DOES IT PAY TO GO BANKRUPT?
Can’t pay your bills? Relax. You can still live extravagantly, though broke, by the simple expedient of going bankrupt. It’s becoming an increasingly acceptable escape in an affluent society that’s turned overspending into a way of life
ALL ANGUS KEMP WANTED to do was get a color TV set before the new fall shows came on. The trouble was that Kemp — we’ll call him that because it’s not his real name — already owed 28 creditors $7.700. And when a finance company repossessed his blackand-white set it looked as though he wouldn’t be viewing the premieres at all. Kemp was down, but he wasn’t out. He went to another finance company, borrowed $1,200 and bought a big-screen color set, and before they came and carted it away from him he had caught all the new shows.
Kemp's other creditors kept bugging him for their money. He explained that he didn't have any money. He was 26 years old. separated from his wife, and was working as sales manager of a small Toronto firm. He couldn’t live on his income of about $150 a week in the style to which his overspending had made him accustomed. He had expensive tastes. For instance, he had a mobile telephone service hooked up in his car, and from the size of his phone bill you’d think he had a teenage daughter with a boyfriend in Tanzania. He liked to rent cars, too, and Budget and Tilden RentA-Car systems were among the creditors. So was Toronto Airways Ltd. — Kemp liked to fly and he owed $250 for lessons. He owed $300 to Eaton’s, $60 to a Toronto pet shop, $2,000 to an assortment of finance companies. He had run up $200 on his Shell credit card. In addition, he owed, as he put it, a couple bucks here, a couple bucks there.
Angus Kemp’s story has a happy ending — for him, at least. He went into personal bankruptcy and forgot all about the $7.700. It only cost him $375 — he was able to find a Toronto trustee in bankruptcy who charges somewhat less than his competitors and gets a volume business — and he didn’t lose his job. Nor did he necessarily forfeit his ability to obtain credit in the future.
“Finance companies are usually quite happy when someone has just gone bankrupt,” says Kemp’s bankruptcy trustee (who, like most money men, creditors and debtors interviewed for this article, insisted on a guarantee of anonymity). “It indicates that he has no financial obligations and is capable of taking some on. A finance company that has got stung on a bankruptcy will often lend money to the same bankrupt.”
However, a survey of several sales finance and consumer loan companies suggests that personal bankruptcy is, rather, an obstacle (though surmountable) to renewed credit. “We take each case by itself,” says an executive of a large finance company. “We don’t usually extend credit to a bankrupt until he re-establishes himself to our satisfaction. This may involve his obtaining credit elsewhere. Many bankrupts can get credit at department stores.” A spokesman for the Robert
Oh, the debtor is but a shamefaced dog With the creditor’s name on his collar; While I am king and you are queen For we owe no man a dollar!
— Charles P. Shiras (1824-1854)
Simpson Co. Ltd. says that a recent bankrupt would “find it very difficult to obtain credit here — at least for two or three years.” But. insists a director of a consumer loan company, “A bankrupt can usually get his foot in the door somewhere and start all over again.”
Few of the 1.735 Canadians who went into personal bankruptcy last year — almost double the number who did so in 1956 — had such a happy time as Angus Kemp. But his attitude, a sort of insouciance, is increasingly typical of the 10 percent of Canadian families who, according to the Consumer’s Association of Canada, are dangerously in debt. A recent poll of 3,000 representative U. S. families found a great pull between Puritan ideals of economy and the charge-it thinking of the affluent society. The charge-it cult is gaining fast. The survey showed, for instance, a potential increase of 400 percent in borrowing for travel or vacations. “Obviously,” concluded pollster Louis Harris, “credit has only begun to be tapped.” The average Canadian's consumer debt is already the equivalent of 60 days of disposable income (i.e., after direct taxes). More than half of all Canadians under 35 face consumer debts that exceed their liquid assets. Collectively, we are now in hock for seven billion dollars, and we care no more than the cricket in the schoolbook poem who fiddles while the sun shines, then asks a provident ant for a loan. Says the ant. smugly, “We ants never borrow, we ants never lend.”
The ant is an anachronism in a society geared to credit. So is the shamefaced / continued on page 76
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BANKRUPTCY continued front page 35
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“It’s a mistake to wait—buy now”
dog with the creditor’s name on his collar. The typical debtor is now a gay dog pursuing happiness in a cherry Mustang that is 25 percent paid for. He covets many of the products touted in the 1,500 advertisements that bombard the average consumer every day of the week. If he thought about it, he’d probably go along with Professor James V. Poapst of the University of Toronto’s School of Business, who is a strong proponent of consumer credit, secs nothing wrong with the Canadian way of debt and believes that, in most cases, “it’s a real mistake to wait until you have the money to buy something, since by depriving yourself of it you are making yourself poorer.”
