Going Broke: creditors worry it's getting too respectable

Bankruptcy: "complete failure; ruin" (Webster's New World Dictionarym ). A few decades ago, most Americans would have gone to almost any lengths to avoid the state described above.

Today, thousands are willingly embracing bankruptcy, and a federal law passed in 1978 is encouraging them to do so. In the process, the meaning of the word "bankrupt" is being redefined. For example:

* A New York resident used the law to declare bankruptcy, thus discharging an was no impediment.

* An individual in Colorado, taking home $1,300 a month in income, filed for bankruptcy to eliminate $1,338 of debts.

* A California couple declared bankruptcy so they could save up enough money to buy a house. They eliminated debts consisting of loans taken out over 16 years of education.

Lawyers say that under provisions of the US Bankruptcy Reform Act of 1978 individuals can discharge all debts except for alimony and child support. Couples filing jointly can shiel about $35,000 worth of property before assets are used to pay off creditors.

"I don't think Congress envisioned using bankruptcy as a financial planning tool, but that's what is occuring," says Larry Young, assistant counsel for Beneficial Finance, a natiowide loan firm. "The law [favors] the people who would abuse it."

The act, which became effective Oct. 1, 1979, was the second major revision of the Bankruptcy Act of 1898. The first was in 1938.

During the first 12 months of the new act, personal bankruptcies jumped 75 percent, according to a recent study by Brimmer & co. Inc., an economic and financial consulting firm headed by Andrew F. Brimmer, a former member of the Federal Reserve Board.

"While many forces are at work in causing bankruptcies to rise -- among them unemployment, the recession, and inflation -- bankruptcy filings are in excess of what one would expect on the basis of historical experience," Mr. Brimmer says.

About 151,000 of the 397,958 Americans who went bankrupt last year did so because of the more liberal provisions of the new federal bankruptcy code, he says.

Brimmer, who based his study on 6,000 bankruptcy cases, says the majority of people going bankrupt are middle-class or working- class people. The median annual income of bankrupts in 1980 was $13,163; the median debt was $12,068. Fifty-seven percent of the bankrupts were 30 years old or younger.

One typical bankruptcy case, he says, involved a customer who purchased a $2, 000 home video recorder on installment credit. In the first year, the purchaser paid back only $200. Although the merchant was willing to take back the equipment, the customer filed a bankruptcy petition. When the case came up, the judge ordered the buyer, who wanted to keep the video recorder, to pay the merchant $650, the depreciated cost of the equipment. AS a result, the merchant was out $1,150.

Credit granters -- among them J. C. Penny stores, Sears Roebuck & Co., the National Automobile Dealers Association, Mobil Oil Corporation -- say the rise in personal bankruptcies resulted in industry losses exceeding an estimated $3 billion last year. Losses for 1981 could amount to more than $7 billion, they say. on to other customerS the debts of the bankrupts. For many creditors, losses increased two or three times in the first year of the new law. Sears is a case in point. In its year ending Jan. 31, 1980, sears lost $20 million due to customer bankruptcies. During the next year, the company lost $46 million -- about a 120 percent increase.

Sears now more closely monitors new credit accounts. Says Randolf Aires, SEars Vice-president for governmental affairs, "The jump in our losses is due to the new bankruptcy law. There's no stigma attached to filing for bankruptcy anymore. People don't think there are any consequences."

Critics say the sections of the new code that are being abused are Chapter 7, which provides for liquidation of a debtor's eligible assets and distribution of the proceeds to creditors, and Chapter 13, which provides for a court-approved repayment plan for individuals without liquidation of their assets.

In response to the increasing bankruptcies, 22 states have rejected the liberal federal property exemptions under Chapter 7 of the bankruptcy code. The federal law gives states this option.

Arizona, Florida, Illinois, South Dakota, virginia georgia, kansas, and Ohio have passed legislation and now recognize only their more stringent state exemptions. Several other states expect to do the same.

Sen. Bob Dole (R) of Kansas, chairman of the Senate Finance Committee, has filed a bill to stop bankruptcy abuses. Its chances of enactment are considered good. Under this legislation, debtors would not be able to declare bankruptcy and pay not hing to creditors.