Flirting with disaster

http://www.jewishworldreview.com | We're addicted to debt. We borrow, our businesses borrow, our state and federal governments borrow. Most of the attention is focused now on the federal budget deficit ,which could reach an astonishing half a trillion dollars next year. The overall national debt could almost reach its congressionally mandated limit of $7.4 trillion.

State governments, most of which are required by their constitutions to balance their budgets, will have combined deficits of an estimated $70 billion next year. As bad as all of that is, the most troubling burden of debt plaguing this country rests squarely on consumers.

Consumer debt is on the rise and, not surprisingly, personal bankruptcies are skyrocketing. Reports show that consumer credit increased 5 percent in May to $1.76 trillion, and household debt now stands at 110 percent of annual disposable income, up from 76 percent in 1986.

Americans set a new record last year for going broke. In the last year, 1.6 million people filed for personal bankruptcy. As Elizabeth Warren, professor of law at Harvard University, puts it, "If each little family were a business, we would describe America's businesses as vastly overleveraged, and that far too many are on the brink of disaster."

More and more individuals and families are choosing bankruptcy as a way to deal with their out-of-control debts. Joseph Pomykala, professor of economics at Towson University, points out, "The bankruptcy rate is ... 12 times the rate of the Great Depression on a per capita basis."

Help may be on the way in the form of new bankruptcy reform legislation, which has recently been passed in the House and is awaiting passage in the Senate. Senator Chuck Grassley says that bankruptcy reform legislation is well overdue. "It's been 20 years since we've dealt with bankruptcy as a major overhaul. (The) one time we got it to President Clinton ... he vetoed it."

Now Grassley says, "If we get it through the Senate this time, the president will sign it." Pomykala is in favor of the legislation. "I think it's very fair to consumers. (They) will benefit through lower interest rates and maybe easier credit availability." Many consumers are beginning to resent the ease with which debtors file bankruptcy. According to the latest Cambridge Consumer Credit Index, almost three-quarters of Americans favor legislation that would make it more difficult to discharge debts.

Others disagree with the legislation arguing that it is flawed and that it does not attack the root of the problem: the aggressive tactics of credit card companies. Robert D. Manning, author of the book "Credit Card Nation," asserts, "Instead what you need is a bankruptcy bill where the banks actually get (penalized) for knowing that they're lending money to people who can't pay it back."

And while one does have to question the practices of credit card companies that deliberately target those who can never repay, the consumers who sign up for those credit cards and loans must exercise discretion, as well.

There is evidence that some consumers may be deliberately abusing the system. Studies have found many consumers who file for Chapter 7 bankruptcy do have the ability to pay some of their unsecured debt. And other studies found that as much as 10 percent of personal bankruptcy filers were repeat filers.

Pomykala told me, "There are definitely people gaming the system." This means that the option of bankruptcy, which would have been unthinkable to previous generations, is now considered, by some, a financial planning tool. That is just unacceptable.

Whether we blame aggressive credit card companies, irresponsible consumers or both, one thing is certain. It's time to bring debt under control. Who knows, if consumers become more responsible maybe they'll insist upon the same standards for the federal government.

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