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Going for broke
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September 25, 2000: 7:01 a.m. ET
The Harringtons are in a hole. Is filing bankruptcy an option to shed their debt?
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - The Harringtons feel they are fighting a battle they can't win. They just cover their debts when they are both working, and a bad credit history keeps them from buying a house or consolidating their loans.
"We are strapped for cash!" Mike Harrington, 28, writes. "We need a way out - neither of us are going to see more income any time soon, nor a profitable job change ...
"I am considering bankruptcy. We can't seem to get ahead on our bills, we have to make choices considering which bills to pay and which to stretch, and are basically only paying interest and monthly fees. Would bankruptcy allow us to fix our debts, and possibly purchase a house?" he asked.
A lot of plastic peril
The couple owes $52,000, half of that for Dorinda Harrington's student loans on her college degree, a bachelor's in biology from the College of Charleston. She also owes $12,000 on her 1995 Subaru Legacy. He owns his 1990 Mazda, at least.
 The rest of the Harringtons' debt is on credit cards. They get punished by the penalties and high interest rates. But they can't consolidate their loans or get new credit cards, Mike Harrington said, because their credit history is bad.
Harrington, who was born in Wilmington, Del., moved to North Carolina after flunking out of his pre-engineering program at the University of Maryland
The schooling was much harder than high school, where he'd done well. There were a lot of distractions, too, like the Georgetown party scene in Washington, D.C.
"I really honestly didn't have the discipline to pull through it," he admitted. Not having a college degree put paid to his idea of heading to officer's training school for the Air Force.
Harrington worked for a while, first in technical support near Washington. He didn't like working 80-hour weeks in a salaried position, though, and he didn't see much prospect of a pay raise for the next few years. So he moved to Asheville, N.C., where a couple of friends had already gone. The cost of living was a little easier to bear.
"I ended up installing car stereos and doing some other odd electrics stuff," he said. So he fell back on his original plan and enlisted in the Air Force for a four-year tour. After training, he was stationed in Charleston, S.C., working to repair and maintain C-17 cargo planes.
A stable job in the civilian world
He met Dorinda, then a student at West Virginia University, in 1996, when she came to Charleston to visit a mutual friend for spring break. They fell in love quickly, and she transferred to the College of Charleston that year.
 Mike Harrington knew he'd get shipped to Washington State if he re-upped with the Air Force, and he didn't want to leave the East Coast. So as his four years wound up and Dorinda finished her degree, he scouted for jobs.
He found one in Greensboro, N.C., maintaining and repairing the electrics on commercial planes for TIMCO. The field was avionics, something he had learned in the service.
"They had pretty much the best thing going that was stable," he explained. "I could have made more money as a contractor, but it wasn't stable, and I couldn't do that with a wife."
Leaving Charleston and the Air Force and moving took most of the money they had, Harrington said. He got a raise earlier this year, when he moved from the shop floor up to the offices. He's now a technical coordinator, which pays a little under $40,000.
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But around the time he got the raise, Dorinda Harrington lost her job. The Greensboro branch of the electronic-media staffing service she worked for closed down in March. It took her until August to find another post, as a temp herself, handling recruiting for a United Parcel Service call center in Greensboro.
"When she stopped working, of course, it was really hard to make even our regular payments on everything," Mike Harrington said. He hasn't looked at their credit history, but he knows it's bad. The cards "show us 30 days late for six months in a row."
 The Harringtons would like to buy a house. They're paying $735 in rent for an apartment on the edge of Greensboro proper, out near the airport where he works. But he figures they could buy a similar apartment and actually end up paying less on a mortgage than their rent. The mortgage interest would be tax-deductible, too, he pointed out.
Because of their credit woes, though, no one will touch them, he said, including the Federal Housing Administration and the Department of Veteran's Affairs.
The same applies to their credit cards. "No one will give us a consolidation loan because of our credit history, and we can't play credit cards against each other," because they can't get any new ones, he stated.
And that leaves bankruptcy. "It's going to take us more than seven years to repay what we currently have, meanwhile our rent will go up, along with our other payments," he said.
He doesn't know much about filing for bankruptcy, but he figures they could keep some essentials like their cars while breaking free of the burdensome credit-card debt. Their credit record is shot anyway. They don't have much in the way of possessions, just a storage shed with car-repair equipment and cast-off furniture.
"It seems we're just chasing our tails and we will be for years," Harrington said. "That's not really a viable solution. That doesn't get us anywhere."
What the planners say:
"Claiming bankruptcy should be a last resort, and used only when absolutely necessary," said Chris Dalto, an MBA grad and financial planner with Delessert Financial Planning in Newton, Mass. It's the third option behind increasing their income and decreasing their expenses. A combination of those would be preferable, he says.
