Some say it's too easy to get credit, some say it's too easy to walk away from debts.
As the debate - mostly between bankers and bankruptcy lawyers continues - the nation's number of consumer bankruptcies hit a record high in 1996.
In the Tristate, bankruptcy figures also are hitting new peaks.
Personal bankruptcies made up about 95 percent of all bankruptcy filings by the third quarter of 1996, according to the American Bankruptcy Institute. As more people turn to the courts for protection from their creditors, more creditors insist that the system is flawed.
Bankruptcy lawyers and others who support the current system disagree, saying it is essential to provide a fresh start to consumers who get too deep in debt.
While some bankruptcies allow consumers to reorganize their finances and repay their debts, another type cleans the slate and discharges most or all consumer debts.
Less social stigma
Experts on both sides of this issue agree that seeking bankruptcy should be a last resort. Although the act itself carries less social shame than it used to, filing for bankruptcy still tarnishes consumer credit reports and inevitably leads to at least 10 years of higher interest rates.
John Russell, a spokesman for the Columbus-based Banc One Corp. - the third-largest credit-card issuer nationwide - said the industry has seen the number of bankruptcies filed by credit-card owners almost double in the past five to six months.
''Storefront lawyers make it very easy to declare bankruptcy,'' Mr. Russell said. ''They get paid upfront, before the creditors, so there's business there.''
Advertised fees for bankruptcy lawyers typically run from $300 to $1,000 in the Tristate. Attorneys and secured creditors - those with a lien or collateral - are paid first.
Robert A. Goering Sr. is a bankruptcy lawyer who has taught a bankruptcy course at Northern Kentucky University's Salmon P. Chase College of Law for 26 years.Mr. Goering said the number of bankruptcies has historically followed the amount of outstanding consumer credit.
He blames the lack of financial education in the country's school systems and the credit issuers for the swelling number of bankruptcies.
''The credit-card people have gone wild in issuing so many credit cards,'' Mr. Goering said. ''I don't say it's all the bank's fault, but you can't create a climate of overspending and be surprised when it happens.''
Mr. Goering said bankruptcy is the only break for debtors who get in over their heads, and opponents are wrong when they say consumers are abusing the system.
''The rise in unnecessary bankruptcies is a myth,'' Mr. Goering said.
Tighten standards
Greg Lutz, the vice president for consumer lending and credit at Cincinnati-based Fifth Third Bancorp, disagreed.
''It's money they borrowed and we spent - and we lose,'' he said. ''They walk away from it (debt), and they should have to pay that (money) back.''
Mr. Lutz said the rise in bankruptcies is hurting the credit industry's business, forcing creditors to tighten credit standards by making fewer exceptions to the lending criteria for applicants.
For example, say a lender requires a borrower to be at a job for a year before qualifying for a credit card. In times of low bankruptcy, banks or lenders might take a risk with someone with less than a year on the job.
Jim Cole, vice president of consumer collections for Fifth Third, said he sees consumers charge thousands on credit cards and then go out and buy a new car. Then, because many bankruptcies end with the consumer keeping some of his or her property - under the federal and state exemption laws - individuals simply erase their debts and keep spending.
''People are getting debts wiped out that they could repay,'' he said.
Could work it out
A study by Michael Staten, director of Purdue University's Credit Research Center supports the creditors' opinion.
Mr. Staten presented the results of the study to a federal panel appointed to study the growing insolvency problem - the National Bankruptcy Review Commission - in December.
According to the study, bankruptcy courts are unnecessarily discharging $3 billion to $5 billion of unsecured debt each year.
Almost half of all people who file for Chapter 7 - bankruptcies that allow debtors to liquidate most or all of their assets and pay creditors from the money left - could repay an average of 33 percent of their non-housing debt over three years. The same debtors could repay more than half of their total debt over five years.
Norm Slutsky said he has seen bankruptcies from all sides. He serves as a bankruptcy lawyer for both individuals and creditors, and he is a court-appointed bankruptcy trustee. Trustees oversee cases, collect and sell property and pay the creditors. If a creditor thinks that the debtor is withholding property or acting illegally, the trustee must investigate the claim.
''There is very little abuse in the system from any side,'' he said.
Mr. Slutsky said statistics like those in Mr. Staten's study can be manipulated to support either side.
He said bankers and ''pro-bankers'' like Mr. Staten want to eliminate the Chapter 7 option from the bankruptcy code.
''The view there is (Chapter) 13 for everybody, and (Chapter) 7 only in extreme cases if absolutely necessary.''
He said many filers need to file Chapter 7 because their assets are too small to ever repay their large debts. Chapter 13 bankruptcies generally do not erase the debts, but this code often allows filers to keep more of their assets and work out a repayment plan. Since 1990, more than 60 percent of all bankruptcies have been Chapter 7 filings.
Opponents and advocates of the current system do agree on one thing - bankruptcy should be the last possible resort for a consumer.
''There's more than one way to solve credit problems,'' Mr. Slutsky said.
Bernard Kaiser, executive director of Credit Counseling Service of Cincinnati (CCSC), said individuals overwhelmed by debt should start out with a careful review of their finances.
''One of the first things you want to do before you start thinking about bankruptcy is sit down and try to work out a budget,'' he said. ''Make a realistic budget bringing you down to the bare bones.''
Consumers should add up their bills and if they can't pay the bills, they should contact the creditors personally and try to work out a different payment plan.
''If you can't get relief (from creditors), that's when you want to contact us,'' he said.
Free counseling provided
CCSC provides free one-on-one budget and debt management counseling. People in serious credit trouble can enter the free debt management program, in which CCSC works out a customized payment plan with debtors and creditors. The debtor then gives a set amount of money each month to CCSC, and the organization handles the bill payments.
''We rarely ever have to say you need to run right to the bankruptcy court right away,'' Mr. Kaiser said. But the service can help consumers realize their options with a professional financial analysis.
He said many people who thought their only option was bankruptcy could have avoided it if they had turned to non-profit services like CCSC, which exist in most U.S. cities.
''It wouldn't cost them but just a little bit of time,'' Mr. Kaiser said - ''and that little time they spend is a lot better than making the 10-year mistake.''
