Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, November 3, 1995 TAG: 9511030095
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: FARRELL KRAMER ASSOCIATED PRESS
DATELINE: NEW YORK LENGTH: Long
There's not much honor among borrowers anymore.
Orange County, Calif., home to Disneyland and a symbol of the good life in America, has filed for bankruptcy protection. Rockefeller Center, New York City's Art Deco symbol of U.S. financial might, has sought similar refuge.
Americans are falling behind on their credit card bills even as they pile on more debt. People are declaring bankruptcy at a rate of nearly twice a minute.
And the U.S. 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. Not paying your bills, it seems, doesn't carry the stigma of shame or ruin it once did.
``What's really happening is bankruptcy is becoming every bit as much a corporate tool as a hostile bid,'' said 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 ended June 30, more than 800,000 people sought bankruptcy, compared with 80,000 in 1958, federal statistics show.
This doesn't mean bankruptcy is worry-free. The penalty for individuals can be much higher than it is for corporations. The blot of bankruptcy can hurt a person's ability to borrow money for years.
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 be able to borrow money to pay bills coming due. The Republican-led Congress has refused to raise this so-called debt ceiling unless the Clinton administration agrees to the GOP's budget plan.
Just what would happen if Uncle Sam failed to pay the bills is a matter of opinion. It has never happened before.
House Speaker Newt Gingrich 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.
``The one thing that is assumed by all people in the financial world is that the federal government of the United States pays its debts,'' he said. ``If the debt limit were not raised and the government were not able to meet its obligations, this would be a financial disaster.''
Some think stock and bond prices would collapse, throwing the U.S. economy into turmoil and creating effects that could ripple around the globe.
Regardless of who's right, just the debate about default shows that the once-unthinkable is now thinkable.
That change in attitude has occurred over many years.
U.S. corporations, municipalities and individuals have become more financially sophisticated, using American bankruptcy laws as a way to help, not ruin, distressed people and businesses.
Many settlers of the American colonies came to their new land to escape the repression of debtors' prisons and the harsh consequences of default. U.S. bankruptcy laws, unlike the laws of some other nations, seek to let people preserve their assets rather than liquidate them.
``There are any number of reasons why people are in trouble. There are probably 800,000 different reasons,'' said Beverly Tuttle, president of the Consumer Credit Counseling Service of Connecticut, a nonprofit company that helps overextended debtors devise ways to pay bills. ``In general, people are increasing their consumer debt at an alarming rate.''
High debt, from credit cards and other sources, can turn to trouble quickly in the event of a lost job, illness or other unforeseen event. That's when bankruptcy becomes an option - although, Tuttle says, it's better to try and work out repayment terms directly with creditors.
A personal bankruptcy filing remains on an individual's credit report for seven to 10 years, making additional borrowing for homes and autos difficult, though not impossible.
Since a person can file only once every seven years, Tuttle notes, an individual just out of bankruptcy with a good job can be seen as a reasonable risk. In the 1960s or '70s, that person would have no chance of borrowing again.
``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.''
It also has become big business.
Steelmaker LTV Corp., for example, filed for bankruptcy in 1986 and had its reorganization approved just two years ago in one of the longest and most complex bankruptcy proceedings in U.S. history. It was also among the most expensive - fees paid to lawyers and others exceeded $200 million.
by CNB