How do director Francis Ford Coppola, comedian Redd Foxx, loudmouth Morton Downey Jr. and increasing numbers of ordinary Americans spell relief?
Try b-a-n-k-r-u-p-t-c-y.
Americans may be losing the edge in most money matters to peoples across the Pacific and Atlantic. But when it comes to the financial dodge, we are without peer. Nowhere else do so many debtors evade their creditors by declaring bankruptcy.
Since 1984, each new year finds more Americans than before carrying bankruptcy petitions into their local courthouses. They range from high rollers such as former Texas governor John Connally, who lost his fortune through sorry real estate deals, to poorly paid store clerks.
Last year Americans filed more than 616,000 personal bankruptcy petitions, 12 percent more than the previous year, to set a new, dubious record, according to Robert Johnson, executive director of the Credit Research Center at Purdue University. It`s expected that 1990 will bring another new high.
Add to them the numerous corporate mega-bankrupts of the 1980s: Johns Manville in manufacturing; A.H. Robins in pharmaceuticals; LTV in steel;
Texaco in oil; and the airlines Braniff, Continental and Eastern.
The new decade was barely under way when Campeau Corp., owner of ritzy Bloomingdale`s and other department stores, and Drexel Burnham Lambert, the aggressive financial services firm, grabbed headlines with their freshly minted bankruptcies. They`re the latest victims of the last decade`s leveraged buyout craze, in which the swells running those firms mired them in tar pits of debt. Future casualties are so likely that some New York lawyers say LBO really stands for ”large bankruptcy opportunity,” reports Time magazine.
The bankrupcty boom has happened not while the nation is in a recession or a depression but in the midst of its longest peacetime expansion ever. What`s going on? Has banking become just another trend, like cocooning or low- stress aerobics?
Many people end up in bankruptcy court because of unavoidable personal tragedies such as major illness or divorce. But many don`t. Bankruptcy observers point to two major culprits for bankruptcy`s growth: the weakening social stigma surrounding it and the credit card epidemic.
Bankruptcy, they contend, no longer has the social stigma of, say, leprosy, perhaps because people have by now seen so many famous people and companies go bankrupt and come away looking unscathed.
A generation ago, bankruptcy was unthinkable. Just look at Frank Capra`s classic movie ”It`s a Wonderful Life.” After inept Uncle Billy loses the savings and loan`s money, a frantic George Bailey grabs him by the collar to throttle him, screaming: ”Where`s that money? Do you realize what this means? It means bankruptcy and scandal and prison!”
By contrast Erica Jong, in her contemporary novel ”Parachutes and Kisses,” makes bankruptcy quite thinkable, little more than a big garage sale. Her heroine, best-selling author Isadora Wing, ponders her finances after learning she owes big taxes.
What the hell if I`m broke, she thought. I`ll make it again as I made it the first time. She felt that her life was beginning again-all the more because she had to start from scratch. She would declare bankruptcy, sell her possessions, simplify her life. . . . She could certainly face life without black soap.
In partnership with the changing American psyche are competing credit card issuers, who have showered the country with too much plastic, giving cards to many folks who wouldn`t have qualified a decade ago and who wind up overextending themselves. They`re even sending credit cards to people who`ve gone bankrupt.
”I never had the major cards until after I went bankrupt four years ago,” says Fred Adams (a pseudonym), a problem debtor who attends meetings of a local chapter of Debtors Anonymous, a national organization for compulsive overspenders.
He sought court protection after amassing $24,000 in debts through store credit cards and a car loan on his $27,500 salary as a telecommunications worker. ”Now I`ve got American Express. I don`t understand it.” Still, he doesn`t hesitate to use the card.
An American Express spokeswoman said the company doesn`t ask on its applications if a person has filed bankruptcy but does indicate its intention to do a credit check. It has no absolute ban on bankrupts who later establish themselves as good credit risks, she said.
Pioneer deadbeats
U.S. bankruptcy laws are generally the most lenient in the industrial world. Liberalized in 1978, those laws for more than a decade have allowed companies or individuals who aren`t even flat broke to declare bankruptcy. That`s how Johns Manville, with more than $1 billion in assets in 1982, could go bankrupt the same year as a tactic to fight mounting lawsuits over asbestos.
Those liberal laws spring from our special heritage. ”Let`s lay it on the table. The U.S. was settled by deadbeats,” says Purdue`s Johnson. ”They were fleeing their creditors on the continent; that`s why many came here.”
Georgia, for instance, was founded as a debtors` retreat.
The Old World`s approach to debtors who welshed could be draconian. Ancient punishments, including death and selling off children as slaves, gave way to enforced wearing of silly outfits publicly and incarceration in squalid 19th Century debtors` prisons.
When the new Americans wrote their Constitution, one of the first powers they gave Congress, even before granting it the ability to raise an army, was the authority to enact uniform bankruptcy laws to prevent such indignities. But debtors` prisons cropped up here, too, the last being closed in the 1820s. American-style bankruptcy is meant to rehabilitate the debtor, thereby reclaiming as a useful member for society a loser in the great American economic crapshoot. It`s also supposed to give creditors a fair shot at getting back as much as possible of what`s owed them.
Like Hindus plunging into the Ganges to cleanse themselves of sin, debtors can dive into bankruptcy to get a what the law calls a ”fresh start.” Their debts can be wiped out totally through a personal bankruptcy known as a Chapter 7 or a more gradual process calling for partial repayment from future income, called Chapter 13.
Last year, 71 percent of personal bankrupts chose straight bankruptcies. Under Chapter 13, debtors are allowed to keep their assets; some also choose it for moral reasons, to make good on their debts.
