Stumbling Toward Enlightenment

By JONATHAN D. GLATER

Digging out of debt keeps getting harder for the unemployed as more companies use detailed credit checks to screen job prospects.

Out of work since December, Juan Ochoa was delighted when a staffing firm recently responded to his posting on Hotjobs.com with an opening for a data entry clerk. Before he could do much more, though, the firm checked his credit history. The interest vanished. There were too many collections claims against him, the firm said.

“I never knew that nowadays they were going to start pulling credit checks on you even before you go for an interview,” said Mr. Ochoa, 46, who lost his job in December tracking inventory at a mining company in Santa Fe Springs, Calif. “Why would they need to pull a credit report? They’d need something like that if you were applying at a bank.”

Kevin Palmer, 49, of Santa Ana, Calif., lost a job offer after a credit check revealed a bankruptcy.

Once reserved for government jobs or payroll positions that could involve significant sums of money, credit checks are now fast, cheap and used for all manner of work. Employers, often winnowing a big pool of job applicants in days of nearly 10 percent unemployment, view the credit check as a valuable tool for assessing someone’s judgment.

But job counselors worry that the practice of shunning those with poor credit may be unfair and trap the unemployed — who may be battling foreclosure, living off credit cards and confronting personal bankruptcy — in a financial death spiral: the worse their debts, the harder it is to get a job to pay them off.

“How do you get out from under it?” asked Matthew W. Finkin, a law professor at the University of Illinois, who fears that the unemployed and debt-ridden could form a luckless class. “You can’t re-establish your credit if you can’t get a job, and you can’t get a job if you’ve got bad credit.”

Others say that the credit check can be used to provide cover for discriminatory practices. Responding to complaints from constituents, lawmakers in a few states have recently proposed legislation that would restrict employers’ use of credit checks. While some measures languish, Hawaii has just imposed new restraints. Business executives say that they have an obligation to be diligent and to protect themselves from employees who may be unreliable, unwise or too susceptible to temptation to steal, and that credit checks are a help.

“If I see too many negative things coming up on a credit check, it’s one of those things that raises a flag with me,” said Anita Orozco, director of human resources at Sonneborn, a petrochemical company based in Mahwah, N.J. She added that while bad credit alone would not be a reason to deny someone a job, it might reveal poor judgment. “If you see a history of bad decision-making, you don’t want that decision-making overflowing into your organization,” she said.

More than 40 percent of employers use credit checks at least sometimes, according to a 2004 survey by the Society for Human Resource Management, up from 25 percent in 1998. The share has almost certainly risen today, say career counselors.

“It has been an ongoing and increasing issue,” said Mollie de Rojas, district coordinator for the local operations of the Ohio Department of Job and Family Services.

Credit counselors, worker advocates and the unemployed contend that a credit check is not always relevant to hiring decisions.

“There’s no relationship between being a personal trainer making $12 an hour” and having a good credit history, said Janet L. Newcomb, a career counselor in Huntington Beach, Calif. “People are being turned down for jobs on the basis of things that really have nothing to do with qualifications.”

That is the complaint of Kevin Palmer, 49, who for months lived at the same homeless shelter in Santa Ana, Calif., as Mr. Ochoa. After an interview that seemed to go well one day in June at a property management company, a manager walked him around the office the next day, introduced him to other employees and showed him an available desk. A credit check later, the offer vanished.

It was “a glorified clerk’s job, taking homeowners’ complaints,” Mr. Palmer said of the opportunity, which paid about $39,000 and could have gotten him back on his feet after losing his condominium to foreclosure and filing for bankruptcy. Last month, he says he found a job at a property management company in San Francisco — a company that did not run a credit check on him.

It is generally legal to run credit checks on job applicants, but some states have restrictions. In Washington, which has perhaps the most stringent requirement, a candidate’s credit history must be substantially related to the job under a law that took effect in 2007. Last month, lawmakers in Hawaii approved a measure that generally allows an employer to review a credit history only after making an offer and requires the credit check to be “directly related” to job qualifications. In California, Gov. Arnold Schwarzenegger vetoed a similar law. (New York law requires a background check’s findings to be related to the job, but it addresses criminal records and does not mention credit checks.) Lawmakers in Michigan and Ohio have proposed barring employers from using credit history in making employment decisions.

