Bankruptcy Filings Accelerate Easy Credit Blamed For 53% Increase During First Five Months Of This Year

Bankruptcy filings in the Inland Northwest have reached record levels, and many experts blame easy credit for the problem.

New cases in U.S. Bankruptcy Court in Eastern Washington for the first five months of this year ran 53 percent ahead of last year’s pace, said data quality analyst Jo Jennings.

If the sprint continues, she said, the yearend total likely will eclipse by more than 1,000 the record of 4,302 set in 1988.

That year was the last before an economic turnaround lifted Spokane out of a prolonged recession.

The statistics indicate Spokane is not the epicenter of the rumblings registered in Bankruptcy Court. Sharper shocks have hit the four court offices in the Columbia Basin.

Spokane filings increased 34 percent, while increases elsewhere ranged from 52 percent in Richland to 102 percent at Wenatchee.

Almost all the cases are personal bankruptcies filed under chapters 7 or 13 of the Bankruptcy Code. Only four farm bankruptcies - Chapter 12 - have been filed in the entire district, and only one more business reorganization under Chapter 11 has been filed than at the same point last year.

In Boise, where all bankruptcies for Idaho are filed, Chief Deputy Sue Beitia said the trend mirrors Spokane’s.

The record for the Gem State was set in 1991, when 4,149 cases were filed.

“We’re filing a minimum 450 cases per month,” she said. “That will put us way above that.”

The rush to find refuge from debt is not unique to the Inland Northwest. The Administrative Office of U.S. Courts just hiked its estimates for bankruptcy filings nationally by 6 percent for 1996.

This year’s projected total of 1.07 million will swell to 1.15 million next year and to 1.25 million in 1998, the Washington, D.C., office said.

Attorneys attribute some of the growth to changes in the bankruptcy law last year that allowed individuals to protect more of their assets from creditors.

But they and other observers say the path to bankruptcy has been slickened with plastic and other household debt. According to the Federal Reserve Board, principal and interest on debt consumed 16.7 percent of after-tax income at the end of 1995, up from 15.3 percent two years earlier.

Mortgage debt was relatively stable over that period. But installment debt soared 38 percent, while personal income climbed just 11 percent.

Celia Chen, an economist with Regional Financial Associates in West Chester, Pa., found there is a direct correlation between high consumer debt service and increased bankruptcy filings in every state.

“They basically track each other,” she said, not just for the last few years, but going back two decades.

In a study published in April, Chen said Washington residents ranked 14th in debt burden, with 17 percent of after-tax income covering principal and interest payments.

Idaho, at 16.1 percent, ranked 31st. Montana ranked 49th, with a 14.8 percent debt-service burden.

As recently as 1994, households carried more mortgage than consumer debt. But in the ensuing two years mortgage debt has climbed only marginally, while consumer debt rocketed.

“The credit card companies have been very, very aggressive,” Chen said. “They have been exploring markets they have not been before.”

Mostly, that means households with incomes once considered too low to qualify for credit, said Dain Bosworth analyst R. Jay Tejera.

Baby Boomers have shifted into a saving rather than a consuming mode, he said, forcing banks to look elsewhere for borrowers.

Many of those new customers do not know how to handle credit, and losses from those accounts are starting to mount, he said.

In March, card delinquencies reached 3.5 percent of all accounts, the highest level in a decade.

Credit overdoses contribute to the continued growth of business at Consumer Credit Counseling of Spokane, where education director Michael Hayes said caseloads have forced officials to add workers.

“We really haven’t had a drop-off in 18 months,” she said, a departure from the seasonal swings of the past.

Hayes said traditional problems like job loss, medical bills or divorce are less frequently the cause of financial duress.

More often, plastic is to blame.

“Misuse of credit gets to the point where we just can’t juggle it anymore,” Hayes said.

She gives this example to clients:

If you borrow $2,000 on a card with an 18 percent interest rate and make the minimum $35 per month payment, the debt will take 10.8 years to repay. The interest cost will be $2,574 - more than the principal.

Hayes said only 2 percent of the clients who complete the service’s counseling program seek bankruptcy, compared to 44 percent for those who don’t.

Attorney Tim Nodland said the availability of credit puzzles him.

He said individuals and couples earning as little as $1,000 per month come into his office with credit card debt ranging up to $25,000.

Some are guilt-racked; for others, bankruptcy has become a benign family tradition. “I see parents bringing in their kids,” Nodland said.

But, he said, creditors are challenging more filings as their patience with deadbeat customers wears thin.

“Bankruptcy’s no cakewalk,” he said.

Attorney Barry Davidson handles more cases involving business filings.

He said he sees fewer clients victimized by a medical emergency or job layoff, and more taking advantage of some provisions of the law that ease tax liabilities.

Davidson also noted a rise in traffic from contractors, subcontractors and suppliers caught in the residential construction downturn.

During the building boom of the early 1990s, he said, “We probably went four or five years without seeing a subcontractor.”

Chuck Monson is the executive vice president for the National Association of Credit Management office in Spokane, which covers an area from the Cascade Mountains into Western Montana.

Members meet to discuss how well their customers keep up with their bills. The number of names coming up for discussion has been getting longer and longer, Monson said.

“We think we are seeing more of our members who are experiencing payment problems with their customers,” he said.

Although some of the problems were created by businesses that were too lax extending credit when times were good, Monson said, “It’s not any big thing you can point a finger at.”

That may be part of the problem, several said.

“It is not as much a black mark as it used to be to have a bankruptcy on your record,” said Tejera. “You’re not necessarily signing your death warrant.”

“There’s no stigma anymore,” agreed Nodland.

, DataTimes ILLUSTRATION: Graphic: Debt piles up