BANKRUPTCY BOOMS : DEBT-RIDDEN SOCIETY TURNS TO CHAPTER 7.

Byline: Deborah Adamson Daily News Staff Writer

Five years ago, Laurie's world crumbled.

The homemaker faced bankruptcy, divorce and a return to the work force after a 10-year absence. She needed to support herself and her two children.

``We had no income,'' said the 42-year-old Laurie who, like many people interviewed for this article, requested anonymity. ``It was pretty hard.''

Her troubles began when her ex-husband's business started to fail. He kept her in the dark about the real state of the company, supporting it by charging expenses on their credit cards.

In 1992, faced with $30,000 in credit card debt they couldn't repay, pending foreclosure on their home and half-a-dozen calls a day from collection agencies, the couple filed for Chapter 7 liquidation bankruptcy.

They divorced at around the same time, a tenuous relationship made weaker by their financial problems.

Today, Laurie's new life means keeping a close watch over her finances. That means buying only necessities, cutting coupons and bypassing luxuries such as taking vacations every three to six months.

She gets some child support, but ``it's a struggle still.''

Laurie's problems are hardly unique.

In 1996, bankruptcy filings surged past the 1 million mark nationwide for the first time, and a tenth of them came from the region between San Luis Obispo and Orange counties, according to the U.S. Bankruptcy Court.

In the San Fernando Valley, the number of filings rose 47 percent in 1996 to 15,300 cases. Eight out of 10 cases were Chapter 7 bankruptcies like Laurie's.

Record levels of consumer debt, corporate downsizing, the inability of Americans to save and a diminished stigma in filing bankruptcy all contribute to the rise in filings, experts said.

`Hard-working people'

Jackie never thought she and her husband would file bankruptcy. After all, they made $110,000 a year and weren't big spenders.

But her husband was laid off from his $70,000-a-year job in 1990. While the 49-year-old Jackie continued to work, her salary was not enough to pay their $2,800 monthly mortgage.

Their debt ballooned to $70,000, thanks to credit card charges, home remodeling costs and a year of living expenses.

They used up their savings. Their home in Palmdale, which they bought in 1990 for $286,000, was repossessed and sold for $160,000 a few years later.

``It's not like you're a deadbeat,'' she said. ``We're good, hard-working people who found themselves in a jam.''

Visa USA said that a combination of factors usually lead an individual to bankruptcy court, often triggered by a catastrophic event such as a job loss.

But having plenty of debt makes a situation worse, experts say. Many filers couldn't even meet minimum payments on their credit card balances.

``It's driven by credit card debt more than ever,'' said David R. Hagen, a partner at the bankruptcy law firm of Merritt & Hagen in Woodland Hills.

``What do they buy? It's just stuff,'' he said. ``It's meals, it's airplane tickets, it's things you buy on the television.''

Not a scarlet letter 

The number of bankruptcies has increased as the stigma of bankruptcy has diminished, Hagen said. People who once would not consider bankruptcy as an option now turn to it for help, he said.

``It's not like a scarlet letter where it will follow them for the rest of their life,'' he said. ``It's not something you're proud about, but it's not a skeleton in your closet either.''

What leads to bankruptcy? One answer lies in the easy availability of credit, consumer groups say.

Mail solicitations of credit cards, instant approval of retail store cards and promotional programs tied to spending encourage consumers to pile it on.

``Credit card companies are making it easy for people to drown in debt,'' said Gerri Detweiler, author of ``The Ultimate Credit Handbook.''

The average American has 10 credit cards, said Dara Duguay, education director for Consumer Credit Counseling Service in Los Angeles, a nonprofit group funded by the government and creditors.

There are 6,000 different consumer cards in the market, including gas station and retail store cards, she said.

In addition, many credit card companies encourage people to carry balances, said Ruth Susswein, executive director of Bankcard Holders of America in Virginia, a credit card consumer group.

For instance, the GM gold card will drop your interest rate by a few percent if you carry a balance of more than $2,500. The AT&T Universal card gives you points for every dollar you carry on your balance. The points are exchanged for discounts on telephone bills and other perks.

The minimum monthly payments are so low that most of it goes toward paying interest at rates typically in the high teens, Susswein said.

For example, a consumer paying $38 a month on a $1,900 debt wouldn't have it paid off for more than 23 years, Susswein said. And by that time, that person would have shelled out close to $6,000.

Debt without bankruptcy

Debra Henry Wardlaw of Ventura knows what it's like to be neck deep in debt.

By the age of 25, she had amassed a $30,000 debt, including $10,000 in school loans and $12,000 for a car. The rest were obligations on 15 credit cards, amassed from mail solicitations, in-store promotions and others.

``When I got depressed, I shopped,'' said Wardlaw, saying it wasn't unusual for her to drop $500 during one trip to a department store.

As the debt piled on, she had to take a second job to meet the monthly minimum payments. She worked at an insurance company for $8 an hour, then headed off to do telemarketing at night and on Saturdays.

She even switched to one credit card company that promised to consolidate her debts and give her a lower minimum monthly payment, but at 29 percent interest.

Still, her income was no match for her debt obligations.

