Thursday, March 22, 2012
NYT: One Couple's Ordeal Against Credit-Card and Housing Debt
TWELVE-STEP programs often talk about the moment of clarity, when an addict starts to understand just how dire the situation has become.
For Karawynn Long, 42, and Jak Koke, 47, it arrived in 2005, when they crossed the $40,000 mark on their credit card bills. “For some reason that was a scary number, over some internal threshold,” Ms. Long said.
Their pledge to fix the problem came a couple of years before the economy turned, giving them a head start on all the other people who buckled down once disaster become clear. Ms. Long and Mr. Koke, who live here, paid off the debt, earned more money and changed their spending habits — all of the things you’re supposed to do when plotting a financial turnaround.
But in the end, their best efforts were not enough to avoid being dragged down by the one asset that they thought would protect them — their home, which they will have to shed before they can complete their comeback.
Their story begins in early 2002, when they moved in together. A year later, they began a publishing start-up — Per Aspera Press — that they hoped would become their own science fiction and fantasy imprint. The business name is taken from the Latin phrase “ad astra per aspera,” which means “to the stars through difficulties.” But the effort generated more difficulties than stars, and they struggled to finance it with ever-more credit card debt.
Ms. Long, an author herself, also acknowledged that half of that $40,000-plus debt load was from living beyond their means.
She always assumed she would share the upper-middle-class lifestyle of her childhood. She went out to eat — a lot — something that continued during her relationship with Mr. Koke. They took vacations. And when money was tight? “Basically I just put it on credit cards to keep that level of lifestyle no matter the actual situation,” she said. “Like I was entitled to that.”
Mr. Koke grew up in what he describes as an average middle-class family. Both his parents worked. His money philosophy has always been to try to arrange his expenses and his life so that he could live on part-time employment, with the rest of his time devoted to writing novels.
“I did pick up the responsibility gene in the sense that up until we had our business where we ran up this huge debt, I didn’t have much debt on my cards,” he said. And the pair were sure the publishing imprint would succeed. “It always seemed like at some point it will break through and pay for itself and our lives, too,” Mr. Koke said. “But it never actually did.”
The credit cards had also seen them through periods of unemployment. Both have spent the bulk of their careers in the technology industry, mostly as contract employees. She has worked as a Web designer at various start-ups, and he has had jobs as a biotech researcher at several universities, as well as on-and-off work doing technical and marketing writing and editing at Microsoft.
He has two daughters from a previous marriage: Michaela, 19, who rents a room from a great-aunt in Portland, Ore., while saving for college, and Claire, 13, who lives half-time with her father and Ms. Long.
By late 2005, Ms. Long started to worry about the ballooning debt. Early in 2006 they began household austerity measures, including few or no meals in restaurants, no vacations and the suspension of contributions to their retirement funds.
The couple also shut down the publishing effort and found full-time jobs. She worked for a brokerage firm, and he got what he thought was a long-term contract writing for Microsoft. That raised their combined annual income to around $150,000.
Then, they threw every extra penny at the credit card debt, around $2,000 a month. Soon the older daughter, Michaela, noticed that the formerly automatic answer of “Sure, honey, here’s the money” started to change. “If you wanted to get a sports sweatshirt or something we would work something out where I paid half if I really wanted it,” Michaela said.
Claire, who was 7 at the time, said she noted the drop-off in vacations and meals out. And Christmas changed. “I did think I used to want to have lots of stuff under the tree,” she said. “But then I kind of got more excited about people opening the presents that I got them and making them happy. You don’t need to have all the things.”
The couple first took aim at the credit cards with the highest interest rates and wiped out the entire balance within two years. To celebrate, they took vacations to Sea World and Mexico. But the family had mere months to enjoy the accomplishment before the nation spiraled into financial crisis.
By October 2008, Ms. Long was unemployed. Mr. Koke’s hours at Microsoft were slashed in half, and his wages for the time he did work dropped by 10 percent. Both have lived off contract work in the three years since, and their annual income is less than half of its peak. What saved them from utter financial devastation was the fact that they had rid themselves of the credit card debt.
But then there was that one remaining troubled debt lurking: their home. The green, single-story house sits among fragrant pine trees in a quiet neighborhood of north Seattle, near Haller Lake. Inside, the furnishings are sparse and tend toward Native American arts and Pacific Northwest décor.
They bought it in 2006, just as their family austerity measures began. It measures 1,800 square feet and cost just over $400,000. They had not saved enough for a down payment, so they did what many Americans did at the time: they took out a second mortgage, also known as a piggyback loan. The first mortgage was a 30-year fixed rate loan for $303,750. The second mortgage was for $101,250 with a 15-year fixed rate and a balloon payment at the end. This meant they had no equity in the home from the outset. Based on estimates at Zillow.com, they now owe $82,000 more on the mortgage than the property is worth.
Given their severely diminished household income, the two mortgage payments ended up being about 65 percent of the couple’s take-home pay each month. “We were killing ourselves to pay this mortgage,” Ms. Long said.
So in January 2011, they stopped paying.
They said they had tried to work with their bank, to no avail. So they are squatting in their own home, waiting for a foreclosure notice to tell them when they must leave. Ms. Long, who now writes her own personal finance blog called Pocketmint, was blunt. “I’m C.F.O. of this household,” she said. “It’s a business decision for us.”
The mortgage payments that have not gone to the bank have instead gone into an emergency fund and will also help with an eventual apartment rental.
The family also took a vacation last fall, their first in at least two years. The four of them flew to Washington, D.C., for less than $250 each, according to Ms. Long, who did dogged airfare research. They stayed with a relative, prepared most of their own meals (including lunches to eat outside the Smithsonian museums), and spent less than $1,800 for nine days, she said.
Those who would look askance at that expense when they are not paying the mortgage, Ms. Long said it was money well spent. “We took a vacation to the Smithsonian because we’ve learned that experiences, rather than possessions, are the way to happiness,” she said. “And we wanted to share that with our kids.”
Claire says she learned even more over the last few years by watching her parents work their way through their financial problems. “I learned,” she said, “a lot about not getting trapped.”
Posted by James Shenwick