1995's boom in busts goes on Personal bankruptcies are setting the pace

July 05, 1996|By Jay Hancock | Jay Hancock,SUN STAFF

Consumers continue to shop till they drop -- into bankruptcy court.

After a bumper 1995, bankruptcy filings continued to increase this year and show every sign of setting records. Personal bankruptcies are setting the pace.

But analysts are divided on what the boom in busts means for the business climate. Some say the trend bespeaks a basic economic frailty and points to a coming slowdown.

"We are monitoring the bankruptcies very carefully," said Maureen Allyn, chief economist with Scudder, Stevens & Clark in New York. "Business got the message that debt was risky, but consumers haven't yet."

But others interpret it as an echo of last year's slump, not as a harbinger of recession.

Slow growth from October through January "put people into some trouble, and we're seeing some fallout," said Michael Conte, director of the Regional Economic Studies Institute at Towson State University. "February and March came around, and people were falling off the edge." Conte thinks filings will slow, reined in by this year's faster-growing economy.

What's not in dispute is that shoppers are racking up credit-card debt at a giddy pace and are queuing almost just as quickly to shuck it through bankruptcy proceedings. The average household owes a record 19 percent of its yearly income in consumer installment debt, which is mostly accounted for by plastic. That's more than two months' worth of income.

A typical household earning $30,000 a year has credit-card balances of $5,700. A $70,000 household owes $13,300 -- not counting the mortgage.

Robert Williams, 30, tells how easy it is to float up to those heights. Despite being "extremely conscientious about where my money goes," the Greenbelt resident and doctoral candidate in psychology managed, with his wife, to acquire more than a dozen cards and more than $10,000 in balances.

While not coming close to bankruptcy, they saw the light of solvency last year and have been rigorously paying off card debt. "Some of the credit cards we don't use, even though we still have them," Williams said. "We're real proud of that."

Most plastic addicts aren't so disciplined. U.S. bankruptcy filings -- the majority of them by individuals -- soared by 25 percent in the first quarter of 1996 to 266,149. At that rate, filings might break a million this year for the first time.

The pace in Maryland is just as torrid. Filings here increased by 24 percent in the first quarter, to 5,148. Filings for April and May roared by 39 percent over the same months last year. Precise results for June bankruptcies weren't available yet, "but they have not gone down," said John Winkler, acting clerk of U.S. Bankruptcy Court in Baltimore.

It's not as if 1995 was a slow patch, either. Maryland bankruptcy filings were up by three fourths last year from 1990's results. Nationally, late credit-card payments popped in the first quarter to 3.53 percent from 3.18 percent a year earlier -- the highest level since April 1981.

"The hard thing to grasp is that this is occurring in a relatively strong economy," said Robert Sweet, chief economist for the financial management division of First National Bank of Maryland.

Indeed, national unemployment is only 5.6 percent; Maryland's is even less. But joblessness and salary shocks aren't so much to blame for rising bankruptcies, analysts said. Overindulgence is -- by banks and consumers both.

In the search for growth and the huge profit spreads generated by credit-card loans, banks keep granting lines to consumers of lesser and lesser means, said Scudder's Allyn. Even though unemployment is low, "churn" among jobholders is up, and many people go jobless long enough to seek bankruptcy protection, she said.

"You have all these kinds of traps that the industry sets for the consumer," said Bill Keating, who teaches debt-reduction classes at Montgomery College in Rockville and who has written a software program called "Gettin' Outa Debt." "Here's why it's so widespread: If the consumer will loan you money at 3 or 4 percent and you can loan it back to them at 18, that's one hell of a deal."

Keating is doing his part to improve the nation's credit and bankruptcy statistics. He's trying to persuade people to cut their balances, trash their cards and eventually pay cash for everything but their house.

Towson state's Conte says the statistics will soon improve -- but not because of Keating or any sudden Puritanism on the part of shoppers. The economic activity that has pulled up the gross domestic product this year will eventually boost the bankruptcy indicators, he said.

Bankruptcy filings are a classic lagging economic indicator, he added. They show what has already happened, not what will. "You don't need to be a brain surgeon to see that's it's the result of a bad economy, not the cause," he said. "It has absolutely no indicative value for what is to come."

Pub Date: 7/05/96

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