How to Avoid Drifting Into Debt

There is no disputing it: Americans are in debt. The reality of just how deep this debt runs might surprise you. Consider the following statistics: about 43% of American families spend more than they earn each year; the average American household has 13 credit cards and carries $8,000 in credit card debt; and personal bankruptcies have doubled in the past decade.

Not only are American citizens neck-deep in debt; the United States Government is not exactly leading by example. According to the United States Department of Treasury, our government's outstanding debt is over nine trillion dollars. One report states that the National Debt has continued to increase an average of $1.42 billion per day since September 29, 2006.

You probably carry some debt: your mortgage; your car payment; a credit card or two. You have a steady job and know what you can afford. You pay your bills on time every month. But what if you showed up at work tomorrow and found you no longer had a job?

If you were struck by an unforeseen financial disaster, would you be able to recover? The loss of a job or spouse, a medical emergency, or other unfortunate circumstance can mean the difference between making ends meet and financial devastation.

Felix Herrera* found himself in such a predicament when his mother fell ill and died. He left town to be with her and stayed through her funeral, causing him to miss work for two weeks. His blue collar job doesn't offer paid personal or sick days, so for him this meant two weeks without pay. "When I found out my mother was dying, all I could think about was seeing her one last time," says Felix. "But when I got home I had to figure out how to pay my rent."

After exhausting all other avenues, Felix decided to get a loan. "My credit isn't great, and the only thing I had for collateral was my truck," he says. "I had seen a commercial for a place that gives loans on car titles, even to people with bad credit. I didn't know what else to do."

Car-title companies charge an average APR of 322% and payday lenders an average APR of 560%. People who typically take out loans from these providers already live paycheck-to-paycheck and often find they are unable to make more than interest payments. And for a car title loan, the vehicle can be repossessed by the lender after one missed payment.

"I've paid over $1000 back to them on a $500 loan," says Felix, "but that hasn't even put a dent in the principal. If I have another emergency now, I'll lose my truck, too."

Divorce can also cause financial hardship. Combine the loss of a spouse's income with a sharp decline in housing sales, (Arizona foreclosures increased 170% between July 2006 and July 2007) and the results can be disastrous.

Elizabeth Davis* went through a heart-wrenching divorce, and although she and her children were initially able to stay in the family home, it was not without difficulty. "In the divorce decree it stated that I would keep the house and refinance to remove my ex-husband's name from the loan and the deed," says Elizabeth. "I was offered a no-stated income loan. I was reluctant to accept this adjustable rate mortgage, but I was assured I could refinance before it reset to a higher payment. I was offered a refinancing plan, but the payment was almost exactly the same as before, and it was considerably too high."

Finding her mortgage payments unfeasible, Elizabeth put her house up for sale and moved into a smaller, more affordable town home closer to her family. "The house was put on the market in late spring," Elizabeth shares, "and so far only three people have looked. Before we moved out we had scheduled an open house, but because of medical problems we had to cancel just days before; it was apparent it would have been a flop. There hadn't been time to post an ad saying the open house had been cancelled, and cars going by never even slowed down."

Now saddled with two house payments and no buyer in sight, Elizabeth is understandably worried. "Financially this has been devastating," she states. "The home that I thought had thousands of dollars in equity has now been substantially reduced to a ridiculously low price, and still I can't find a buyer. Should the home sell, I will receive absolutely nothing. If it doesn't, I age 41, I'll be starting from scratch."

According to Crown Financial Ministries, bankruptcy is not the only answer. Crown is a nonprofit organization founded in 1976 that teaches God's Biblical principles for finances, helping people set up budgets and get their finances in order.

Ron Staub is the Southern AZ Area Director for Crown Financial Ministries. "The only 'good' debt is one for your residence," reports Staub. "You never want to be in debt for something that will only depreciate." This includes automobiles, furniture, and of course credit cards. And while mortgage lenders frequently advise home buyers they can afford a house payment that is 1/2 of their income, Crown's advice is very different. "No more than about 1/3 of a family's income should go towards their residence," says Staub. And that's not just for your mortgage payment. "You should include property taxes, home insurance, utilities, sanitation and maintenance costs in that total," says Staub.

Crown advises that in order to remain free from encumbering debt, families should follow three basic steps. The first step is to establish a budget and accumulate $1000 in their savings account. The second is to build up enough in savings to cover one month's living expenses. The third goal to accomplish is to save enough to cover three month's expenses in an emergency. This advice was a lifesaver for Craig and Becky Hill. "We took a Crown class offered at our church," says Becky, "and started following the principles we learned. When Craig hurt his back and was out of work for two months, we were okay even though we didn't have disability insurance. If we hadn't had our emergency fund, I don't know what we would have done!"

And if you are considering contacting a debt counseling agency, be cautious. "The only agency Crown recommends is Consumer Credit Counseling Service of Atlanta," says Staub. This is because the agency includes tithing and other giving as allowable expenses; Staub reports that other debt counselors - even those with Christian in their name - will tell you to quit giving. Another downside to using these agencies is that in order to negotiate a reduction with your creditors, you must be at least 90 days behind on payments. If you aren't, the credit counseling agency will let your payments lapse in order to negotiate. Any good credit you had will become tarnished.

Whether you are deep in debt or you simply want to guard against getting buried by it, the best thing to do is educate yourself and seek Godly counsel. And remember, no matter how hopeless your situation might feel, remember Christ's words in Matthew 19:26 …"With man this is impossible, but with God all things are possible."