What to do with all that debt?

Most forecasters see the economy merely downshifting, not heading into reverse as the housing boom ends. Many say that America's credit culture is more an economic strength than a weakness. "Well-developed financial markets, and thus ample consumer and business credit, is one of the big reasons why the US economy is so strong in comparison with other economies around the world," says Gina Martin, a Wachovia Corp. economist, in an interview by e-mail.

For all the growth of borrowing, household net worth has been rising. The median family's assets exceeded its liabilities by $93,000 in 2004, up from $71,000 in 1995, according to Federal Reserve data released this year. Debts are up, too, but people are generally borrowing to buy homes or pay for college educations – both of which can be long-term sources of wealth.

Nearly 1 in every 100 US households filed for bankruptcy last year, as debtors rushed to avoid a new law that makes it harder to win protection from creditors. Meanwhile, the percentage of home loans that are past due has been edging up for several years, to about 12 percent of all FHA mortgages.

Debtors' prisons are a thing of the past, but financial and legal hardship for the overly indebted isn't. Experts say the first line of defense is to curtail spending on credit. Build up some savings for financial emergencies. Understand the fine print on loans.

"Compare rates," urges Mr. Weller. "A lot of people don't understand that the credit-card market is extremely competitive."

If you do fall behind on payments, state and federal laws may help you resist abusive collection efforts. Debt collectors are not allowed to contact you at unreasonable times and places, such as between 9 p.m. and 8 a.m. The federal Fair Debt Collection Practices Act also provides that a collector may not use threatening or obscene language. The collector must send written notice of how much you owe, to whom, and how to dispute the amount if you believe it is incorrect.

"There are small investors that have gotten into the debt industry," says Langer, the auctioneer. But buying and selling loans on his exchange would require a good bit of homework. "You want to know what you're buying," he says, "and you want to know who you're buying it from."

Many of the bidders will be companies or investors who specialize in nonperforming debt.

For those not interested in starting their own collection agency, there are other more common ways to invest in debt.

The most tried-and-true way is buying bonds – generally the debt obligations of governments or corporations. Debts sold by the US Treasury have yields ranging from 4.7 to 5.1 percent, depending on their duration. Corporate bonds can pay 6 percent or so, but with higher risk of default.

Investors can also tap into household debt – mortgages. Mortgage-based mutual funds have outperformed intermediate-term government bonds this year. And for all the volatility in the housing market these days, analysts say these funds can be surprisingly stable. That's because the payment of their mortgages is often guaranteed by the Government National Mortgage Association, or Ginnie Mae.

"These funds tend to hold up pretty well in rising interest-rate environments," says Scott Berry, an analyst at the investment research firm Morningstar Inc.

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