Eileen Dorsey, a certified financial planner with Money Consultants Inc. in St. Louis, is more blunt. "Bankruptcy is not the answer - it is only a short-term fix," she insisted.
Instead, Dorsey recommended that the Harringtons contact a consumer-credit-counseling service. They're often paid for by creditors and free to consumers, she said. A credit counselor should be able to negotiate with creditors and arrange an affordable payment schedule that either reduces or eliminates their interest charges.
Dalto concurred, and recommends a service such as Genus Credit Management or the Creditpage.com Web site, which is sponsored by debt-counseling services.
"Only after talking with a debt counselor should Michael and Dorinda consider bankruptcy," he said.
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A house is out of the question until the Harringtons take care of their consumer debt, Dorsey and Dalto agreed.
Yes, the deductible interest is attractive. But Dorsey pointed out that homeownership comes with numerous headaches - often expensive headaches. Insurance, real-estate taxes, drapes, refrigerators, washer-dryers.
"Before you buy a house, you need a cash cushion, not a debt overload," she said. The lenders will not give the Harringtons a loan because simple arithmetic tells them "that there is a high probability that you would not be able to make every monthly payment."
And they are right, when Dorsey runs the numbers. A $100,000 mortgage, with $200 a month in taxes and insurance, would likely cost around $930, according to the planner. With the Harringtons' debt and living expenses, they'd have 47 percent of their income gone in fixed costs.
"That is too high. Most lenders want to keep the number at about 30 percent to 38 percent at the highest," Dorsey said.
One option: make more money
Mike Harrington said neither he nor his wife is likely to see more income anytime soon. That's assuming they stick with their current jobs, Dalto pointed out.
"Many individuals are hesitant to take on part-time employment outside of their full-time job for a myriad of reasons," Dalto said. People might feel it's beneath them, or that they won't be able to spend enough time with the people they love.
Though finding a part-time job is hardly a perfect solution, "Michael and Dorinda should seriously weigh the reasons for not deciding to choose this option," the planner said. They might even be able to find a weekend or nighttime job they could work together, he pointed out.
If they're able to pick up 20 hours a week at even $7 an hour, they'd net close to $400 a month after the tax bite. By putting that extra cash toward their Sears card, they should be able to erase the $3,200 they owe on it in three-quarters of a year or less, Dalto said.
Dorsey suggests that further education is in order. Mike Harrington, who has an associate's degree through the Air Force and some credits from Maryland, is looking at going back to school for his bachelor's and maybe an MBA. Good idea, the planner stated.
"At your age, you should be able to increase your income opportunity over the long-term," she said, if not through college then at least by learning some new skills.
A couple of areas to refocus cash
The Harringtons are living on a tight budget. Their main indulgence is going out to eat a couple of times a month.
Planners normally recommend allowing such little bits of fun in a budget, or it'll be impossible to keep. But Dalto does see two areas of expense that the Harringtons could adjust to pay down their debt.
The Harringtons are paying $50 a month for cable TV. That's "something that can be cut," Dalto said. They have some small amounts of debt, such as $250 on an overdraft and $350 they owe on a Pep Boys store card.
Cutting cable and paying the $50 toward those debts would take care of at least one of those debts in a matter of months. Knocking those out would save them credit charges, and once they're taken care of, they can resubscribe to cable as a reward, Dalto said.
Reconsider student loans
The planner also encourages Dorinda Harrington to reconsider the payments she's making toward her student loans. If they're typical student loans like Stafford loans, the loan provider allows borrowers to defer payments up to three years in case of economic hardship.
This is not an optimal solution, because Dorinda Harrington will still accrue interest on the loans. But she should take her $230 a month payment and apply it to any credit-card debt that has a higher rate of interest - which they likely all do, Dalto said.
One of the drawbacks to bankruptcy is that student loans survive it, Dalto continued. That's half their debt.
There are other drawbacks to bankruptcy. The Harringtons would still be able to get credit after bankruptcy -- creditors realize you can only claim bankruptcy once every six years. But they would end up paying more for virtually every financial product, including life, auto and homeowner's insurance, Dalto said.
Better to eke out a little more cash, reposition their payments to knock out the worst debt and think about deferring the student loans.
"Michael and Dorinda must realize that their situation is not hopeless," Dalto said. "They should keep in mind that every long journey begins with a first step."
* Disclaimer
Got questions about financial planning? Need some advice? CNNfn.com has organized a panel of outside experts to answer your questions. If you want to be considered for the "Checks & Balances" column, where professional planners suggest ways you can manage your money, send us an e-mail at checksandbalances@cnnfn.com. For those selected, financial planners will review the details and suggest ways to meet those goals.
Include information about your age, occupation, income, assets and monthly expenses -- imagine you're providing a full income statement and balance sheet. Also, share with us any short-term and long-term financial goals you may have. And don't forget to leave your phone number. 
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