Dear Mr. Berko: 

I am 43 and worked 16 years for the same company. I lost my job in January 2010 because the company automated its production and moved jobs overseas to reduce labor costs. I was making over $92,000 during my last five years, and our union negotiated a good severance package. It took me over three years to find a new job, and it pays about half what the old job paid. We’ve been going into a big hole every month after paying our bills. And the daily phone calls from debt collectors are constantly harassing me and my family.

It’s more terrible than you can imagine. We’ve used all our savings and all of the money in my 401(k) account. We have $384,000 of debt, including $205,000 on the house, which is worth $155,000. My wife can’t work (too complicated), and we have four children in school.

We went to a credit counselor, who is willing to work with us. He says he can get most of our debts reduced to 10 or 15 cents on the dollar and cancel other debts we owe so that our life will be easier. Enclosed is the plan he made for us. It will pay all our bills, including our 7.5 percent, 30-year mortgage payment, which will be reduced from $1,543 a month to about $550 a month. My brother, who lent me $6,700, thinks this is a scam and told me to write you for your recommendation. Once we get this money problem squared away, we want to get serious and begin saving for retirement, which we have neglected for years. 

S.G., Chicago



Dear S.G.: 

Once the cat has left the bag, it’s almost impossible to put it back in.

I’m truly sorry for you and my recommendation, which is bankruptcy. In relation to your earnings, you folks are too far over your chin in debt to climb out or even participate in the usual 48-month debt management program. I blame you for your profligacy and ignorance. But I blame your creditors’ greed more. They made it so easy for you guys to borrow that much money. Meanwhile, finding a reputable credit counseling agency is almost as tedious as performing brain surgery. A good place to begin is the U.S. Trustee Program. It maintains a list of approved agencies that provide pre-bankruptcy counseling. Google the program before you take a step.

Your brother is as right as a rajah. This credit counselor, who will take 20 percent off the top of every dollar you deposit with him, is a scam. And if he does get your debtors to take a cut in the dollars you owe, some accountants say you may have a federal tax liability on the amount of your loan forgiveness. However, I can’t imagine how this guy could reduce your mortgage payments by $1,000 a month unless the bank were to reduce your interest payments to 3 percent. Because most banks are made whole by Washington for mortgage losses and because those losses can also be used as a tax advantage, many banks would rather foreclose on your home than reduce your mortgage interest. Isn’t that just ducky?

It’d be ideal if you could accumulate enough money to retire, but unless you win a lottery, your chances of a comfortable retirement in 25 years are not good. Most Americans, even those who can read and write, have a financial IQ that’s below freezing. We dream about a comfortable retirement, but few dream about how to go about achieving it. For instance, if you figure you’ll need $65,000 of income in 25 years and Social Security (if it survives) will pay you $25,000, where will the remaining $40,000 a year come from? Do you know how much money you must invest to generate $40,000 in annual income? The answer is probably $800,000, which includes principal invasion. In order to accumulate $800,000 in the coming 25 years, you’d need to invest about $25,000 a year earning 5 percent. How could you save $25,000 annually when you’re earning $60,000 before taxes? Bankruptcy is your only recourse.