More Debtors Seeking Refuge In Bankruptcy

There seems to be little honor among borrowers anymore.

Orange County, Calif., home to Disneyland and a symbol of the good life in America, filed for bankruptcy protection after disastrous investments. Rockefeller Center, Manhattan’s Art Deco symbol of U.S. financial might, has sought similar refuge.

Americans are falling behind in their credit card bills even as they pile on more debt. Individual bankruptcies, a good barometer of financial distress, are running at the rate of nearly two filings per minute.

Today, the federal government is moving toward what could become its first default ever.

The trust between borrower and lender, which for generations of Americans represented a solemn pact, is fraying. Reneging on a promise to repay has become a fact of life.

This doesn’t mean bankruptcy is trendy, recommended and worry-free: the blot of a filing can hurt your ability to borrow money for years. But it’s no longer a stigma of shame and ruin.

“What’s really happening is bankruptcy is becoming every bit as much a corporate tool as a hostile bid,” says Wilbur Ross, senior managing director at the investment bank Rothschild Inc. and a specialist on corporate reorganization.

“It no longer has anything like the curse that it had a generation or so ago.”

That also extends to ordinary Americans, who are using bankruptcy laws in increasing numbers. For the 12 months through June 30, more than 800,000 people sought bankruptcy, vs. 80,000 in 1958, federal statistics show.

Up until now, the promise to repay has been kept by the U.S. government. But a political struggle in Washington over the budget has raised the possibility of a default.

The federal debt limit, now $4.9 trillion, must be raised within a few weeks or the government won’t have the ability to borrow money to repay bills coming due. The Republican-led Congress has refused to raise this so-called debt ceiling unless the Clinton administration agrees to its budget plan.

Just what would happen if Uncle Sam failed to pay the bills is a matter of opinion. It’s never happened.

House Speaker Newt Gingrich, R-Ga., has said financial markets would shrug off a default as a purely political event.

John Kenneth Galbraith, the Harvard economist, said a federal default would be devastating.

“If the debt limit were not raised and the government were not able to meet its obligations, this would be a financial disaster,” he said.

Regardless who’s right, just the debate about default itself shows that the once unthinkable is now thinkable.

Accounting for that change in attitude has evolved over many years.

U.S. corporations, municipalities and individuals have become more financially sophisticated, using American bankruptcy laws as a way to help distressed people and businesses, not ruin them.

A leading contributor to bankruptcy is high debt, from credit cards and other sources. It can turn to trouble quickly in the event of a lost job, illness or other unforeseen event.

“Ten years ago, 20 years ago, bankruptcy was one of the most shameful things that an individual could consider,” said Norman Ornstein, resident scholar at the American Enterprise Institute, a think tank. “If you filed for bankruptcy it was a sign of total, abject failure.”

“Now, it’s just another business strategy. Lawyers have found a way to make it a business strategy.”