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PERSONAL BANKRUPTCIES CLIMB AS CONSUMERS TAKE ON DEBT.

Byline: Saul Hansell The New York Times

It was not long after Christine Olander moved to New Jersey from Chicago in 1987 that she got her first auto loan. Then came a department store card and then a Visa card. It was, as she sees it now, ``a vicious circle.''

In nine years, Olander, who is 34 years old, accumulated some 35 cards and $60,000 in debt.

Over the same period, she lost her job as a home health care aide and turned to working as a waitress for $2 an hour plus tips, hardly enough to make her minimum credit card payments, let alone to pay the rent. It took a card of a different sort to show her the way off this treadmill: A lawyer's business card, stacked up in a diner, with a toll-free number and the heading ``bankruptcy.''

Olander's experience is a flesh-and-blood profile of the forces that have produced an explosion of personal bankruptcies in the United States.

If the current torrid pace continues, about 1.1 million Americans will file to have their debts wiped away this year under federal bankruptcy laws, up 25 percent from 1995 and far surpassing the record of 900,000 cases in 1992.

Unlike the previous surge in bankruptcy, which took place in the wake of a severe recession, the current epidemic coincides with the fifth year of an economic recovery. Unemployment and inflation are low, a record number of people are working and the stock market is bounding back to its record highs.

How to explain the anomaly? In part it is because many individual households, despite the robust economy, are still being shattered by job loss or an uninsured medical emergency that pushes them over the edge.

``People don't have a safety net,'' said Jeannie Seeliger, a lawyer in Jersey City, N.J., who specializes in bankruptcy. ``They have high credit-card balances at high interest rates and they don't save any money. When the layoff hits or there is a large medical bill or a divorce, they have no cushion.''

At the same time, bankruptcy no longer carries the stigma it once did, making it far easier for those who have simply accumulated too much debt to repudiate their obligations with only modest adverse consequences. But most of all, the bankruptcy surge reflects the payback from the wave of unsolicited credit-card offers that banks and card companies have showered on many more Americans than ever before.

Indeed, though sudden tragedy still pushes a lot of people over the edge, even more are drifting almost casually into insolvency. Alan A. Aaron, a lawyer who has practiced in Midland, Texas, for 15 years, said that the vast majority of his new bankruptcy cases were ``a husband and wife working where everything seems to be going the right way, except they have more money going out than coming in.''

Not only will 1 in 100 households declare bankruptcy this year, their debt will be higher than ever before - 5.3 times their annual income, compared with only 3.5 times in 1988, according to Visa International.

All these bankruptcies cost banks and other lenders an estimated $10 billion last year, a cost they passed on to their other customers in the form of higher interest rates. But far from being a painful drain on their profitability, the added expense is in fact a planned consequence of their efforts to win business in an increasingly crowded market by making higher-risk loans.

The banks are allowing far higher credit limits than their customers' incomes would have warranted in the past. And they are giving new credit to people they previously would have shunned, including those in their first jobs, those with low incomes and even those who have just emerged from bankruptcy.

``Nowadays a credit granter can dip into a risky class of borrower,'' said Robert Johnson, a researcher with the Purdue University Center for the Study of Consumer Credit. ``Even if 8 out of 100 will go bad, they can charge enough interest to make a profit.''

Many industry experts wonder whether the banks are playing a big game of musical chairs, with more money lent out and circling from one card to another than can ever possibly be paid back. And they envision a mad scramble when the music stops.

``We don't want to have a severe economic downturn with so many people on the edge,'' said Fred C. Allvine, a marketing professor at Georgia Tech.

``If unemployment rose by 50 or 100 percent, bankruptcies would soar and the banks' portfolios would be highly questionable.'' He fears consequences far beyond the banking sector.

``Consumer credit has been the tail that has been wagging the dog in the economy,'' Allvine added, ``so we have to ask whether we have been sucking the consumer so far into debt that a mild recession could become a major downturn.''
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Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Daily News (Los Angeles, CA)
Article Type:Statistical Data Included
Date:Aug 25, 1996
Words:816
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