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Life in the Red

David Gould | Photographer's Choice RF | Getty Images

DETROIT — The belt-tightening was the easy part. Cancel the cable. Skip the air conditioners. Ration the cellphone, unplug the wireless Internet, cook rice and beans — done, and done.

The larger problem for LaKeisha Tuggle, 33, who had lost her public relations job, was cash flow: After her unemployment insurance and savings ran dry, there was none. So she did some creative financing, juggling loans, credit lines, tax refunds, and educational grants, to stay afloat — until a Sunday in September of 2011, when it looked as if the jig was up. She awoke to a foreclosure notice on her front door that announced her home would be auctioned in a week.

"One week?" said Ms. Tuggle, a single mother who was more than $20,000 behind on her house payments. "I had no idea what to do."

The usual explanations for reckless borrowing focus on people's character, or social norms that promote free spending and instant gratification. But recent research has shown that scarcity by itself is enough to cause this kind of financial self-sabotage.

"When we put people in situations of scarcity in experiments, they get into poverty traps," said Eldar Shafir, a professor of psychology and public affairs at Princeton. "They borrow at high interest rates that hurt them, in ways they knew to avoid when there was less scarcity."

The psychological burden of debt not only saps intellectual resources, it also reinforces the reckless behavior, and quickly, Dr. Shafir and other experts said. Millions of Americans have been keeping the lights on through hard times with borrowed money, running a kind of shell game to keep bill collectors away. The average debt for households earning $20,000 a year or less more than doubled to $26,000 between 2001 and 2010, according to the Urban Institute. The averages for households in slightly higher brackets grew by 50 to 90 percent in the same period.

People dig deeper precisely because they long to escape.

Ms. Tuggle was too busy getting ahead to imagine falling behind.

In the fall of 2005, she bought a brand new bungalow in Mexicantown, a neighborhood then on the rise. The October issue of the Michigan Citizen Newspaper featured her under the headline "American dream in Southwest Detroit."

"The neighborhood has just blossomed," she told the paper.

In the accompanying photo she wears a slight smile — assured, restrained — the smile of a 26-year-old who has just become a homeowner, thanks to a mortgage assistance program she found through a neighborhood redevelopment agency.

Even when her employer laid off its entire staff in 2008, including Ms. Tuggle, her confidence remained. She turned down an offer from her old employer to return as a part-time receptionist. "It wasn't enough to cover my bills, and I just assumed I'd be back working soon," she said.

She had resources, after all. A couple of thousand dollars in savings. A 401(k) plan. A Discover card with a $500 limit. Her parents were next door, and she had friends to help out, if needed.

"I remember early on, maybe late in 2008, I paid off my Discover card and closed it out," she said. "I felt, like, OK, that was good, I'm taking care of this."

That combination — self-confidence, with a history of paying bills on time — sets many people up for a steep fall, experts say. They are comfortable borrowing, they make most payments on time, and their debt goes up only incrementally at first.

"I went out on the street to talk to constituents about the national debt during that congressional debate last year, and as soon as people heard that word, they said, 'Debt? Let me tell you how much I owe!' " said former Representative Hansen Clarke, whose district included much of Detroit and who last year proposed legislation to provide some relief.

Pamela Brown, a former office manager who has worked sporadically since having a stroke and a heart attack in 2009, said she had to borrow because she owns her house, disqualifying her for many public benefits. "I won't give up this house because, well, it's all I have," said Ms. Brown.

Tenecia Hardwick began borrowing after losing her job as a casino worker in 2009. Her two boys have learning disabilities that qualify the family for some federal aid. She has taken out payday loans, has a $400 credit-union debt, and said that the only way she could see to make good was to borrow more.

She recently made an appointment at GreenPath, a national debt-consolidation service, to see whether she could begin to pay down what she has borrowed. "By the time people come to see us, they have no more credit to use," said Kathryn Moore, a counselor at GreenPath. "They've been borrowing just to meet payments on previous loans; it builds on itself."

In a paper published in November, a trio of researchers led by Anuj K. Shah of the University of Chicago's school of business showed how pronounced this effect can be.

In one experiment, participants competed in rounds of the game "Family Feud," a trivia contest in which each question allows for multiple guesses. One team was "poor," allotted only 15 seconds per round; another was "rich," having budgets of nearly a minute per round. Both groups could borrow time against future rounds, but the poor borrowed far more, progressively shrinking their future paychecks while the rich mostly avoided debt.

The research team, which included Sendhil Mullainathan and Dr. Shafir of Princeton, demonstrated that same effect in a series of related experiments. Scarcity by itself — independent of personality or any other factors — fuels a drive to borrow recklessly.

