THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Wednesday, August 14, 1996 TAG: 9608140003
SECTION: FRONT PAGE: A12 EDITION: FINAL
TYPE: Editorial
LENGTH: 100 lines
In 1992, the economy was so flat that President Bush lost his bid for re-election, even though he had won a popular war. More Virginians declared bankruptcy that year than ever before.
This year, the economy is humming so sweetly that President Clinton is favored to win re-election. So are bankruptcies down? Hardly.
This probably will be the first year that 1 million Americans declare bankruptcy.
Virginia is doing its part. Only seven states have higher bankruptcy rates, and the commonwealth is shattering its record for bankruptcies, set in 1992.
Through June this year, 17,307 Virginians filed bankruptcies, compared with 15,204 during the first half of 1992. That 2,103 increase represents a lot of misery and unpaid bills.
Records were also broken locally. In Norfolk bankruptcy court, serving South Hampton Roads, 4,027 bankruptcies were filed in the first six months of this year, compared with 3,877 in the first half of 1992, the previous local record. All of those filings were for personal bankruptcies except for 148 business filings this year and 212 in 1992.
So what's going on? According to conventional wisdom, bankruptcies should rise in hard times, as people lose jobs, and fall in good times, as people make more money.
Why is conventional wisdom wrong?
First off, surprisingly enough, there does not appear to be a correlation between the rate of unemployment and the rate at which bankruptcies are filed.
In 1992, for example, Tennessee had the lowest unemployment rate and highest bankruptcy rate in the nation. Conversely, West Virginia had the highest unemployment rate and one of the lowest bankruptcy rates in the nation.
The financial-services research firm SMR Research Corp., in Budd Lake, N.J., has studied bankruptcies for the past six and a half years - both nationwide and within individual states, cities and counties. The firm attempts to determine what causes and doesn't cause bankruptcies. It publishes studies and sells them to various financial institutions and the government.
Among the different states, cities and counties, SMR found no correlation between unemployment and bankruptcy rates. Also surprisingly, it found little correlation in different regions between loan-deliquency rates and bankruptcy rates. Further, SMR found no correlation between harsh state bankruptcy laws - allowing filers to keep very little - and lower bankruptcy rates.
Apparently what drives people to bankruptcy has less to do with the state of the economy than with bad things that happen to them. SMR uses the term ``insolvency event'' to describe an accident or other event that drives a person to declare bankruptcy. (The old-fashioned term is ``rainy day,'' as in, ``Better save for a rainy day.'')
Loss of a job tends not to be an ``insolvency event,'' said SMR President Stuart A. Feldstein, because the person's debt is not immediately increased, unemployment benefits kick in and often a second person in the household has an income.
The three key ``insolvency events'' are:
Becoming injured or getting very sick without having health insurance. Your income stops while your debts suddenly double or triple. Rising health-care costs only make matters worse. About 15 percent of Americans lack health insurance. That's about the rate at which Virginians are uninsured.
Getting divorced or suddenly being ordered to make up for months or years of missed child-support payments. Some 30 states, including Virginia, are cracking down on deadbeat absentee parents. Many absentee parents are filing for bankruptcy in order to escape old debts and free more of their income to pay back child support.
Having an auto accident while lacking insurance. Of the eight states with the highest bankruptcies, half, including Virginia, do not require liability insurance. In the commonwealth, a driver can avoid buying liability insurance by paying an annual $400 uninsured-motorist fee. That fee provides no insurance coverage. In effect, uninsured motorists cross their fingers and hope for the best. If they have accidents, they may well declare bankruptcy.
In a more perfect world, there would be fewer bankruptcies because:
A way would be found to insure the health of more people. Making health insurance transportable from job to job was a step in the right direction.
Absentee parents would be caught after they missed payments for two or three months, not years; and divorce would be rarer.
Everyone would have auto insurance. According to SMR studies, Virginia would surely reduce its bankruptcy load if auto insurance were required. The state needs to study the true cost of not requiring auto insurance.
SMR President Feldstein does not believe credit-card debt is a main cause of bankruptcy. For one thing, he said, it amounts to only 5 percent of total consumer debt. For example, total credit-card debt in America is about $280 billion, compared with home mortgages totaling $3.6 trillion.
What tends to happen, Feldstein said, is that people have an event that gets them into a financial hole. They try to use credit cards to crawl out of the hole, but they can't. Thus credit cards contribute to the eventual bankruptcy but are not the intitial cause.
Here's how to avoid bankruptcy.
Rule one, according to Feldstein: ``Find happiness living within your means.'' Making more money is no insurance against bankruptcy. In fact, bankruptcies tend to be filed by people at the high end of middle class, people with easy access to credit. Low-income people have far less access to credit.
Rule 2: Save for a rainy day, or, if you prefer, an insolvency event.
Rules 3 and 4: Carry health and auto insurance.
Rule 5: If you're married, stay married.
Rule 6: If you are having trouble paying bills, seek counseling before it's too late (see editorial below). MEMO: Related editorial printed on page A12: "Consumer Credit Counseling
Service of Virginia..." by CNB