``I wasn't a dummy, but I ended up doing some dumb things,'' Wardlaw said.

In desperation, she called a credit counseling service for help. She didn't file for bankruptcy, but came close.

The center negotiated a repayment program with her creditors. She has been paying them $525 a month since 1991. By November, she will be free of debt.

``I can see a light at the end of the tunnel,'' said Wardlaw, now a management analyst.

More importantly, the experience taught her discipline.

Instead of Neiman Marcus, she goes to thrift shops and garage sales. She buys store brands. Instead of splurging on an evening out, she and her husband go on cheap, but romantic, dates such as watching the sunset at the beach.

Rachael also didn't file bankruptcy, but wished she did.

The 31-year-old North Hollywood woman owed less than $10,000 and repaid her debt in three years. But she said in some cases her road was harder than that of a friend who filed bankruptcy.

Rachael struggled for years to repay all of her debt. Her friend didn't have to under Chapter 7 bankruptcy.

Meanwhile, she was harassed by creditors, turned down for a credit card that gave her friend a new account and had to repair mistakes to her credit history herself. One creditor insists that she still had not repaid her bill, despite her sending a copy of a canceled check.

``It never occurred to me to file bankruptcy. I felt it would be like stealing,'' she said. ``Yet I am the one who is penalized.''

Credit for those in bankruptcy

Laurie said she considered credit counseling but decided to file bankruptcy instead because she could start living a debt-free life within months.

``It was too much stress,'' she said. ``Chapter 7 gets rid of your debt.''

While the bankruptcy filing remains on your credit record for up to 10 years and makes it harder for you to get a loan, there are ways around that.

Several companies specifically target people with bad credit records, because it's a lucrative niche market, Hagen said.

Foothill Nissan in La Crescenta will help customers with poor credit get car loans. However, the buyer must be out of bankruptcy, willing to pay a higher interest rate and put up a heftier down payment.

Asset Retrieval Services in La Jolla offers a special Visa or MasterCard for people in distress. The company buys your debt as from your bank, which writes off the loss. Then it offers to lower your debt in exchange for 3 percent in minimum monthly payments.

For instance, if you owe $2,000, they will lower it to $1,200 as long as you pay $36 a month. The interest rate is 18 percent and a one-time $35 fee applies. In addition, a portion of that $36 monthly payment is set aside into a ``bank'' that allows you to charge that much on the card.

``It's great for people who have filed bankruptcy and for people who don't have a credit card,'' said Barry Lotz, head of Asset Retrieval.

He's not concerned about these customers being poor risks because the payoff is substantial. It's not hard for his company to turn a 100 percent profit.

``It's amazing,'' Lotz said. ``You don't know how big it is.''

His company buys each debt, as part of a package, for one half percent of the total amount. It turns around and charges 18 percent interest, plus the one-time fee. The company's cost of buying the debt is recouped after one payment by the consumer.

So a $2,000 debt would cost the firm $10, covered easily by the first payment. After administrative costs, everything else is gravy.

``The cash flow is great,'' Lotz said.

ARE YOU IN TROUBLE?

Signs of a precarious financial situation:

You're spending more than you make

You owe more than one year's salary to unsecured creditors such as credit card companies

Your financial situation is giving you health or relationship problems

You don't save

You're paying only the monthly minimum on your credit cards

If you file for bankruptcy, it:

Stops collectors from harassing you immediately, including the IRS 

Ensures that creditors cannot attack your bank accounts, foreclose your property or take any action against you. If they wish to continue collection, creditors have to get permission from the bankruptcy court

Means you probably won't pay back all of your debts.

However, bankruptcies:

Appear on your credit history from seven to 10 years

Make it harder to get a home or car loan for two to three years

Make it harder to rent or sometimes find a job

Make it harder to apply for credit in general

Bar you from filing a Chapter 7 bankruptcy for six years

SOURCE: Merritt & Hagen

CHAPTER 7

80 percent file this form of liquidation bankruptcy

Your assets (with exceptions such as your home, car and most retirement accounts) are sold and the money is divided among your creditors

Even if your assets are not enough to pay off your debts, you don't owe your creditors anything afterwards

However, you're still liable for your mortgage and other debt that is secured by collateral, as well as for ``non-dischargeable'' obligations such as student loans and child-support payments

CHAPTER 13

About 12 percent file this form of bankruptcy

You pay off your debts in installments over three to five years

Depending on your income, you could be asked to pay off all or part of your debt

To qualify, your unsecured debt must be less than $250,000 and your secured debt must be less than $750,000

CHAPTER 11

Used when debt exceeds the limits set for Chapter 13

Businesses usually file this form of bankruptcy

7pt

SOURCE: Merritt & Hagen

CAPTION(S):

Photo, 2 Boxes

Photo: (Color) Debra Henry Wardlaw was able to avoid bankruptcy and pay back $30,000 in debt, with a credit counseling agency's help, and now lives more frugally with her husband, David.

Michael Owen Baker/Daily News

Box: (1) ARE YOU IN TROUBLE? (See text)

(2) MOST COMMON TYPES OF BANKRUPTCIES (See text)