COLUMN ONE : ‘ . . . And Forgive Us Our Debts’ : Bankruptcy court often seems the answer to consumers’ prayers. Filings are soaring, stigmas are fading. But lenders are cracking down.

Hunted by the bill collector, fleeing from the repo man, maxed out on plastic credit, debt-weary Americans have turned to a radical solution: They are declaring bankruptcy. And they are doing it in record numbers.

If announcing “I’m broke” still has a stigma, it’s fading fast. Lawyers promote bankruptcy’s virtues in newspaper ads. Celebrities declare it. Billion-dollar companies stride into bankruptcy court almost routinely.

“The quick way to buy the stuff was to use the credit card, and the quick way to get rid of the debt was to go to bankruptcy,” recalled Stephen V. Jesser, 30, a San Diego entrepreneur who filed after splurging on a condominium, video equipment, clothes, “anything that caught my eye.”

Quick, indeed. A Chapter 7 filing under the federal bankruptcy code, used by most consumers, instantly blocks the bill collector. Many debts, including payments on most store merchandise and medical bills, are eliminated by the court. As a newspaper ad promises, once a person files: “Those calls will be stopped!”

But as those calls increasingly come to a stop, a backlash among lenders is starting.

Visa U.S.A. has mounted a national effort to sue cardholders it believes commit bankruptcy fraud, such as the auto salesman who owed $138,000 on 20 credit cards and switched the title of his 34-foot boat to a relative before filing. In Southern California, the nation’s bankruptcy capital, a U.S. Justice Department task force now targets such crimes.

The boom in bankruptcy cannot be chalked up only to conniving consumers, however. The debtors often are victims of their own poor planning, credit counselors say. And for every case of outright abuse, there may be many others in which hapless individuals have been overwhelmed by money woes arising from job loss, illness and other unforeseen problems.

Actually, just how many of America’s financial patients really need the bankruptcy cure is disputed. But this much is certain: Personal bankruptcies continue to soar, leaving banks, finance companies, hospitals, department stores and other credit providers stuck with billions of dollars in worthless loans.

The number of consumers who swear each year that they can’t pay the bills has more than doubled since the early 1980s. Last year, 616,753 consumer bankruptcy filings were lodged, an all-time record and a 12% increase from the year before, according to the Administrative Office of the United States Courts in Washington.

Nationally, one household out of every 138 is in bankruptcy; the California figure is one in 105. “The filings had been pretty steady for four or five years, and then they just went through the roof,” observed Edward M. Flynn, an analyst with the courts office.

The statistics are people like Marcelino Lopez, 57, who makes $800 a month as a janitor in a McDonald’s restaurant. Two years ago, the Pasadena resident was broadsided in a car accident on his way home from work and suffered nerve damage in his leg.

There was no way he could come up with more than $23,000 for medical bills. But the bill collectors pushed hard with phone calls, letters and, finally, legal threats. Frightened, the Guatemalan immigrant met with a lawyer who advised him to file bankruptcy.

Asked recently how he felt about being freed from his debts, Lopez replied instantly: “Gracias a Dios” --thank God.

Lopez’s lawyer is Houston Slate, a former FBI agent and unabashed newspaper advertiser whose 10-lawyer firm represents 2,500 Southern California debtors a year. Advertising about bankruptcy “tells people there’s a way out,” he said with the trace of a drawl from his native Nashville.

“It’s like if you have a bad attack of appendicitis. Aren’t you glad there’s doctors around to take the appendix out?”

A bankruptcy epidemic at a time of uninterrupted economic growth may seem puzzling. But several forces appear to be spreading it.

More than ever, consumers are tantalized with chances for easy credit. Applications for pre-approved credit cards, for instance, regularly appear in middle-class mailboxes--with little regard to the recipient’s debts. And people seize the opportunity: From 1980 to early this year, consumer credit debts (other than mortgages) ballooned from just over $300 billion to more than $720 billion, according to the U.S. Federal Reserve Board.

