Personal bankruptcy -- the 1990s financial strategy du jour of the middle class -- increasingly is being used by industry executives and other wealthy individuals. Nationally a record 1.4 million consumers declared bankruptcy in 1997, and that number could reach 2.2 million by 2001.
A growing number of these financially distressed consumers make six-figure salaries. In Rochester, for example the 2nd U.S. Circuit Court of Appeals will hear the case of Dr. Robert and Karen Kornfield, who filed to eliminate $534,000 in debt despite boasting an annual income of $336,000.
Hugh Brydges figured two BMWs, portable phones, and friends in Virginia Beachs banking circles could shield him from financial problems when he was diagnosed with testicular cancer in 1989. A year and several doses of chemotherapy later, he turned to bankruptcy as his only answer. Brydges had health-care coverage, but when he stopped working to fight the cancer he didn't have enough money to cover more than $100,000 in interest he owed on several real-estate investments.
"I used to lie in bed at night thinking, How am I going to come up with that money," says Brydges.
Today's easy credit certainly makes it possible for people to find themselves collapsing under heavy debts. Since 1994 lenders have mailed some 2.5 billion credit card solicitations yearly, according to the National Bankruptcy Review Commissions Oct. 1997 report.
Executives use credit cards to finance businesses on the side. When ventures fail, these would-be entrepreneurs see few alternatives to bankruptcy. A record of tax liens or regular late mortgage payments will prevent banks from issuing new loans.
"If a person can't pay off debts after two years using disposable income on a strict budget, he or she should file," advises New York bankruptcy attorney James Shenwick.
Experts stress that the stigma attached to "going belly up" has decreased. Not only did Brydges recover from cancer, he struggled through bankruptcy and even started a small manufacturing company from his convalescent bed.
"I felt so wiped out, so betrayed, but life wasn't over," recalls Brydges, who began developing blueprints for boat-mooring systems that he would launch as Sea Safe Inc. in 1991.
Despite a booming stock market, many blame bad investments for their problems. Increasingly individuals turn to Chapter 7 bankruptcy, in which a trustee liquidates the filers assets and divides them among creditors, in effect releasing debtors from responsibility for all unsecured debts. Under a Chapter 13 bankruptcy, the debtor keeps his or her assets, but must pay the creditors back a portion of the money owed.
Under either form of bankruptcy, restoring credit will take as few as two years. Some creditors even seek out recent debtors and will issue home-equity loans if the prospective borrower has a steady income and no more debt.
Brydges used credit cards to finance the start-up of Sea Safe, now in its seventh year of operation with revenues of more than $1 million. The company will be sold to Brunswick Corp. of Lake Forest, Ill., late this year, says Brydges.
One of the most important considerations for those considering bankruptcy is where they live. States regulate the number of exemptions, such as a second house, allowed from liquidation. In Ohio, for example, debtors can retain just a few assets while in Texas and Florida they can keep more. In Tennessee, Georgia, and Nevada where collections agencies make life difficult for people who can't make payments, the bankruptcy rate is highest.
New alternatives to bankruptcy are available to those drowning in a sea of debt. A growing number of credit counselors help debtors work out payment plans and negotiate with lenders. And if the credit-card industry has any impact, national laws will make it harder for Americans to declare bankruptcy.