Bankruptcy Filings Rise 21.2% in State

Californians, continuing to seek financial refuge in the courts, filed a record 53,361 personal bankruptcies in the second quarter, up 21.2% from a year earlier, a research firm reported Tuesday.

But the rate of growth in bankruptcies abated somewhat from the 30% to 35% increases seen for the previous two years--a finding certain to add fuel to the raging nationwide debate over bankruptcy reform.

The results, reported by Santa Ana-based CDB Infotech, are similar to those in a nationwide study conducted recently by Visa USA. In that study, the rate of growth of bankruptcy filings nationwide slowed to 16.6% in June, from increases in the 25% range during the previous several months.

“Whether this is a trend or not remains to be seen,” said David Sandor, a Visa USA spokesman. “But we’re encouraged by it. It suggests that more people seem to be working out their problems outside the courtroom.”

Experts say the slower rate of increase could be due to an improving economy. But they continue to worry that too many people are seduced by easy credit and the growing social acceptance of bankruptcy as a financial tool.

In 1996, total bankruptcies nationwide surged 27%, to 1.16 million. Through mid-July, filings were up an additional 23%, from a year earlier, according to MasterCard International. That puts the nation on track to hit a record 1.3 million to 1.4 million bankruptcies this year.

“It’s obvious that a lot of people have been given access to credit who can’t handle it responsibly,” said Rick Rozar, CDB’s president and chief executive.

In its study, CDB measured the number of Chapter 13 bankruptcies, which allow debtors to repay some debts while they reorganize their finances, and Chapter 7 liquidations. The vast majority of those types of filings are made by individuals or couples.

In Los Angeles County, bankruptcies jumped 21.4% from a year earlier, to 16,573 in the second quarter. In Orange County, filings were up 12.6% to 4,582.

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Although high bankruptcy levels have been associated with problems such as divorce and lack of medical coverage, many critics have pointed their fingers squarely at credit card issuers.

Ike Shulman, a San Jose lawyer and chairman of the legislative committee of the National Assn. of Consumer Bankruptcy Attorneys, said the profits that credit card companies earn from charging high interest rates more than offset the losses they suffer when debtors declare bankruptcy.

“There is little or no disincentive to them to lend to a riskier and riskier pool of clients,” he said. “That is why the bankruptcy explosion is occurring now, even when the national economy is healthy.”

Many also blame what are known as bankruptcy mills--law firms that promote bankruptcy as a solution to credit woes. “This is big business now, encouraging people to file bankruptcy to get rid of their debt,” said Marcy Tiffany, the U.S. trustee for U.S. District Court in Los Angeles.

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The new data on bankruptcies come as the National Bankruptcy Review Commission prepares to make what is sure to be a controversial final report to President Clinton and Congress in October.

Various groups, including retailers, lawyers and credit card issu

ers, have attacked the commission’s preliminary proposals as misguided and likely to worsen what many portray as a system that is already out of control.

William P. Binzel, vice president of government relations at MasterCard International, said the commission’s preliminary proposals fail to address what he believes is the biggest flaw in the bankruptcy system: that Chapter 7 debtors, who are able to repay at least some of their debts, can avoid repayment with no questions asked.

Binzel contended that the proposed changes would add to that problem by letting debtors keep more assets than most states now allow.

If adopted, that rule “would lead to a dramatic increase in the number of bankruptcy filings,” Binzel said.

Judith Benderson, legislative counsel to the commission, acknowledged that “there has been some controversy” over the proposals.

But they are intended “to make the [Bankruptcy] Code fairer and more efficient, and make the whole system that way,” she said. For instance, one change being considered would eliminate the ability of debtors in Chapter 7 cases to single out certain bills to repay, which the commission believes unfairly favors certain creditors over others.