Deadbeat Nation

EIGHTEEN MONTHS AGO SHANE AND Cindy thought they'd found their piece of the American Dream. The twentysomething newlyweds were earning more than $80,000 a year and had just bought their first home. But when Shane quit his job to open an auto-repair business, the bills ballooned. Today they owe $90,000 on credit cards and car loans, and their income has dropped by half. So last month they took their troubles to a Detroit bankruptcy court, where they had to explain why Cindy was still buying expensive Coach purses last fall when bill collectors were calling up to 20 times a day. Although they're ashamed enough to ask NEWSWEEK not to use their last name, they saw no other way out of their deepening financial morass. "We fought bankruptcy the whole way," says Shane.

But are folks fighting hard enough? It's becoming a national debate. Last year a record 1.2 million Americans filed for bankruptcy, up 44 percent from 1994, and so far this year the numbers are still rising. The deluge of deadbeats has set off a search for an explanation-and a way to slow the stampede to the courthouse. Economists are busy publishing studies, a federal commission is holding hearings and Congress will weigh in next fall. Driving the debate is a growing sense that bankruptcy has become so common that it's lost its stigma. And as the stock market teetered last week, many experts had another question: if so many people's finances are unraveling when the economy is booming, what happens when the market crashes or the next recession hits?

It's a safe bet courts will be more crowded, partly because of the growing acceptance of bankruptcy as just another lifestyle choice. Credit-card issuers, academics and judges all sing the same refrain: we buy gas at Texaco, which filed for bankruptcy in 1987. We fly on TWA, another onetime corporate deadbeat. We applaud for Kim Basinger and Tom Petty, who've both walked away from debts in the past. Says Hollywood lawyer Joseph Eisenberg: "We're seeing less of 'I want to pay people back' and more of 'I need a fresh start'." Judges compare the change to the decline in embarrassment over divorce and illegitimacy. They also blame lawyers' ads-"Solve your debt problems quick and easy!!"-for improving the image of bankruptcy. Creditors say the attitude shift is leading to abuse: one study says 45 percent of bankruptcy filers could pay back much of their debt. Complains Kansas City, Mo., judge Frank Koger: "People don't buckle down and try to work out their problems."

Debtors' lawyers and some academics don't buy that argument. Harvard Law professor Elizabeth Warren sees few frivolous filers: today's average bankrupt has debt (excluding home mortgages) equal to twice his yearly income, she says. And bankruptcy lawyers say the sense of humiliation remains. "[Judges] don't see people come in here crying, desperate for relief," says San Jose, Calif., lawyer Norma Hammes. "They don't see the debtor's shame."

More sting: The debt-ridden won't get sympathy from credit-card issuers, who are lobbying hard to put more sting in the bankruptcy code to limit losses. On their wish list: limits on who can file for bankruptcy under more forgiving Chapter 7, in which one's debts disappear, and who must use more punishing Chapter 13 and pay back debts out of future income. Card issuers are also aggressively challenging filers' prebankruptcy purchases-like Cindy's Coach bags.

It's still unclear how badly our nation of maxed-out credit-card holders will fare when the economy sours. There's fresh evidence that bankruptcies have little to do with levels of unemployment or economic growth: two new studies conclude that bankruptcies are simply a function of consumer debt levels. In the past, consumers have lightened their debt load and boosted savings as times got tougher, says Visa VP Kenneth Crone. But it's too early to tell if that trend will hold true in the '90s. Even if it does, it's clear that too many Americans are clueless about credit, and experts like New York Law School professor Karen Gross argue that debt-management classes should be made a part of the bankruptcy process. Put Shane and Cindy at the front of the class.