Bankrupt at 24

She earned $27,000 a year but owned 300 pairs of shoes. Now the self-proclaimed “Imelda Marcos of Marina Del Rey” is paying for it.

This week, the 24-year-old former manager of an Ann Taylor boutique will file for bankruptcy--one of a growing number of young adults who are so in over their heads financially that they’ve resorted to bankruptcy to bail themselves out.

Just five years ago, only 1% of personal bankruptcies filed were by those age 25 or younger. By 1998, that number had risen sharply--to 4.9%, according to the American Bankruptcy Institute. Industry experts say that percentage is continuing to increase.

Sometimes it’s a teenager who has overindulged consumer desires with a passel of credit cards. In other cases, it’s a college kid who’s used student loans to subsidize an inflated lifestyle, or a person who thought youth negated the need for health insurance but was hospitalized at devastating expense.

The story of the former store manager, who asked that her name not be used for this story, is telling. She got her first credit card--a JCPenney charge with a $200 limit--at age 14. By the time she graduated from high school, she had expanded her pocketbook with several more department store cards. Working part time and living at home, she was able to pay her bills and still have money left over for savings.

Things changed when she turned 18. She moved out of her parents’ house, began working full time and started school at the Fashion Institute of Design and Merchandising in Los Angeles. She also received her first “real” credit card--a Visa with a $5,000 limit.

She celebrated by buying her “first really expensive pair of shoes”: $300 Charles David boots. When she received similar credit card offers in the mail, she added them to her wallet.

“Every time I got a credit card, I got at least one pair of shoes,” said the merchandising major, who expected her post-graduation salary would be around $40,000 and spent money as if she already had it. Things didn’t go as planned. After graduation, she couldn’t find employment in her field. Then she injured her foot and lost her job. Living paycheck to paycheck, and paying just slightly above the minimums due each month on her 15 credit cards, she could no longer afford to pay her rent or make payments on her car--a new Lexus. The car was repossessed, she was evicted and she moved home, where she had nothing to do but field phone calls from creditors, which began each day at 8 a.m.

“It’s terrible when your morning starts out with a bill collector,” said the chic and slender young woman, who, though unemployed and bankrupt, was fashionably dressed in knee-high leather boots, a body-hugging skirt and sweater and two gold necklaces.

Her financial incompetence coupled with circumstances beyond her control propelled her into the ranks of the estimated 150,000 Americans under the age of 25 who will file for personal bankruptcy this year--ambitious young adults who tasted the rewards of financial success before they could afford it.

*

Credit card companies’ aggressive marketing to high school and college students is often cited in the growing number of youth bankruptcies. Walk on to any university campus and you’ll see fliers promising instant credit. During orientation week, booths are often set up to make it easy for students to apply.

“People have access to credit at an earlier age today than they’ve ever had it before,” said Sam Gerdano, executive director of the Virginia-based American Bankruptcy Institute. It is a change that gives young people independence and freedom and helps drive and sustain the economy, he said. “[It] makes them important consumers but also means they have the capacity to run up higher amounts of debt faster than they would have in a prior era.”

More than 80% of college students have at least one credit card by the end of their freshman year, according to Robert Manning, author of the just-published “Credit Card Nation” (Basic Books). Of those, 25% received their first card in high school. According to Manning, the credit card companies are trying to get people as young as possible to establish corporate loyalty.

Until the late ‘80s, credit card companies saw college students as poor risks because they didn’t have full-time jobs. They only issued cards when students neared graduation--even then, parents had to co-sign.

That began to change around 1990, when the companies decided to bank on graduates’ earning potential and removed the co-signer stipulation. That strategy has paid back in spades.

Between 1990 and 1995, the average student credit card debt more than doubled from $900 to $2,100. By 1997, graduate students averaged seven cards and carried a total balance of $5,800. That’s in addition to school loans, which are increasingly being used to pay off students’ credit card debt.

To support average post-college debts and other expenses, graduates need to earn more than $38,000--that’s $4,000 more than the national average. Some graduates step into careers that quickly pay that much, but many do not. And, according to a 2000 survey by the National Assn. of College Employers, only 51% of students have jobs by the time they graduate.

And the unsettled state of the economy presents new reason for concern.

If the country enters a recession, “[we’re] going to see thousands and thousands of students who are with large debts and without a job,” Manning said. “I don’t hear anybody sounding the concern that students should be especially wary right now to prepare for a tight job market and to cut down their debts. There are going to be a large number of recent graduates that are going to be absolutely flabbergasted because they don’t understand what they did wrong.”

One of the reasons credit card companies are cashing in on high school and college students--and contributing to an increase in youth bankruptcy--is the students’ financial naivete. California, like most states, does not include financial literacy in its school curriculum.

A national survey of high school seniors in 1997 found a correlation between their money management skills and their states’ personal bankruptcy rates. In states where the personal bankruptcy rate was high, the mean scores on a test of their money savvy were lower. In states where the filings were low, the students knew more about money management. The survey was conducted by the Jumpstart Coalition, a national nonprofit working to increase financial literacy among the young.

“Young people can get into a lot of difficulty long before they get to the seriousness of bankruptcy,” said Stanley Breitbard, chair of Jumpstart’s California chapter. “Kids get into real problems with making the wrong investments and using credit cards to borrow, which is unwise. . . . After they leave high school, there’s no other opportunity to teach them. Colleges don’t teach it.”

That leaves the burden of financial education to parents. But parents aren’t always in a position to be good teachers. The average U.S. household carries $8,000 in credit card obligations. Most students don’t understand the implications of taking on debt and often don’t have anyone to advise them. Away from home for the first time, they may assert their independence through increased spending. It takes a strong student to resist the temptations that exist on campus. Trend conscious and highly impressionable, college students are influenced by celebrity culture and the images they see in the media and may emulate a lifestyle that is simply outside their reach.

Students from low-income backgrounds are especially susceptible to financial problems. The random pairing of dormitory roommates often matches middle- or upper-class students with those from lower-income families, who may feel the need to keep up with their new friends’ lifestyle.

“The competitive pressure to consume on campus has reached unprecedented levels,” Manning said. “I’m convinced when you give kids $5,000 or $10,000 who never would have had it, it creates an inflationary pressure--whether it’s taking a spring break trip or going to nice restaurants.”

*

That pressure was felt by a 24-year-old general education major at East Los Angeles City College. A second-generation Mexican American from Boyle Heights who asked that his name not be used for this article, he declared bankruptcy last July after racking up close to $20,000 in credit card expenses. Most of it was for clothes, dinners and drinks with friends.

“You’re at an age where you want to go out. I was 20, 21, going to clubs, going out with friends . . . so I needed clothing, the colognes. You charge dinners if you’re going to go out on dates. I did a lot of that.”

From his appearance, you’d never guess he had gotten himself into such deep financial trouble--and that’s the way he’d like to keep it. He is soft-spoken, clean-cut and well-dressed. He doesn’t talk easily about what’s happened. When friends came by the house, he would turn off the ringer on the phone so he wouldn’t have to take calls from creditors.

While making the minimum payments on his 12 credit cards, it wasn’t long before his excessive spending caught up with him. Working a part-time job that paid $1,000 a month and paying $500 toward his credit card debt and $400 in rent, he dropped out of school to work full time to pay his bills. That wasn’t enough. Two years after he’d received his first credit card, he took out a personal loan so he could rid himself of debt, but once he paid off his cards, he charged them all up again.

Because he lived at home, his parents included his income to help them qualify for a home loan and added his name to the title. When his dad lost his job, the burden of making the mortgage payments fell to him. But he was already at the edge of his financial limit. It wasn’t long before he was unable to keep up and filed for personal bankruptcy.

He was 23 years old.

Most people under the age of 25 who file personal bankruptcy file Chapter 7. It relieves the debtor of the obligation to pay back the money owed, with the exception of student loans, which are almost never excused.

To stop his parents from losing their home, the City College student filed for Chapter 13, meaning he has to pay everything back. Every month for five years he will pay $500 to the bankruptcy court. The money is then distributed to his creditors.

He’s made seven payments so far, but it will be 10 years before the bankruptcy will disappear from his credit report. “I have 53 payments left,” he said with a sad smile. He’s living at home, is back in school and hopes to become a teacher.

He will not be able to get another credit card for years. When he does, it will be at a much higher interest rate than average. Having a bankruptcy on his record may also limit his employment opportunities.

*

There are significant negatives for anyone filing bankruptcy, but for a young person it can be especially damaging, emotionally as well as financially.

“Filing should only be done after all other options are exhausted,” said Gerdano of the Bankruptcy Institute. When young people declare bankruptcy, it is often to get rid of garden-variety, unsecured consumer debt--and frequently not a large amount. “If you have another financial emergency, bankruptcy is not an option because you can’t get another discharge for six years.”

For many people, bankruptcy is a first resort rather than a last, said Catherine Pulley, spokeswoman for the American Bankers Assn., the nation’s largest banking trade organization. “It’s a quick fix.”

She does not think that banks, which issue credit cards, are culpable in the dramatic increase in youth bankruptcy. “People need to recognize that credit is a tool that can make certain things in life easier . . . but credit is also a responsibility. It’s a loan, just like any other loan,” she said. “At the age of 18, you’re an adult. You can fight and die for your country. You can vote. They’re not kids.”

Many, though, quickly get in over their heads. Of the 7,000 personal bankruptcies that We the People, a nationwide legal document preparation service, files each year, 15% are from people 25 or younger. Of those 15%, about a third are just 21.

Ira Distenfield, who heads the Santa Barbara-based document preparation firm, believes that bankruptcy, while extreme, is sometimes the best choice. “When you have no options, you start making irrational decisions,” he said. “Anything from erasing the problem with alcohol or drugs to suicide.”

Trisha Johnson, an Oklahoma mother, wishes her daughter had chosen a different way out. Distraught over $2,500 in credit card debt, her 17-year-old daughter, Mitzi Pool, took her life in 1997.

Johnson and another mother, whose son also committed suicide after being overwhelmed by credit obligations, are working to pass a law in Oklahoma restricting credit card companies’ presence on college campuses.

Meanwhile, Congress is considering changes in the nation’s bankruptcy laws that would make filing less debtor-friendly. The proposed legislation would require filers to undergo credit counseling at their own expense and increase court filing costs. It would also hold attorneys responsible for the legitimacy of their clients’ bankruptcy claims. If contested and found to be invalid, the attorney would owe $20,000 to the federal bankruptcy trustee.

That bill, if passed, could trigger a rush of bankruptcies by those trying to file before the law takes effect.

Overall bankruptcies already are expected to rise as much as 15% in 2001. While the majority of people who file personal bankruptcy are between 35 and 44, any increases would certainly boost the numbers among those under 25 as well.

*

The 24-year-old shoe addict, after moving home with her parents, said she had considered suicide as a solution to her financial problems. “[It] crossed my mind every day. If I just died, I’d feel much better,” she said. “For the longest time I thought, ‘I’m never going to get out of this. My friends aren’t listening. My parents don’t understand.’ ”

She grew up poor--the second-youngest of seven children raised on a construction worker’s salary. Her parents, Cambodian immigrants, don’t have a checking account, much less a credit card.

After a year at home, during which she also developed a drinking problem, she called 411 and cried to the operator, who gave her the phone number of a Los Angeles pro bono legal group, Public Counsel.

“I should have filed for bankruptcy two or three years ago,” said the young woman, who continues to receive credit card offers in the mail and over the phone. Her 16-year-old sister, she said, is receiving the same offers.

“Now I look at the little stuff I purchased with my cards and think, ‘I wish I would’ve waited, saved up and paid cash.’ ”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Where to Get Help

Here are some resources for those having difficulty managing finances:

* Consumer Credit Counseling Service: Free educational workshops and one-on-one meetings with credit counselors. (800) 750-2227 or https://www.cccsla.org.

* Public Counsel: Free legal assistance to low-income debtors. Also assists with bankruptcy filings. (213) 385-2977 or https://www.publiccounsel.org.

* Myvesta: Formerly Debt Counselors of America. One-stop shopping for the financially impaired. (800) 680-3328 or https://www.myvesta.org.

* Nolo: Legal information on debt and bankruptcy in easy-to-understand language. https://www.nolo.com.

* CardTrak: Information on how credit cards work and where consumers can find the best interest rates. https://www.cardtrak.com.

* Quicken: Information on debt reduction, cleaning up credit and how to borrow wisely. Also includes a debt calculator to determine how long it will take to pay off debts with various payment schedules. https://www.quicken.com.

* “Money Troubles: Legal Strategies to Cope With Your Debts,” by Robin Leonard (Nolo Press, 2000).

* “Slash Your Debt--Save Money and Secure Your Future,” by Gerri Detweiler (Financial Literacy Center, 1999).

* “Surviving Debt--A Guide for Consumers in Financial Stress” (National Consumer Law Center, 1999).