But what of the chronic overspenders, the people whose bank accounts are here today, drawn tomorrow, who are credit-happy and all too often in trouble? As Prof. Poapst sees it, such people simply lack guidance. “We may have to teach them to budget,” he says. “A loan is a pretty sim-
ple product. All you have to learn is how to buy credit sensibly.”
Others view with considerable alarm the bankrupts, the busy bailiffs and the booming collection-agency business. In Ontario alone, 135 collection agencies garnered more than $19 million last year from consumers who couldn't or wouldn’t pay up without pressure — a rise of four million dollars in three years. And, significantly, that sum represented only about one third of the amount of money they were after.
“We have trouble with 10 percent of our accounts,” says the assistant vice-president of a large sales-finance company. “Five percent get in over their heads due to circumstances beyond their control. Five percent are simply not reliable. Everyone today shares a completely different attitude to debt from the old one of shame and guilt. But this five percent — they don’t seem to feel much obligation.” A Toronto finance-company director says that at least half of personal
bankruptcies are unnecessary. “Company-wide, we lose two percent of the average outstanding balance of our loans, and the rate is rising.” One result, of course, is incalculably higher interest charges.
Finance companies do what they can to discourage bankruptcies. “If a man is in real difficulty, we'll reduce payments and interest charges and help him get re-established,” says an industry spokesman. “We are not ogres.” Most firms will also co-operate with such social-service organizations as the year-old Credit Counselling Service of Metropolitan Toronto, which acts as an intermediary between debtors and creditors. “We're here for people who want help.” says executive director G. E. Penfold. "We don't offer any easy way out. but we have kept people working who would have been on welfare forever because they couldn't have afforded to work — their wages would have been garnisheed. We try to improve creditor-client relationships and prorate debts in such a way that our people can meet their obligations with some self-discipline. Our hope is to develop in them an ingrained habit of regular payment.”
Penfold doesn’t know what percentage of his clients backslide into debt after they leave his nest. “We haven’t been operating long enough,” he says. But a “fairly small” percentage of cases referred to the Counselling Service by other organizations don’t bother to show up for appointments. The ones who do, he feels, are strongly motivated to clean up their financial messes. The most desperate cases, he believes, are “alcoholics of credit” who haven't been able to control their urges to buy. Penfold refers to one compulsive credit situation that included a department-store account of more than $5,000.
A Manhattan psychiatrist. Dr. Harold Greenwald, has theorized that many chronic debtors are masochists who enjoy being shoved around by their creditors — one of his patients became deeply depressed after he had settled up his last account. Dr. John Clayton, unit director of the Ontario
Hospital at 999 Queen Street West in Toronto, says the overspenders he has encountered among mental patients there are “helpless pawns in their drives and needs — they are just swept along in the rat race.” William G. White, a supervisor with the Family Service Association of Metropolitan Toronto, takes the view that most of them are simply exploited by creditors and salesmen, “the way the lumber industry exploited the forests in the old days and nobody thought anything
about it." Linn K. Twinem, chairman of the Consumer Bankruptcy Committee oí the American Bar Association, teels that most of the debtors who’ll throw 1.5 billion dollars down the personal bankruptcy drain this year in the U. S. are “misguided or misinformed —they just can't look ahead and calculate what their ability will be to pay." Twinem adds that others are "simply indifferent about the whole thing and will buy what they want without any concern about paying up.”
The president of one small Toronto finance company takes a cynical — and frightening — view of this latter group. "There used to be an assumption that not to pay was an immoral act,” he says. "But was it valid? Part of our so-called morality is based on getting the most for the least. What better, then, than not to pay at all? Isn't that the best possible buy? Then, too. there is the idea, inspired by the trade unions, that the boss is a bad guy. He's going to exploit you. The
boss is also the guy down the street with the big store. So you try to beat him. One way is through the wonderful mechanism of bankruptcy. The worst credit risks — and there are more of them every year — arc people who own nothing, lost souls spiritually and intellectually, people who move through life almost like automatons, and who pay up only when they are forced to.”
Y es, hankers used to be like Scrooge before he encountered the ghost of Marley.
Bat along came TV and now
they are Good-lime Charlie.
— Ogden Nash
The advent of hanks as money department stores has had an incalculable effect on the new morality of credit. The Bank of Commerce hawks “Red Convertible Loans” and the Toronto - Dominion Bank intones, “Money cannot buy happiness. But you can give it the old school try with a low-cost personal loan.” (The low cost, incidentally, is somewhat deceptive. Figure on a three-year installment loan adding at least 25 percent to the cash price of a purchase.) Now that bankers are with it, the loan-company folks — who charge up to 40 percent interest annually on small consumer loans — will assume almost any risk to meet stiffening competition for the credit dollar.
“Anybody can obtain credit somewhere along the line,” says Murray Hahn, a Toronto bankruptcy trustee. “Banks, near-hanks, trust companies, credit unions, finance companies, individuals looking for investment opportunities — they can’t shovel it out fast enough. Many people get credit from more than one source on the same security. They don’t care if they can repay it. After a while they run out of places to borrow, and excuses, and so they go into bankruptcy.”