At the same time, bankruptcy has become more attractive. A 1978 change in the federal code increased protections covering a person’s house and car. (They still may be reclaimed and sold under certain circumstances; credit card and other “unsecured” consumer loans typically are wiped out.)

Filing costs $120. A person can file on his own, or a lawyer will do the job, usually for a fee of a few hundred to a thousand dollars.

To explain the boom, many also point to aggressive advertising by lawyers and to social influences, such as a U.S. culture that glorifies spending on luxuries and the perception that bankruptcy is losing its stigma as more apply for it.

In the last few years, singer Jerry Lee Lewis, former Texas Gov. John B. Connally, civil rights politician Charles Evers, film director Francis Ford Coppola and silver speculators Nelson Bunker Hunt and William Herbert Hunt all have had their day in bankruptcy court--to name just a few.

“In this country, bankruptcy is seen as you tried and you failed--and so what?” said Richard A. Feinberg, a consumer psychologist at Purdue University.

Several years ago, researchers at Purdue’s Credit Research Center concluded that about 20% of those who filed for Chapter 7 could have repaid their debts within 36 months instead of backing out of them, said Michael E. Staten, associate director of Purdue’s Credit Research Center. This finding remains a basis for complaints that debtors often seek bankruptcy as the easy way out, not the financial life raft it is meant to be.

But the issue is unsettled. A recent analysis of 1,557 bankruptcies during the 1980s found that no more than 9% of the debtors were in a position to repay, said Elizabeth Warren, a University of Pennsylvania law professor. The typical filer had suffered an income loss from being fired or sick or some other major problem, she said.

“What the bankruptcy data show is that incomes sometimes go down--and catastrophes can happen to you,” said Warren, co-author with two University of Texas professors of the 1989 book, “As We Forgive Our Debtors,”

She was thinking of people like the mid-level Southern California bank employee, 35, who declared bankruptcy in April. For the woman--who asked that her name not be used--bankruptcy was the culmination of years of medical and personal problems.

Her story illustrates how a combination of woes often gang up to wreck a person’s finances.

It started with a divorce several years ago. Afterward, to feel better, “I went out and bought all new furniture and a new TV,” the account manager recalled. But part of the problem was physical: She had lupus, a disease that would later require four costly visits to the hospital. Even now, her medicine costs $200 a month beyond what insurance pays.

“Depressed and confused,” she bought gold chains and earrings, gifts for relatives and other luxuries, she said. Paying was deceptively easy: “Every time I ran out of money, somebody sent me a credit card--and I accepted it.”

In fact, she was living on a plastic pyramid--relying on new credit cards to make the payments on old ones. But the scheme inevitably collapsed. Several weeks ago, a credit counselor told her the situation was beyond repair: She owed $45,000 on a $40,000 salary. After a week of painful soul-searching--”I was suicidal”--she declared bankruptcy.

Now, with the guidance of the nonprofit National Center for Financial Education in San Diego, the woman is saving money for the first time in years. “I’ve got to learn to put $500 in my savings account and take $100 to the Broadway--rather than the other way around,” she said.

Lenders add to the bankruptcy boom by showering credit card offers on people who are waist deep in debt, critics argue.

“Lenders find it more profitable to absorb bankruptcy losses than to deny loans to risky borrowers,” complained Paul Richard, vice president of the San Diego-based organization that is helping the bank employee put her financial house in order.

Those who lend concede the obvious: They made credit much more available in the 1980s. “But they haven’t been totally indiscriminate,” said Fritz M. Elmendorf, a spokesman for the Consumer Bankers Assn. in Arlington, Va. “They adhere to standards, and I think they’re tightening those standards.”

It would seem they have reason. The bank-card industry alone, notably Visa and Master Card, lost $1.75 billion from bankruptcies by cardholders last year; fraudulent or abusive bankruptcies accounted for $650 million of the loss, according to a study by Visa.

