NEW YORK - Nicholl Russell believes it was "way too easy" to file for bankruptcy in 1992, and many people in the lending business and on Capitol Hill agree.
Ms. Russell, a divorced mother earning $2.30 an hour plus tips as a waitress in Sioux Falls, S.D., found an attorney in the Yellow Pages. He had her list in pencil on a legal pad her $55,000 dollars of debt, about half of which was charged on credit cards. Then, without ever having her appear in court, he wiped out her debts by filing for protection under Chapter 7 of the federal bankruptcy code.
That was the easy part. "What's hard," she says, "is what comes after bankruptcy."
She couldn't get a job, or credit, and was even turned down when she tried to open a checking account.
"People really look down on you after they find out that you've filed for bankruptcy," she says.
Creditors alarmed about a surge of personal bankruptcy filings are pushing for legislation that would make it more difficult for debtors to walk away from their debts.
A congressional panel of experts had hearings on the matter and last month recommended conservative changes in the federal bankruptcy code, last revised in 1978. Separately, legislation was introduced that would require debtors above a certain income level to pay back at least a portion of their debt.
The bills are aimed at people like Ms. Russell, whose Chapter 7 filing allowed her to wipe away all of her debts. She had the option, although she said her attorney didn't fully explain it to her, to file under Chapter 13. It is a less drastic form of bankruptcy in which the debtor repays at least of portion of the obligations over a few years.
Paul and Barbara Ketterer of Buffalo, N.Y., for instance, filed under Chapter 13 after he was discharged from the Army in 1993 with medical problems. While waiting for more than a year for Social Security disability and veterans benefits to kick in, the Ketterers, who have three children, charged on some 14 credit cards and borrowed to buy a used van.
By the time they filed in 1996, they were $46,540 in debt and could easily have qualified, even under the pending legislation, for a total discharge. They chose instead to file under Chapter 13, and for four years will pay $375 out of their $2,125 monthly income, to repay 5 percent of the obligation.
But the Ketterers are in the minority. Personal bankruptcies rose 28 percent in 1996 to 1.13 million, and are expected to reach 1.3 million for 1997, according to the Administrative Office of the U.S. Courts. About 70 percent were Chapter 7 filings.
Slightly over 31/2 percent of credit-card balances are delinquent, according to Visa USA and MasterCard International, and 1 percent of credit card accounts are dismissed in bankruptcy.
That rate of delinquency raises the cost of credit by about $400 a year for every family in the United States, said William Binzel, a lobbyist for MasterCard International, which supports the pending legislation. The law must be reformed to lower the cost to the majority of people who pay on time, he said.
But Karen Gross, who teaches bankruptcy law at New York Law School, suggests the credit card companies and other lenders have an economic motivation for calling for reform.
"Most businesses would be jumping up and down for glee if they had a 3 percent default rate on receivables," she said. "If you can make the bankruptcy system your collection agent, you essentially defray the cost of collection on to others, which increases your profit."
Those opposed to the changes argue it would strip debtors of their right to erase their obligations and get a fresh start. In addition, it could stop consumers from borrowing and spending, which could ultimately hamper economic growth.
"A functional consumer bankruptcy system is essential to a well-operating capitalist system," said Norma Hammes of the National Association of Consumer Bankruptcy Attorneys. "There has to be some relief valve" for people the vast majority of people who file because they cannot pay.
Lenders complain that consumers have become too comfortable with what used to be a social stigma connected with bankruptcy. They've seen famous wealthy people file for bankruptcy, including corporate raider Paul Bilzerian, actress Kim Basinger, former baseball commissioner Bowie Kuhn, and Arizona Gov. Fife Symington, apparently without severe consequences. They figure it's OK for them, too.
"It is plain from the run-up in bankruptcies, that you are not dealing with a phenomenon of widespread dislocation, medical bills, unanticipated divorces and so on," said Judge Edith H. Jones of the U.S. Court of Appeals in Houston and one of four people on the nine-person congressional commission who called for standards even tougher than those proposed. "Most of these people are continuing to work. They may have been downsized and be making less money, but they are continuing to work."
Michael Staten, director of the credit research center at Georgetown School of Business, was commissioned by MasterCard and Visa to study bankruptcy filings in 13 cities between April and July 1996. He found that 77 percent of debtors who filed for Chapter 7, and 85 percent who filed for Chapter 13, were employed, with annual average incomes of $19,620 and $26,334, respectively.
But even Mr. Staten's figures show that, employed or unemployed, the percentage of bankruptcy filers who could repay even a portion of their debts was much smaller. Mr. Staten found that 25 percent of Chapter 7 filers could have paid at least 30 percent or more of their non-housing debt.
Mr. Staten supports legislation, introduced by Reps. Bill McCollum, R-Fla., and Rick Boucher, DVa., that would require any bankruptcy petitioner who earned 75 percent or more of the median income in their area to submit to a needs test. If, after subtracting living expenses, the debtor had enough to pay back at least 20 percent of his unsecured debt over five years, then he must file for Chapter 13 and not Chapter 7.
But Ms. Hammes says the bankruptcy system is already based on need.
"The debtor has to file a budget showing income and expenses. If the creditors think the debtor can afford to pay their debt, they can file a motion to convert that case to a Chapter 13 or refuse to approve it," she said.
Ms. Hammes and others blame the rise in bankruptcies on lenders extending too much credit to people who cannot pay. "As long as creditors dig deeper into the risk pool for borrowers, you're going to wind up with more losses," Ms. Hammes said.
Ms. Gross suggests that since most people use credit responsibly, lenders don't need to tighten their standards. But they do need to help fund programs to educate bankrupt borrowers on the use of credit, she says.
Ms. Russell, 29, says, she "never learned a lesson" from filing for bankruptcy, so by last year was back in trouble with another $7,500 in debt. Barred from filing for bankruptcy again, she finally sought credit counseling.
Now that Ms. Russell is earning $16 an hour as a customer support team manager for Gateway 2000 Inc., she wishes she could pay back at least part of her debt.
"It was just way too easy" to get full dismissal without fully considering the consequences.
Ms. Russell doesn't see herself as a poster child for irresponsible debtors. But she volunteers as a credit counselor now and rides herd on her children, ages 3, 6 and 8, "so that I know that they are never going to have to suffer like I did.
"They are never going to have to decide between buying food and buying diapers."