Ironically, some people conceivably might be too poor to go bankrupt. It can take the better part of $1,000 to file in Illinois, between the $120 filing fee and lawyers` charges ranging from $300 to $900.
An economical process
For one of the most important experiences in a person`s life, bankruptcy is fairly mundane. It happens swiftly, bankruptcy courts being something of a mill. Once a debtor submits the proper papers to the clerk and they`re time-stamped, that`s it: bankruptcy.
Then angry creditors no longer can legally harass a debtor, and sheriff`s evictions must cease. A bankruptcy trustee is appointed to manage the bankrupt ”estate.”
Within several weeks, the debtor appears before the bankruptcy trustee, usually a lawyer in private practice who gets nominal pay to serve as a bankruptcy official. If the debtor has chosen a straight bankruptcy, the trustee`s job is to take any assets that aren`t ”exempt” or shielded by law and turn them over to creditors. Most debtors who seek bankruptcy, however, have no assets.
For a bankrupt to avoid court-approved repossession or foreclosure, the debtor would have to ”reaffirm” payments on those items. In a Chapter 13 case, the trustee oversees a three- to five-year agreement by the debtor for full or partial debt repayment.
A few weeks after a trustee hearing, a debtor who filed a straight bankruptcy would appear before a judge to be told his debts were
”discharged,” or erased. There are exceptions. Alimony and taxes can`t be discharged. In a Chapter 13, the discharge would come only after the successful end of the repayment plan.
After the bankruptcy is official, it remains in credit bureau files for 10 years. Getting a mortgage or major credit is virtually impossible, although, as the case of Adams of Debtors` Anonymous shows, not absolutely impossible. A Chapter 7 filer can`t file bankruptcy again for six years, though there`s no such restriction on a Chapter 13 debtor.
Tight and lenient states
Americans declare bankruptcy in federal courts, but U.S. laws give states the right to decide how much and what a debtor gets to keep.
Thus, it`s better to go belly-up in some states than others. ”You don`t want to go bankrupt in Nebraska. You barely walk away with the shirt on your back,” says Harry Dixon, an Omaha lawyer who is chairman of the Washington-based American Bankruptcy Institute. ”Now in Florida you can get away with murder.”
He alludes to Florida`s ”homestead” protection, which permits a debtor to keep a house and up to 160 acres of land. That`s why Bowie Kuhn, the former baseball commissioner who was caught off base late last year when his law partnership went bust, has allegedly sold his house in New Jersey, where homes aren`t protected, and has fled to Florida. Creditors are attempting a run-down.
By contrast, in Illinois a debtor can keep no more than $7,500 in home equity, or $15,000 if married. A bankrupt homeowner in Illinois with significant home equity might see the house seized. Among the personal property the Prairie State exempts from creditors` clutches: a car valued at no more than $1,200, necessary clothing, schoolbooks, family pictures and the family Bible.
”One debtor sent me a picture of his family gathered around the dinner table,” recalls Susan Pierson De Witt, a U.S. bankruptcy judge. ”He said,
`Thank you for making it possible for my family to have Easter dinner in our home.` He felt I had saved it for them. It was very touching. But on the other hand, there`ve been some difficult situations when I`ve had to take property from people. That`s my job too.”
”Capitalism without bankruptcy is like Christianity without hell,” said former astronaut and Eastern Air Lines chairman Frank Borman.
But bankruptcy must seem nearer to heaven for some, especially the superwealthy in Texas. The eyes of Texas have long gazed kindly upon bankrupts. Nineteenth-Century debtors from back East would write ”GTT”-Gone to Texas-on their doors and dash West, one step ahead of their creditors.
More recently, the Texas legislature actually considered a special provision to prevent creditors from taking a debtor`s private jet. Too outlandish even by Texas standards, the idea was dropped.
Even so, the rich whose fortunes sour make out pretty well in Texas. One bankrupt developer convinced a court that his downtown Houston office tower was his homestead too. It was topped by his penthouse and swimming pool.
”Those people took advantage of the bankruptcy system, but most people who go bankrupt have really been struggling,” says John Ventura, a debtors`
lawyer in Austin, Texas, giving an opinion shared by most bankruptcy experts. ”Anything unusual that happens throws them into a tailspin and causes bankruptcy.” Ventura has started a $20-a-year national newsletter for bankrupts, called ”Fresh Start.”
A party punch
Doris Nielson (not her real name) went into such a free-fall when Texas`
oil money dried up in the mid-1980s, hurting sales at her children`s-clothing store near Austin. She fell behind on monthly bills, and though her suppliers agreed to work with her, her bank inexplicably refused.
Nielson and her husband, an engineer, were forced to declare personal bankruptcy three years ago, owing more than $225,000 for the store, more than half of it to the bank. Her store`s insurer dropped her, saying she might try to burn down the store, though if she had, she wouldn`t have benefited, because she was leasing and the bank already had claimed her inventory.
Despite what the experts say about the loss of stigma, she felt marked. Some people gossiped and passed on the street without a hello. At a social event, her husband got into a shoving match with an old ”friend” who was spreading rumors about them.
They sold their house and moved into a less costly apartment. During sleepless nights she contemplated suicide, figuring, incorrectly, that the life insurance company would pay her debts, lifting the financial clouds from her husband and 10-year-old daughter.
Now she`s upbeat, working to repay her creditors. ”I`m not proud about filing bankruptcy. But it`s like somebody lifted a terribly heavy log off my shoulders. Thank goodness for it. It`s given us another chance.”