As a result, half the annual fees paid by cardholders goes to pay off the debts of other cardholders who claim they are broke. In addition, Visa is challenging bankruptcy filings that involve more than $3 million in bank-card debt in Southern California.

The targets are consumers like the man who racked up $257,000 in charges on nine credit cards, lied about his income on the applications and declared he was broke, said Lloyd D. Dix, a Van Nuys attorney who represents Visa.

“We’re not out to hurt those that file legitimate bankruptcies,” he said. “You get situations where people need a fresh start. We limit ourselves to cases where there’s fraud.”

More than 100 bankruptcy filings are under investigation by the Justice Department task force based in Los Angeles, said Davis H. von Wittenburg, U.S. trustee for the district. Common scams include concealing assets--sometimes fancy cars or boats--and filing bankruptcy under a phony name.

“We see narcotics, we see arson, we’ve got some cases with murder involved, believe it or not,” said George E. Griffith, a special investigator in the U.S. trustee’s office.

Southern California also has a problem of “petition mills” that lure unsuspecting consumers, often immigrants, into bankruptcy with vague promises to solve their credit problems. The mills charge hundreds of dollars, induce clients to sign documents they often don’t understand--and disappear.

“They run these things for a while and then they are gone,” said Steven E. Smith, an attorney and trustee in bankruptcy proceedings.

But fraud is just one element of the bankruptcy statistics. A more widespread problem, perhaps, is that in today’s credit-happy society, many people don’t know their own limits, financial counselors say. Consumers often delude themselves about the sort of lifestyle they can afford--or consciously choose to live at the edge.

An average client at the Consumer Credit Counseling Service of Los Angeles, for example, owes a total of $15,000 to 11 different lenders and has annual household income of $26,400, said Gary Stroth, executive director.

Debtors fall into distinct groups. Nationally, 30% of those who seek help have problems that can’t easily be solved outside bankruptcy, according to the National Foundation for Consumer Credit. For 36%, the answer may be a modified repayment plan with lenders.

And the rest just need to spend more prudently, said Don Badders, president of the nonprofit foundation in Silver Spring, Md. For such people, learning to live within their means “can be as simple as having both spouses brown-bag lunch instead of each buying lunch out, or getting rid of a second car,” he said.

Such sacrifices are vastly preferable to bankruptcy, credit counselors maintain.

“Quite frankly, most of the loan requests that come in that show a past bankruptcy don’t make it through,” agreed Bruce A. Wood, a vice president at California Federal Bank. In particular, he was referring to requests for “unsecured” credit such as bank cards that aren’t backed up by an asset.

In a mortgage loan, where the lender is somewhat protected by the value of the home, loan approval may be possible if the bankruptcy was concluded at least two years ago and credit has been re-established, Wood added.

It all depends on a person’s history. Debtors, for instance, may choose to file under Chapter 13, in which they agree to repay at least some of what they owe. Such an action tends to be viewed more kindly than a Chapter 7 filing, lenders said.

But establishing credit after bankruptcy is not always a simple matter, at least not at normal rates of interest.

Jesser, who owns an upholstery and carpet-cleaning business in San Diego, has yet to rebuild the credit he lost when he filed a few years ago.

At the time, bankruptcy relief was enormously appealing, he recalled. “It seemed great. You go into this thing and you get out not having to pay a cent.”

Since then he has learned that to lenders, at least, the stigma of bankruptcy is quite real. He got an auto loan only after his father co-signed the form. And he pays another penalty: Unable to qualify for a mortgage, he can’t enjoy the tax benefits of home ownership.

So Jesser has advice for debtors who contemplate bankruptcy court: “Look at the options. Once you do it, you’re stuck.”

GOING FOR BROKE

Number of personal bankruptcy filings. In thousands:

1989: 616,753

Source: Administrative Office of the U.S. Courts

* CASHING IN ON FAILURE

Bankruptcy is a booming business for lawyers, investment bankers and “vulture funds.” D1