoid bankruptcy but nevertheless thinks it’s often the best option in situations like hers. Yes, the strictly practical reasoning goes, a bankruptcy would injure the debtor’s credit for seven to 10 years, but it would take someone this far in debt seven years to pay the bills anyway.

But Larsen is determined to try to handle her debts. To begin, Rich urged her to stop incurring new debt, as she did by putting groceries and other necessities on her credit cards at the end of the month.

“Put those credit cards on ice,” Rich said. That’s not just a figure of speech. “In the freezer, where the cold ruins the strips. Even the gas card. You should operate on a cash basis from now on.”

Rich worked with Larsen to devise a budget so that Larsen can live within her means as she pays off her credit card and other consumer loans. Paying family comes later, as do the church contributions. “My policy is to pay the people who don’t charge interest last, and God doesn’t charge interest,” said Rich, taking an admittedly irreverent but nevertheless practical approach.

Larsen balked at reducing her contributions to $5 every Sunday, as Rich suggested. Planner and client agreed on a reduced tithe of $100 per month and adjusted Larsen’s budget accordingly, all but eliminating luxuries such as movies ($5 a month) and meals out ($20).

Rich recommended that Larsen stick to this spartan plan by putting cash in marked envelopes at the beginning of each month.

“Once the envelope for a particular spending category is empty, you have to wait until the next month,” Rich explained.

While Larsen directs her money to paying down her credit card balances, she can continue to direct her time toward reducing her family debt. She has already become an expert at performing services from baby-sitting to errands for her sister and mother, and the family members have been subtracting a fair rate for each task performed from what she owes them.

As consuming as debt repayment will be for Larsen, it can’t be her sole financial objective. She also has to consider unforeseen expenses and retirement planning.

Her 12-year-old clunker of a car was Rich’s primary concern. It has 130,000 miles on it and isn’t expected to last the year. Rich factored in savings of $800 this year to begin building a car repair/purchase fund.

Retirement savings will probably have to wait until Larsen has cleared up her consumer loans since any salary increases between now and then are likely to be eaten up by inflation and increasing Larsen’s tithe to its former 10%-plus level. After seven years, debt balance zero, Larsen will be able to participate in her company’s retirement plan and gaining the financial stability she set out to obtain 18 years ago. Stanwood, Wash., awaits.

Stephanie Losee is a regular contributor to The Times. To participate in a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. We cannot respond to all inquiries.

This Week’s Make-Over

* Investor: Kay Larsen, 40

* Occupation: Secretary

* Gross annual income: $24,960

* Financial goal: To be free of consumer debt within seven years

* Assets: Less than $200 in savings and a car worth about $800

* Debts: $18,729 on credit cards, $14,000 to parents, $17,600 to sister

Recommendations

* Live by a strict, no-frills budget to pay off consumer debt within seven years and avoid incurring new debt. Continue to perform services for family members in lieu of repaying some money owed to them.

< style="font-weight: bold;"> Meet the Planner

Sharon Rich runs Womoney, a fee-only financial planning practice in the Boston area that specializes in the needs of women and families.