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Bankruptcies are on the rise as consumers to deeper into debt.

The economy is good, if not great, but consumer debt is running rampant. Why are more people than ever filing for bankruptcy protection?

The Administrative Office of the U.S. Courts reported this spring that bankruptcies are at an all-time high, having risen 23 percent in fiscal 1997 compared with fiscal 1996. The office said that filings rose in nearly every bankruptcy court nationwide. Eighty-two of the 93 courts showed greater than 15 percent growth.

Nonbusinesses--the category made up mostly of individuals--were among the most frequent filers. The courts logged about 1.3 million of those petitions in 1997--an increase of 24 percent over 1996. Business filings totaled about 54,000--1 percent more than were filed last year, the office reported.

Several factors--some of them obvious--may be at play, according to the office and official debt-watchers. "The surge in bankruptcy filings most likely was linked to the rise in consumer debt as a percentage of personal income," the report said.

Others note that the stigma associated with bankruptcy has diminished over the years and that the filing process has become easier. A recent Wall Street Journal article points to yet another reason that bankruptcy may be on the rise: a surge in entrepreneurship and the use of credit card debt to fund fledgling businesses. (Rodney Ho, Banking on Plastic to Finance a Dream, Wall St. J., Mar. 9, 1998, at A1.)

That article traced the journey of an entrepreneur set on inventing a better golf club. Credit card companies became Wilbert Murdock's unwitting venture capitalists as he ran up $25,000 in personal debt in two years to fund his vision. Murdock, of the Bronx, New York, hasn't become a statistic in bankruptcy court, but he has been sued by Citicorp's Diners Club, and he has created an elaborate system for keeping collection companies at bay.

Still others hint that the credit card companies themselves may be part of the problem. Another news article detailed the travails of Rick and Christie Fetterhoff of Harrisburg, Pennsylvania. (Matt Murray, Either Bankruptcy Is Too Easy, or Credit Is, Wall St. J., Mar. 2, 1998, at A1.)

The Fetterhoffs have been in Chapter 13 bankruptcy protection since 1995, owing more than $160,000. The couple continues to receive tempting offers of credit advances ranging from $5,000 from Banc One Corp. to $250,000 from New Century Mortgage Corp.

Many credit card lobbyists counter that the increasing number of bankruptcies has resulted because current laws foster them. "[The] flawed bankruptcy laws... allow individuals to discharge debts even if they could repay some of what they owe," according to a statement issued by the Bankruptcy Issues Council, a Washington, D.C., group funded by Visa and MasterCard.

Congress has begun the debt intervention process--not necessarily to address personal bankruptcy issues but to overhaul the bankruptcy system in general. A smattering of bills has been introduced in Congress. The major ones are S. 1301, sponsored by Sen. Charles Grassley (R-Iowa), and H.R. 3150, sponsored by Rep. George Gekas (R-Pa.).

"The House bill is definitely a creditor-sponsored bill," said Samuel Gerdano, executive director of the nonprofit, nonpartisan American Bankruptcy Institute in Alexandria, Virginia. Gerdano said this legislation introduces the concept of "needs-based" bankruptcy, which means that the amount of debt relief a person receives and how much he or she is able to repay would be determined by a formula rather than on a case-by-case basis.

"The creditors can take a snapshot of the debtor's finances and decide, by the numbers, who pays," Gerdano said. "The Senate bill, on the other hand, is less to the creditors' liking because it requires creditors to look at the debtors on a case-by-case basis."

Legislative hearings on both bills were held in March. Each may be up for floor votes by late spring, Gerdano said.

Copies of the report by the Administrative Office of the U.S. Courts are available by calling (202) 273-0107 or by visiting
COPYRIGHT 1998 American Association for Justice
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Copyright 1998, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Brienza, Julie
Date:May 1, 1998
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