We're Addicted To Debt. We Borrow, our businesses borrow, our state and federal governments borrow. Most of the attention is focused now on the federal budget deficit, which could reach an astonishing half-trillion dollars next year. The overall national debt could almost reach its congressionally mandated limit of $7.4 trillion. State governments, most of which are required by their constitutions to balance their budgets, will have combined deficits of an estimated $70 billion next year. As bad as all of that is, the most troubling burden of debt plaguing this country rests squarely on consumers.

Consumer debt is on the rise, and personal bankruptcies are skyrocketing. Reports show that consumer credit increased 5 percent in May, to $1.76 trillion, and household debt now stands at 110 percent of annual disposable income, up from 76 percent in 1986. Americans set a new record last year for going broke, with 1.6 million people filing for personal bankruptcy. Says Harvard law Prof. Elizabeth Warren, "Consumer debt is out of control. If each little family were a business, we would describe America's businesses as vastly overleveraged . . . far too many are on the brink of disaster."

More and more individuals and families are choosing bankruptcy as a way to deal with their out-of-control debts. In fact, 98 percent of all bankruptcies in this country last year were personal. Joseph Pomykala, professor of economics at Towson University, points out, "The bankruptcy rate is atrociously high right now . . . 12 times the rate of the Great Depression on a per capita basis."

Help may be on the way in the form of bankruptcy reform legislation, which recently passed the House and is awaiting a vote in the Senate. Sen. Chuck Grassley says reform is well overdue. "It's been 20 years since we've dealt with bankruptcy as a major overhaul. [The] one time we got it to President Clinton . . . he vetoed it." This time around, bankruptcy legislation has a real shot, Grassley says. "Now it's been through the House four times, the Senate three times. And if we get it through the Senate this time, the president will sign it."

Pomykala also favors the legislation, saying it will "make it harder for debtors that can pay back their debts to file for Chapter 7 liquidation; they still have the option of filing for Chapter 13, which is a repayment plan using their future income." Pomykala also says the legislation is pro-consumer: "I think it's very fair to consumers. [They] will benefit through lower interest rates and maybe easier credit availability." Many consumers have come to resent the ease with which debtors file for bankruptcy. According to the latest Cambridge Consumer Credit Index, almost three quarters of Americans are in favor of legislation that would make it more difficult for debtors to discharge their debts.

Easy money. Others argue that the legislation is flawed and fails to attack the root of the problem: the aggressive or even unethical tactics of credit card companies. Robert Manning, author of Credit Card Nation and professor at the Rochester Institute of Technology, asserts, "Instead, what you need is a bankruptcy bill where the banks actually get [penalized] for knowing that they're lending money to people who can't pay it back." Manning says this would cause credit card companies to be more judicious regarding the debt they offer to consumers.

And while one does have to question the practices of credit card companies that deliberately target those who can never repay, the consumers who sign up for those credit cards and loans must exercise discretion as well. Jacobo Rodriguez, financial services analyst with the Cato Institute, says, "I think that we should all be responsible for the actions that we take, and as aggressive as the credit card companies may be, and they are very aggressive, we as consumers are under no obligation to charge money on their credit cards."

There is evidence that some consumers may be deliberately abusing the system. Studies have found that many who file for Chapter 7 bankruptcy do have the ability to pay some of their unsecured debt. Other studies find that as many as 10 percent of personal bankruptcy filers are repeat filers.

Pomykala told me, "There are definitely people gaming the system, no doubt about it. It's like biting into the apple at the Garden of Eden; once you get a little taste of it, you might want a little [more]." This means that the option of bankruptcy, which would have been unthinkable to previous generations, is now considered a financial planning tool by some. That is just unacceptable.

Whether we blame aggressive credit card companies, irresponsible consumers, or both, one thing is certain. It's time to bring debt under control. Who knows, if consumers become more responsible, maybe they'll insist upon the same standards for the federal government.

This story ran in U.S. News on 07/21/2003.