O.C. Personal Bankruptcy Filings Up 19%, Survey Reports

Personal bankruptcy filings in Orange County jumped 19% in 1996, propelled by rising credit card debt and the destigmatization of bankruptcy, a new study found.

But Orange County, which has staged a stronger economic recovery than most other areas of the state, fared much better than Los Angeles County and California as a whole.

Led by a record level of personal bankruptcy filings in Los Angeles County, the number of Californians seeking court protection from creditors skyrocketed 35% last year.

“It’s the economy,” said analyst John Karevoll, who conducted the study for the information services firm CDB Infotek in Santa Ana. “Clearly, L.A. is lagging in the comeback.”

Personal bankruptcies in Los Angeles County zoomed 64% in 1996 to 53,865, by far the most of any major California counties, according to CDB. The firm compiled filings of Chapter 7 and Chapter 13 bankruptcies, the vast majority of which are made by individuals.

“People are much more willing to file for bankruptcy than they were five or 10 years ago,” said Karevoll. “They’re using it more as a financial tool.”

He also noted that the economic recovery has not helped all segments of the population and that “there is still distress in the economy, especially among low-wage earners.”

But bankruptcy attorney Joseph A. Weber said his mushrooming caseload can be attributed primarily to one factor: financial survival for people who have run up huge amounts of credit card debt.

In the past, Weber said, people had fairly low credit limits on their bank cards. If they got in financial trouble because of a divorce, the loss of a job or medical bills, they would cut back on expenses or get a second job. Today, people are more willing to take on larger debt, and use credit cards to bail themselves out.

“I’m seeing kids walking around with $15,000 or $20,000 credit lines,” Weber said. “I used to be shocked if somebody came in with $30,000 or $40,000 on bank cards. Now, I’m seeing people with six figures on their cards.”

“The credit card people are just handing things out like candy,” said bankruptcy attorney Christopher Blank in Newport Beach.

And that’s not likely to change, he said. Lenders make so much money from credit cards that a slight increase in losses due to bankruptcies “is pennies to them,” Blank said.

Steve Cochrane, a senior economist at Regional Financial Associates, a West Chester, Pa. economic research and consulting firm, said a change in bankruptcy laws about a year ago allowed households to shield more of their personal assets from creditors.

Cochrane predicts the number of filings will decline this year, and again in 1998, because the effect of the new bankruptcy laws “will run its course.”

However, personal bankruptcies will still be at historically high levels--again, because of “the fact that there’s no stigma attached now to bankruptcies.” That has fueled debate over whether the laws should be changed again to make it more difficult to enter bankruptcy, he said.

Contributing to the problem, Karevoll said, is the emergence of an industry that makes entering bankruptcy far less painful than in the past. Previously, he said, bankrupt debtors were essentially cut off by financial institutions and others offering credit.

Now, Karevoll said, there are credit cards targeted specifically at people who have filed for bankruptcy, making it easier for them to fall back into debt.

One bright spot in the figures, however, is that corporate bankruptcies have continued to fall from recession levels.

In Orange County, the number of Chapter 11 bankruptcy filings--nearly all of which are made by businesses seeking protection from creditors while they reorganize their finances--fell 21%, to 204, in 1996. Statewide, they declined 20%, to 1,634.

In Los Angeles County, the number of new Chapter 11 cases was down by 28%, to 629.

“The economic recovery is clearly helping the business climate quite a bit, and that’s reflected in the numbers,” he said.

It also stems from the growing sophistication of company executives, said attorney Blank.

“Businesses have gotten smarter and people who lend to businesses have gotten smarter about working out their problems before entering bankruptcy,” he said.