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Easy credit, tough times spur personal bankruptcies 1 in 100 households will be insolvent this year a record


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."

Christine 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 hTC inflation are low, a record number of people are working and the stock market is bounding back to its record highs.

The anomaly exists in part 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.

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 majority of his new bankruptcy cases involve "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, but their debt will also 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.

The banks are allowing far higher credit limits than their customers' incomes would have warranted in the past.

And they are giving 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.

Pub Date: 8/25/96

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