“In my opinion, it’s discrimination,” said Representative Jon Switalski, the Democrat who proposed legislation in Michigan. “If you miss a few payments or you have medical debt, your skills as a pipefitter or an electrician don’t diminish.”

Courts have not been sympathetic to claims that discrimination is being cloaked in credit checks, said Angela Onwuachi-Willig, a law professor at the University of Iowa. “At what point does the fact that someone lives in a particular neighborhood or someone has a bad credit score become a way of eliminating people for illegal grounds?” she asked rhetorically. “Basically, the courts don’t protect against proxy discrimination.”

Stuart J. Ishimaru, the acting chairman of the federal Equal Employment Opportunity Commission, said the commission would probably issue guidance on the proper use of credit checks. Such guidance, though nonbinding, could offer some reassurance against lawsuits to employers who comply.

“It’s something that intrigues us and worries us,” Mr. Ishimaru said, adding that some job-related tests had led to discrimination claims in the past. “The question is, why do you use it? How is this a good screening device?”

Federal law requires employers to get the consent of job applicants before running credit checks, said Pamela Q. Devata, a lawyer in the Chicago office of Seyfarth Shaw. And if they are considering denying someone a job based on a check, she said, “they have to notify the applicant.” That is intended to give someone a chance to explain circumstances or spot erroneous information.

When the job market improves and fewer people are fighting for slots, credit histories may become less important, said Michael C. Lazarchick, a career counselor in Pleasantville, N.J. “But these are lean and mean times.”

Suze Orman

Do you know what your family would do if you lost your job—or worse, your home? Financial expert Suze Orman is ready to help you devise a recession rescue plan to survive—and possibly thrive—during this deepening financial crisis.

As the recession continues to rise in the United States, the reality becomes more sobering. To date, 4.4 million jobs have been lost in this financial crisis—that’s 15 jobs a minute. Personal bankruptcy filings jumped 31 percent between 2007 and 2008 and are expected to rise another 35 percent in 2009.

Families are also losing their homes at a staggering rate. Each day, another 10,000 homes are foreclosed, forcing families to turn to shelters filled to capacity. Left with no place else to go, some people are putting makeshift roofs over their heads in tent cities.

As the crisis continues, it’s easy to let fear take over—but it doesn’t have to. Suze’s five-step plan can help you rise above and take control. “There’s only one person that’s going to save you right now, and that’s yourself,” she says. “You have got to get on what I’m calling the ‘save yourself movement.’ Each and every one of you has to have your own personal financial stimulus action plan.”

Step 1: Live On Half
Whether you’re single or in a double-income household, Suze says you need to live on only half of what you’re used to—and put the rest in the bank. “If all of a sudden you find yourself without a job—or your partner finds themselves without a job—you are now going to have your income cut by 50 percent almost immediately,” Suze says. Unemployment also only makes up about 50 percent of your income, Suze says.

By living on half now, Suze says you’ll know whether you can really afford to pay your bills if the worst happens. “When you are freaked out, that is not the time that you go through your expenses and go, ‘Should I cut here?’” she says. Use this worksheet to assess your expenses—and cut as necessary.

Suze says to try living on half for six months. “Chances are, it will take you six months to eight months to one year [to find a job],” Suze says. “See what would happen if recession really hit into your lives. Would you be able to make it?”

Step 2: Stash Your Cash
In today’s economy, cash is king—and your credit could be shrinking daily.

Before this recession, credit cards could always be used in case of emergency. Now, Suze says credit card companies are making it more difficult for people to use their cards. Afraid people won’t be paying their bills, Suze says companies are closing accounts with zero balances, reducing credit limits for those paying a little at a time and hiking up interest rates. If your credit card is no longer available, what do you do if you lose your job and have no savings? “You will be in serious trouble,” Suze says.