A composite Toronto bankrupt — described by a trustee, an expert in consumer credit and a social worker —is 35, married, with three children, a Canadian citizen of Anglo-Saxon ancestry, and an unskilled laborer who earns about $80 a week net and has compiled numerous small debts totaling about $3,500. The major creditors are a couple of finance companies — once in trouble, our bankrupt has reacted characteristically by taking out another loan to “consolidate” his debts. (“Why can’t people see that the cost of these bill-payer loans is greater?” says the administrator of a welfare fund. “No man ever borrowed his way out of debt.”)
Sales resistance is a form of selfprotection that the typical bankrupt has never acquired. “Most of them have signed up for food-freezer plans and encyclopedias,” says a busy trustee. “They are marks for all the door-to-door peddlers.” With his income dissipated, our bankrupt falls behind on his rent and faces eviction. So he pays the landlord instead of the finance companies, who threaten to seize his household effects.
The finance companies get together, prorate his debts and arrange a refinancing plan. He is told he can afford to pay off $20 a week. But he falls behind in payments and the fi-
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nance companies garnishee his wages. He is fired from his job — the boss doesn't want to get involved. He goes to a small loan company and gets $150 on a chattel mortgage. He and his family pile into their 10-year-old car and go to Montreal for a holiday. When they get home he gets the name of a bankruptcy trustee from a buddy who has taken a similar route. The trustee wants $500 — and he wants cash. Our bankrupt, a borrower to the end, gets it from an aunt of his wife's.
A loan shark is a rapacious fish that attacks people when they are beyond their financial depth.
One prime motive of most bankrupts is simply to end harassment by creditors, especially finance companies and collection agencies. If debtors often regard credit grantors as sadistic bullies, they sometimes have good cause. Fred Johnson, a Toronto businessman-turned-writer, found himself
$20.000 in the hole in 1962 and decided to take the honorable way out; within three years he had paid off more than half his debts. But, he wrote, “I’ve spent the most miserable three years of my life being hounded, threatened and abused day and night by the creditors I quixotically trusted . . . I should have gone bankrupt.” Almost free of debt today, Johnson says, “It was just my pride that kept me from going under — you’re a sucker not to. The credit system does
everything to drive a debtor crazy — or into bankruptcy. It got to be a kind of game with me. When the collection boys would call me in the middle of the night, I’d find out their home address from the city directory and start calling them at 3 a.m. There would be many more bankrupts if it weren’t for the $500 it costs.”
Jack S., a Toronto truck driver who went bankrupt last spring, borrowed $100 from his mother-in-law and raised the rest by selling a truck — “just before a collection agency was going to sue me for it ... I felt pretty good about that.” Jack S. and his family are currently living on welfare-relief payments. “I guess I don’t feel very good about going bankrupt,” he says,
“but I sure didn’t mind-the-
who were bugging me.”
Arthur K. went bankrupt in June because his Toronto hamburger stand languished when a nearby school closed for the summer. He owed $7,500 to about a dozen creditors. His bankruptcy trustee says, “We tried to talk him into hanging on until the fall. He could have — no one was pressing him. He said he didn’t want to work there any more. We arranged for the business to be taken over by the carpenter who had built the stand. He was one of the main creditors. It’s the trustee’s responsibility to minimize creditors’ losses. As for the bankrupt, when he comes in and gives us the problem, we don’t know what the story is. If I hadn’t taken his business, somebody else would have.”
John G. descended the classic route of debt, consolidation, wage garnishees, harassment and personal bankruptcy. “I don’t feel guilty, just stupid,” he says. “I should have gone bankrupt long ago.”
Wilt thou seal up the avenues of ill?
Pay every debt, as if God wrote the bill.
— Ralph Waldo Emerson (1803-1882)
Although a minority of debtors and their creditors have a well-founded suspicion of each other, 90 percent of Canadian consumers will go on enjoying now and paying later, and the discipline involved will be self-imposed. Sam Baker, the president of Baker Finance Co., of Toronto, is impressed and often surprised by the conscientiousness of such people. And Baker, who is a bit of a philosopher, has come up with a definition of the best credit risks. “They are lovers of a value over and above themselves,” he says. “For instance, there was a Japanese truck driver who worked for a cleaning company, and he was a hi-fi nut who made his own equipment, which he could have got from Philco for $200 cheaper, and he was into us for several hundred dollars for some accoustical components. Then he fell into bad company and went to jail, and from jail he wrote us explaining very pragmatically what had happened to him, and he said he would pay us back when he could. I never doubted it. When this Japanese truck driver got out of jail he paid us off. You see, he was a lover of a kind of beauty. People like him are the best credit risks. They are why we don’t have to worry too much about bankruptcies.” ★