Broke is the new black : Part 1

From ABC News, we have one of those 20/20 stories: Digging out of Debt.

Meet the Petersons. Matt is a software engineer and Suzie works mostly at home raising their three daughters: Julianne, 12, Rachel, 11, and Caroline, 9.

They live in an upscale California neighborhood in a 4,000-square-foot home with a pool, a huge walk-in wine cellar and even its own movie theater. They drive nice cars and own a second home and two vacation time shares.

How do they do it? They're in debt up to their eyeballs

"I know that we don't make ends meet each month, and to make ends meet, we use credit cards, and then the credit card payments start increasing, and you just can't make ends meet even doing that," Suzie said.

Their monthly household income of $8,750 isn't enough to cover all of their expenses, which total $15,000 a month. For over a year, the Petersons have relied on credit cards to keep afloat financially.

Using one card to pay off the other, their credit card balances eventually ballooned to $60,000. Their Bank of America Visa alone has a balance of $19,000, at an interest rate of nearly 33 percent.

The burden of their debt is something that keeps Suzie up at night. "I woke up at 2:30 a.m. this morning because yesterday we went to the diner and tried to use the debit card and it didn't work."

Charles Dickens sums this up in his classic novel, "David Copperfield". The words are given to a Mr. Micawber (who, not coincidentally, ends up in debtor's prison) :

"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

And they say that English literature can't tell you anything about Economics?

Bah, humbug!

In the Peterson case, a series of bad choices contributed to their massive debt. Six years ago, Matt lost his job and spent more than a year out of work. During that time, Suzie decided to open two scrapbooking stores. When her business folded last year, they ended up losing about $200,000 -- most of it borrowed money. There were also some bad real estate and stock investments.

Even as their financial situation worsened, however, the Petersons continued to spend. Last year alone, they took three vacations -- a cruise through the Carribean, a trip to Whistler, Canada and another to Hawaii.

Let's see they lost $200K on a "scrapbooking" business? I must admit that I had no idea what "scrapbooking" was so it was on to Google to help out. Turns out that people like to cut and paste things into scrapbooks, and presumably this was a store that supplied materials, etc.

However, why did they open two stores? Traditionally, everyone opens a store, sees how it's doing for a while before you start expanding.

Nope, this couple jumped in with both feet first. Unfortunately, the feet were covered in concrete.

These people are typical of what I call the "small bid-ness" types. No fuckin' clue about the larger tidal forces that shape their existence, or even the basic economics of running a small business. You know, simple things like "cash flow".

Oh, and they're the first ones with their hands outstretched for handouts when they fail. Not "if" they fail, "when" they fail!

Hell, I spent the first 20 years of my life listening to folks like this bitch about everything. Everything that went wrong was someone else's fault -- the tax laws, the government, the banks, the export policies.

And if all else failed, there was that old bugaboo : "inflation". Everything could be blamed upon it. Never mind the fact that they had no freakin' clue what "inflation" actually meant (hell, they were so stupid that they actually believed that "inflation" meant "increasing prices".)

To help them dig out from under all of their debts, "20/20" introduced the Petersons to financial planner Robert Pagliarini, author of "The Six-Day Financial Makeover," a step-by-step guide to transforming your financial life.

After reviewing the Petersons' financial records, Pagliarini calculated that they were about five months away from bankruptcy. All of their debts translated to a loss of $200 each day.

Pagliarini devised a six-month action plan to rescue the Petersons from economic ruin. First, he advised them to dump their expensive time shares, even though this will mean the Petersons will lose $46,000 on their investment.

Pagliarini hopes they can recoup some of those losses by also selling their home and their second rental property. He believes those transactions will net the Petersons about $113,000.

Pagliarini then wants the Petersons to use that money to pay off their $60,000 credit card debts. If they take all of these steps, Pagliarini believes, the Petersons will actually have a few thousand dollars leftover to save and invest.

The catch? It's an all or nothing proposition. "Do all the big things or do none of them, because if you just do one, two or three, it's not going to work," said Pagliarini.

Matt Peterson is excited by Pagliarini's plan. "We can't wait. I mean we literally can't wait," he said.

Suzie was less enthused, saying, "We have no place to live and $3,000."

Honey, you currently don't own anything at all. You're bleeding $200 a day. That's a fuckload of bleeding.

Compared to that, $3K in assets sounds positively peachy to me!