What if we all paid off our credit cards?

This is not to defend the current high levels of credit card borrowing – nor the aggressive marketing by lenders to people who can ill-afford to take on more debt (delicately referred to in the industry as the “sub-prime” market.) Yes, everyone needs to borrow responsibly. But the credit industry needs to lend responsibly, too. Tricking people into signing up for “teaser rates,” unilaterally changing credit terms after the loan has been made, carpet bombing mailboxes with blank checks – these practices are no more responsible than the shopper who doesn’t know when to stop. (Remember: the reason lenders can afford to take the losses on people who don’t pay them back is by charging more to the people who do.)

The most important factor in all this is the rate of change in consumer debt – and the real income people generate to pay it off. If you get a raise and take new debt in moderation, you’re likely just using credit in place of cash. You can still “afford” the new debt -- at least until your pay is cut or you lose your job. If, on the other hand, the economy stalls and your income goes nowhere – but you keep maxxing out your credit cards to keep the party going – you’re going to regret it tomorrow when the bills come due and you can’t pay them off.

To many observers, the current rate of American savings seems dangerously low – and debt levels dangerously high. But we’ve heard the same warning several times in the past few decades. And the U.S. consumer, and the economy, seem to find a way to keep on going.

What happens to my stock when the company goes bankrupt? I didn't get out in time when Calpine declared bankruptcy. I had $4000 invested and now its only worth $1000. Should I sell while I still can or might it come back up? I don't know what to do!
Steve R. -- Tucson, AZ

We don’t give specific advice on individual stocks. We think people need to make these decisions for themselves and can often do a better job than the “pros” -- if they take the time to ask the right questions and do some research. Why is it that the same people who will spend hours, days or weeks researching the purchase of a new piece of consumer electronics can’t be bothered to apply the same critical selection process to their investments? (Maybe readers can help us answer that one.)

We can tell you that when a company comes out of bankruptcy protection from its creditors, it often leaves shareholders with nothing. After it “reorganizes,” a company pays off its debt holders first. (Usually, the reason a company ends up in bankruptcy court in the first place is that it’s got more debt than it can pay back.) As part of the process, the company usually issues "new" shares and then declares the "old" shares worthless.

If the “new” shares are used entirely to pay off debts, "old" shareholders like yourself (always last in line in these proceedings) are left with worthless paper. You won’t know for sure until the company announces, and the court approves, a reorganization plan. That negotiated settlement spells out which creditors get paid what. Since the company just took on $2 billion in new debt to keep going, it’s likely that those new debt holders will end up owning a big chunk of the “new” shares.

But you needn’t lose sleep about the fate of company’s board of directors. Last week, according to the Associated Press, Calpine's directors voted to give themselves big raises a week after the company rolled out a cost-cutting plan that will fire 300 employees, or about 9 percent of its work force.

 

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