In the arsenal of weapons that a financially troubled family can use against ballooning debts and out-of-control spending, a personal bankruptcy filing is like a massive missile attack--it should be used only as a last resort.
For the Garcias, it may be time to launch the missiles.
Even though the Carson couple earn an income that many would envy, their finances are in dire straits. Their house is worth about $50,000 less than the outstanding balances of its three mortgages, and they owe more than $47,000 in credit card charges and personal loans, many of which are delinquent. Even though they earn more than $90,000 a year, they are falling deeper in the hole each month. The burdens of their debts, spending habits and various other financial missteps are threatening their marriage, their two children's college prospects and their own retirement.
"I try to live within a budget, but then I just get overwhelmed and give up," says Rochelle Garcia, 39, who handles the family's finances. Just juggling the bills and payments each month, she says, is enough to leave her feeling frustrated and defeated.
The solution proposed for Rochelle and husband Reginald by Los Angeles financial planner Margie Mullen isn't "nice": either a Chapter 7 bankruptcy, which would wipe out all unsecured debts, or a Chapter 13 filing, which would allow them to discharge most debts by paying all or a portion over a three- to five-year period. Either way, the filing would tarnish their credit-worthiness for years and could stigmatize them among friends, co-workers and family members.
"As a former lender, I don't take a bankruptcy lightly," says Mullen, who spent 10 years in the banking industry before becoming a financial planner. "But I don't see any other way around those bills."
The Garcias are hardly alone. The sea of American consumer debt is swelling, fed by easy-to-get credit and undisciplined spending. According to the Federal Reserve Board, the nation's consumer debt topped $1.17 trillion in September 1996, a staggering $98 billion more than the year before. A study shows that more than a quarter of the nation's households have not yet paid off credit card debt from the 1995 holiday season.
Not surprisingly, personal bankruptcy filings are surging, although many critics contend that people are too quick to take this route. According to forecasts by the American Bankruptcy Institute and Visa USA, at least 1.1 million households, about 1 in every 100, will file for bankruptcy at some time.
Overwhelming indebtedness is pervasive at all income levels. As the Garcias' experience shows, even a couple with a substantial income can get themselves into serious trouble. Reginald, 38, a maintenance supervisor for Metropolitan Stevedore, and Rochelle, a computer technician for Metropolitan Life Insurance, earn a combined annual pretax income far above the average.
How did the Garcias get here? Apparently through a combination of generosity and poor choices over the last decade.
Proceeds from second and third mortgages on their home went toward two home remodelings and to make cash gifts to several needy family members. Over the last two years, even as their debts were mounting, the couple leased a sporty Toyota four-wheel-drive vehicle and put their $1,200 1995 federal tax refund into a mutual fund recommended by their tax preparer. Throughout, they have continued to contribute $200 each month to their church, even though it has meant skipping some payments on their overstretched credit cards. "I know I'm easily swayed when it comes to money," says Rochelle. "My husband says I'm just too nice."
A successful petition for either Chapter 7 or Chapter 13, which would take about three to six months to complete, would reduce or cancel the credit card debts and personal loans that seemingly keep the Garcias in permanent financial distress and allow them a chance to begin accumulating the money they will need for the college educations of Joannie, 15, and Kawena, 11, and their own retirement.
Although the Garcias would be able to keep their home, on which they are current in their mortgage payments, a bankruptcy would require them to give up their leased Toyota and perhaps put other belongings up for sale to repay creditors. In addition, it would expose them to intense scrutiny by the Bankruptcy Court and leave a scar on their credit record for 10 years.
Mullen believes the potential benefits of bankruptcy to the Garcias will outweigh its negatives, but she worries that unless the couple permanently change their spending patterns, they are doomed to repeat their missteps.
"I'm very concerned about the psychology of the family's spending habits," Mullen says,
Mullen favors a Chapter 7 bankruptcy because, however drastically, it would wipe the slate clean, it is to be hoped once and for all.