Living in the Red Zone

By early 2009, all of Ms. Tuggle's rainy-day funds were gone, and all her favors called in. She had no job prospects on the radar and only a trickle of income from part-time work at a day care center.

But one remnant of her former life remained: a bank account, still open, on life support.

She picked up her purse on a chilly afternoon that winter, drove to a local strip mall and walked into a storefront payday loan office.

"As long as you have that bank account, and a check with you, you can qualify," she said. "So I took a check in, and when I walked out I felt bad. But I looked at the payments and thought, 'Oh sure, I can do that.' "

And she could, just not for very long.

Payday loan operations typically charge 15 to 30 percent interest every two weeks, and many who have used them report slipping behind quickly and being forced to pay off the loan — with yet another loan, often from another payday operation.

By the time people are in this deep, they have usually crossed a line and begun to think of borrowing as a necessity rather than a convenience or quick fix, experts said.

Kristin Seefeldt, a sociologist at the University of Michigan, has followed the same group of 39 single mothers living in or near Detroit, asking about this very issue — the level and consequences of carrying debt.

She has uncovered a financial Atlantis, lives lived under water, with debts owed to utility and cable companies that don't show up in typical surveys. The women carried an average of $3,700 in debt, but some owed 10 times as much. They were nurses' aides and fast food cooks, retail and factory workers.

Dr. Seefeldt found that the women tended to group their bills into three categories: those to be ignored; those to be paid later; and those on which to make at least partial payments. They continually checked their credit reports and considered bills that did not appear on them safe to ignore. Those that did show up but generated little or no hassle from bill collectors fell into the "pay later" category.

The partial payments went for core necessities: cellphone or car repair payments, for example. "You're keeping the lights on, you're not being evicted, the kids are not hungry, the family is protected," Dr. Seefeldt said. "It allows you to say, 'I'm doing what I'm doing, and I'm not out on the street.' "

Some of the study participants were as sophisticated as any debt manager. One woman, a former retail worker, was using more than a dozen credit cards to buy food and pay her mortgage, playing the cards against one another to lower rates.

"What I did last week was, I called the credit cards I already have and said, hey, you know, I'll transfer this balance over here if you give me this rate for the period of time," she told Dr. Seefeldt. "And they seem to be buying into that." The woman kept track of all the credit cards and their varying rates on an Excel spreadsheet.

Ms. Tuggle tracked her borrowing in a large manila envelope and built a portfolio that went well beyond credit cards. In addition to payday loans, she enrolled at Full Sail University in 2009, in the entertainment business department, and got a loan and $3,500 in education grants.

"That worked for a little bit," she said — until she got pregnant and had to take a leave from school.

She sang throughout her pregnancy last year, too, leading a reggae band called Roots Vibrations, earning $50 to $100 per show. And by 2011 she had landed a job as an enrollment officer at an alternative high school.

After two years, it felt like Ms. Tuggle had finally broken her fall. The load was lighter, she had some income, and by September of 2011 an air of relief had entered the house.

She was getting ready for church one morning, blasting music, singing along, when she saw though the front window a neighbor from across the street, gesturing toward her front door. She pulled the door open and there was a foreclosure sign on it, "huge, practically as big as the door, with that duct tape," she said.

She laughed at first — it seemed so impossibly wrong. At church she sang her part in the choir and did not say a word to anyone about it. Back home, the blunt force of the sign began to make itself felt; she was more than $20,000 behind on her mortgage payments and nowhere near catching up.

She lay down on her bed and cried.

"I'm not going to throw a pity party for myself. That's just not who I am," she said. "But it was one of those moments when I thought I was going to give up."

Helpful Neighbors

She had little time to mourn and no idea what to do.

It was her next-door neighbor — her mother — who came to the rescue. Katherine Tuggle urged her daughter to use the last source of relief that she knew of, the law. The prospect of paying a lawyer $600 almost killed that plan. But LaKeisha found the money and filed for Chapter 13 bankruptcy, consolidating her debt and reducing her monthly nut. A few months later, she refinanced through the Neighborhood Assistance Corporation of America, or NACA, reducing her interest rate from 7 percent to 2 percent.

Last month, she made her third full payment, completing a probationary period to keep the new loan.

"Whew," she said. "It was close."

She still has no cable or air conditioning. And there is just enough money coming in to pay the bills. But for all that, she counts herself lucky.

"Until I hit it big as a singer, I'm still stretching, even now," she said. "In fact, what I'm thinking right now is maybe I could sell meals. I do love to cook."