BANKING

Fast forward to 1992. Johnson pays off the last of his creditors. “We didn’t have to pay everything, but everybody got something,” he notes. One year later, Crestar approves the debtless Johnson’s request for a loan to finance his own business, Johnson Interprises Inc. Today, expansion plans are in the works for the company’s products – Popy’s Gourmet Foods.

Despite a bankruptcy filing, Jeffrey Johnson and his wife, Laura, qualified for a loan to start their own business.

Johnson’s story is not unusual. Last year more than 31,000 Virginians filed for bankruptcy – that’s a number roughly equal to the entire student bodies of the University of Virginia and James Madison University combined. Johnson’s creditors, on the other hand, were pretty lucky. They got most of their money back. The number of bankruptcies filed in Virginia has more than doubled in the past 10 years.

These figures are rising rapidly and don’t show any signs of slowing.

Like retro-’70s fashion, bankruptcy seems to be enjoying an uncomfortable surge in popularity. But unlike sideburns and leisure suits, it’s a little easier to explain the bankruptcy trend. W. Stephen Scott points to credit-card debt as a leading cause. Scott, a Charlottesville bankruptcy attorney who heads the Virginia Bar Association’s bankruptcy section, estimates that 90 percent of filers are done in by consumer debt.

“It seems to me [credit-card issuers] are being awfully liberal with getting people to pick up their accounts,” he says. “It’s the American system of competition. Everyone is trying to get the most customers.”

Capital One, a Falls Church credit-card company, has some of the most conservative methods in the industry. But even company spokeswoman Diana Sun concedes that credit cards add to the nation’s bankruptcy woes. “What a lot of [issuers] do is send out these higher lines because it bumps up their response rate,” she says. If consumers get two credit-card solicitations in the mail, one offering a $10,000 limit and the other a $1,000 limit, most would pick the higher line of credit.

So are banks, with their unsecured credit lines, really at fault for the rise in bankruptcy filings? No way, says Chaye Neal, a collector in Crestar’s litigation department. “It’s a matter of self-control,” she says. “The creditor gives you an amount of credit based on your ability to pay it back. We cannot force you to apply for a credit card, and we cannot force you to use your credit card.” Yet Bruce Whitehurst, vice president of the Virginia Bankers Association, says some people can’t help themselves.

“Managing revolving credit cards is much more difficult than car or mortgage payments for most people,” Whitehurst says.

Harbour Credit Counseling Service Inc. in Virginia Beach sees its share of consumers who revolve their monthly credit-card balance. Executive Director Ray Noftsinger calls it the minimum-payment trap. “They have adjusted their standard of living to making just the minimum monthly payment on their credit cards,” he explains. “Quite often that minimum monthly payment only covers the interest and little more.”

Overspending isn’t the only factor in the bankruptcy surge. Ten years ago, who would have thought that Armani would come out with a polyester suit? We live in a fickle society with fast-changing values. “Bankruptcy is no longer the social stigma it was 10 or 20 years ago,” Whitehurst says. “It’s now considered a way out for a lot of people who wouldn’t have even considered it in the past.”

Some bankers blame this social tolerance in part on the advent of legal advertising – classifieds announcing “Chapter 7 Bankruptcy, $325 + costs” in the column above $175 divorces. Scott says the disrepute associated with bankruptcy has all but evaporated. “The more filing going on, the more general consumers hear about it.”

Crestar spokesman Barry Koling agrees, but he says bankruptcy is primarily a macroeconomic issue: A poor economy and increased downsizing have forced more people to file.

There’s plenty of debate over that point, however. The economy was terrible in 1975, Noftsinger points out, but bankruptcy was not socially acceptable back then. “If you took a snapshot of five years ago and a snapshot of today, you wouldn’t recognize it,” he says.

If not the economy, then what? “Other than the systematic moral decay we have in this country?” