Declaring bankruptcy: when individuals try to copy Texaco

What if you wanted to do what Texaco Inc. has done? What if you wanted to file for bankruptcy because you had a big legal claim against you, one that wasn't settled yet? You probably wouldn't do anything this drastic. For one thing, you wouldn't come out of bankruptcy with investors lining up to give you more money and bankers lining up to lend to you, as they eventually will do for Texaco. Instead, you would carry a legal stigma with you for years and would find it difficult to get a credit card or bank loan for some time.

Yet some 400,000 Americans filed for protection under one of the bankruptcy laws last year, a number that's growing each year as more people get too deep in debt, as creditors and collection agencies get tougher about demanding money, and as more people rationalize that what's good for business is probably good for them, too.

``People are asking themselves, `If Texaco can file, why can't I file?''' says James Chatz, a Chicago attorney who specializes in personal and business bankruptcy. ``I think you'll see more wage earners declare bankruptcy because of Texaco.''

Even before Texaco filed for bankruptcy to protect itself against a $10.52 billion damage award to Pennzoil, the rate of personal bankruptcies had been rising, Mr. Chatz and other personal finance specialists say.

``I see a much harder line from creditors and collection agencies to collect everything they can,'' Chatz says. ``They're not willing to compromise or talk about a settlement.'' Collection agencies, he notes, are graded on how much money they can get out of debtors and they use these grades to help line up more clients.

``They can't call you in the middle of the night any more, but they still have their letters, and they still call. So people declare bankruptcy to get these guys off their backs,'' he says.

A more common reason for bankruptcy - irresponsible use of credit - is now touching a new class of people.

``There's an increasing number of yuppie professionals who are prone to running up too much credit, can't pay it off, and file for bankruptcy,'' says Kenneth Malek, a partner in the Chicago office of Seidman & Seidman/BDO, accountants.

At the same time, Mr. Malek says, ``we're seeing in the Southwest and West, in the oil patch, a lot of individuals in previously very lucrative businesses who are now faced with severe economic times.''

On the other hand, Chatz says, he has seen people declare bankruptcy when they had only $2,000 of debts. ``It's pretty silly to pay $500 to $700 for an attorney to get out of $2,000 in debt,'' he says.

Before considering bankruptcy, people should understand what it is and what it means to their credit. One thing to remember, says Dennis M. Gurtz, an accountant and financial planner in Washington, is the word ``protection.''

``In most cases, you're filing for protection from bankruptcy, not bankruptcy,'' he says. ``Creditors can get very nasty and you're asking the court to protect you from them while you work things out.''

The two most common forms of personal bankruptcy protection are Chapter 7 and Chapter 13, with Chapter 7 being the most drastic of the two. This one wipes out all debts except taxes, alimony, and child support. If there are any debts secured by property, like a home or car, these normally have to be paid if you want to keep the property.

Federal bankruptcy law lets a married couple keep up to $15,000 of equity in their home, $2,400 in a car, and $1,500 in professional equipment. Individuals get to keep half as much. As for the remaining assets, most will be sold by a court-appointed trustee to clear as much debt as possible. This may be a severe step, but it may be the best alternative when there is little or no income.

It's understandable, then, why most people go for Chapter 13 if they can. Here, they can keep all their property and personal belongings. They can also consolidate all debts, plus taxes (and the bankruptcy attorney's fee), and work out a trustee-supervised plan to repay them over three to five years. The plan has to include a budget to show how much income is going toward paying off creditors.

In most cases, a declaration of bankruptcy will keep most creditors away, but it will also prevent you from getting any new credit for some time. The fact that bankruptcy was declared remains on credit records for 10 years.

Depending on the circumstances of the bankruptcy, however, it may be possible to get credit during that time. People who had to declare bankruptcy because of a sudden, unexpected financial crisis have been able to re-establish credit. It's a slow process that includes talking face-to-face with local retailers, getting a small loan from a credit union, taking out and repaying a passbook loan secured by money in the passbook, and being extra responsible about not bouncing checks.

If you do get in financial difficulty, Chatz says, be wary of debt consolidation services. Often, they just pool your debts and charge you a high fee to collect them from you, he says.

You may be better off starting with a consumer credit counselling agency in your area. Many of these operate on a non-profit basis and charge little, if anything, for their services. They may be able to help you work out a debt-repayment plan, while putting you on a tight, credit-free budget, and keeping you out of bankruptcy court altogether.

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