Credit Problems Are Climbing the Income Scale

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For years, the typical caller at CareOne Credit, one of the biggest debt-counseling outfits in the nation, has been a woman in her 30s with a yearly family income of $30,000 to $35,000 and a credit score around 550 (that's low). In the past two months, though, the people at CareOne have noticed a shift. It's still women who usually get stuck making the call, and the age range isn't dramatically different. But credit problems are rapidly moving up the income scale. More and more calls are coming from people with family incomes a bit above $50,000 and credit scores above 600.

"People who as of late last year were attractive to creditors are now in trouble," said Michael Croxson, CareOne's president. "The traditional person who calls on us is someone who over time learned how to juggle ... and then something happens and the ball drops. What we're seeing at higher-income levels is exactly the same thing." (See the worst business deals of 2008.)

In other words, economic woes that have long plagued those at the lower fringes of the American middle class are now hitting people near the heart of it (the median household income was $50,233 in 2007, according to the latest data from the Census Bureau). And they're hitting fast.

When TIME asked Croxson if lenders are being caught unawares by the sudden change in fortune for hordes of previously creditworthy customers, he said that a tightening of standards by credit-card issuers is actually behind many of the calls that CareOne is getting. People with four or five credit cards who thought their outstanding credit lines could see them through a tight spot are getting notice that their credit lines are being cut. With that cushion gone, they run into trouble. "Not that it's a cushion you should ever rely on to pay for living expenses," Croxson said, "but if it disappears suddenly, that's another ball that's dropped." (See the top 10 financial collapses of 2008.)

CareOne, a for-profit company (customers pay a monthly fee) based in Columbia, Md., got 65,000 calls seeking help in January and 64,000 in February. Those numbers are up more than 15% from a year ago, Croxson said, but the really dramatic changes are in the composition of the callers. What happens after the call? The traditional solution in the credit-counseling business has been the debt-management plan, a three-to-five-year repayment schedule with the terms largely dictated by the creditors. Lots of debtors today are in so deep, though, they can't afford those terms. In that case, bankruptcy is one option — and bankruptcy filings, after dipping in the wake of the 2005 reform that toughened terms for filers, are rising fast. But Croxson said that something called debt settlement is likely to be the really big growth area in coming years. (See which businesses are doing well despite the recession.)

Settlement is a renegotiation of debts that stops short of bankruptcy. Unsecured creditors such as credit-card issuers are willing to accept sharply reduced paybacks from especially troubled customers because they might not get a penny in bankruptcy court. The field has been replete with shady operators and high fees, but states are beginning to regulate it, and Croxson thinks it's headed for mainstream legitimacy (CareOne does not do debt settlement but sometimes steers clients in that direction). Big-time financial trouble is on its way to becoming a respectable middle-class phenomenon.

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