Before the recession, Suze says she would advise anyone with a severance payment or a small lump sum to put it toward debt. But as the economy changes, so must your financial strategy, Suze says—which is why she’s changing the advice she’s been giving for years. “If all you currently have is a very small emergency fund and you have unpaid credit card debt, … you are only to pay the minimum amount due on your credit cards,” she says. “Stash the cash till you have at least an eight-month emergency fund.”

Step 3: Make the Stimulus Package Work for You
Part of the intention behind the economic stimulus plan passed by Congress is to create millions of jobs for Americans—but it’s also designed to lend a helping hand to those out of work.

Many people who have been laid off qualify for COBRA health coverage. “If you happen to get laid off, you lose your job, you have 18 months where that company has got to cover you with health insurance,” Suze says.

COBRA can be very expensive, but Suze has good news—the government is now subsidizing your premium. For nine months, you only have to pay 35 percent of the monthly premium. After the nine months, you’re back to paying 100 percent.

This coverage is available to anyone who was laid off between September 1, 2008, through the end of 2009—as long as your company provides COBRA. You have 60 days to enroll, and you can get it even if you declined your employer’s initial offer. Employers and employees can learn more at the Department of Labor’s website.

Another aim of the stimulus package is to give the economy a much-needed boost—especially in the housing market. Part of the plan includes an $8,000 tax credit for first-time home buyers. “This is for only homes purchased in 2009,” Suze says. “If you owe $10,000 on taxes, you’re going to only owe $2,000 after it’s over. It comes off your actual taxes that you owe.”

In order to take advantage of this incentive, Suze says you have to qualify. “You cannot make more than $75,000 a year of adjusted gross income if you are single; $150,000 in adjusted gross income if you are married, filing jointly,” Suze says.

But it may not be a great deal for all first-timers. Find out if it’s right for you. In the market for a car instead of a home? Find out how you can get a tax credit on a new car.

Step 4: Make Your Home Affordable
Skyrocketing foreclosure rates and plummeting home prices have brought the country to the brink. If you’re about to fall behind on your mortgage—or even lose your home—Suze says there’s a way to keep a roof over your head.

The Homeowner Affordability and Stability Plan hopes to help as many as 9 million American families afford their homes. It’s comprised of two parts—the Home Affordable Modification program and the Home Affordable Refinance program. The loan modification program is designed to help families dangerously close to foreclosure. The government estimates it could help 3 to 4 million homeowners keep their homes and reduce their monthly mortgage payments.

Suze says there are two things you have to do to see if you qualify:
Go to MakingHomeAffordable.gov. The government site will ask you a series of questions and assess your eligibility.
If the site says you are eligible, contact your bank to see if they will give you a modification.

So who will benefit from the Home Affordable Refinance program? People who aren’t in danger of losing their homes now but still want to lower their mortgage payments. The government estimates this program will help 4 to 5 million homeowners who hold mortgages through Fannie Mae or Freddie Mac and are current on their mortgage payments. If they qualify, these homeowners will be able to refinance at a better interest rate—even if their homes have lost value.

Suze says there are two things you have to do to see if you qualify:

Step 5: Look at What You Have, Not What You Had
How much longer should we expect times to be tough? “Things will get better, get worse. … [In] the next two or three years, it will start to turn around,” Suze says. “But I’m so sorry to say it will be, in my opinion, 2015 until every single person feels hopeful again.”

Which is why Suze says it’s so important to look at what you have and be grateful, instead of looking at what you’ve lost and feel angry. “If you continuously look in the rearview mirror while you’re going forward, you’re going to get in an accident. And the victim of that accident is going to be you,” she says. “Don’t compare. You’ll feel stronger, you’ll have more energy and you’ll be able to turn this around.”

Suze Orman

Be grateful for the savings account you do have or the family that has helped you through. Although she knows it isn’t easy, Suze urges everyone to see what they’ve been through as a kind of blessing. “When you are grateful—when you can see what you have—you unlock blessings to flow in your life.”

Get Suze’s advice for creating a savings action plan, a retirement action plan and more!

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