DEADBEAT AND UPBEAT

By John Greenwald

Having a hard time paying your bills? Are your debts becoming unmanageable? Afraid that the bank may foreclose on your home? Why not join the crowd--and toss in the towel? Beat it. Just walk away. Declare yourself bankrupt. More than 266,000 consumers filed for bankruptcy in the first three months of 1996 alone, the highest quarterly total ever. Experts say an unprecedented 1 million individuals will go belly-up by the end of the year. In the process, they are turning an onerous personal disaster into something on the order of overdraft checking. "Personal bankruptcy," says researcher Robert Johnson at Purdue University's Credit Research Center, "is spreading like a virus."

It's a disease with surprisingly mild repercussions on many of those it infects--unless it turns out to be symptomatic of an economy heading off a cliff. Those declaring bankruptcy can still end up keeping their homes, their cars, their jobs and even some credit cards. The most popular provisions are in Chapter 7, which enables the overburdened to shed most of their IOUs; some debtors need only fill out a two-page form. Connoisseurs say the best places to go bust are Texas and Florida, where debtors can hold on to more of their assets than in any other states.

Still, declarations of bankruptcy aren't free lunches. Bankruptcy judgments can blemish credit ratings for up to 10 years, boosting interest charges for new debts such as car loans and mortgages. And despite the lessening stigma, many people still cannot shed a sense of failure and shame. "You feel like s--- forever," says Anne, a saleswoman who changed jobs and moved to another state after declaring bankruptcy three years ago.

The bankruptcy boom may signal trouble ahead for the U.S. economy. Real after-tax income growth has been slow for years, yet consumers have continued to buy; they have simply substituted debt for cash. Now they are even flashing plastic to buy groceries. Household borrowing currently stands at a record $1.14 trillion, an amount equal to Britain's entire gross domestic product. A spike in interest rates could thus send U.S. consumers--not to mention the rest of the economy--into a funk.

One big reason for the increase in bankruptcies: banks. As the debt keeps building, banks continue to flood mailboxes with solicitations of plastic cash--a record 2.7 billion offers were sent out last year. With interest rates that often exceed 18%, and with the banks' cost of money around 3%, credit cards now represent the banks' most profitable source of loans. Small wonder that consumer debt comprises about half of all bank lending, up from one-third a decade ago. Some lenders brazenly target new bankruptcy filers, who, for the following six years, are legally barred from declaring bankruptcy and walking away from their debts again. "What is shocking," says Daniel Guenther, a Maryland attorney, "is that even as clients sit in my office speaking of bankruptcy, they are still getting preapproved cards in the mail."

Many filings are triggered by unforeseen big expenses that come on top of a household's existing mountain of debt. "More medical expenses are not being covered by insurance," notes Ronald Weiss, a bankruptcy attorney in Kansas City, Missouri. "This, coupled with the general increase in medical costs, is responsible for more individuals needing to avail themselves of bankruptcy court." Another factor is gambling, as chances to roll the dice have multiplied. Weiss has noted an upsurge in filings in Kansas City, where four Missouri River boats serve as floating casinos. Chicago bankruptcy lawyer Kevin Benjamin is convinced he's in a growth industry. "The rate will keep going up because this is the way America is." Moreover, Benjamin adds, "the credit companies are in a real bind. If they don't give people credit, they're out of business." And then they, not their customers, would be the ones declaring you-know-what.

--Reported by Bernard Baumohl/New York and James L. Graff/Chicago

With reporting by BERNARD BAUMOHL/NEW YORK AND JAMES L. GRAFF/CHICAGO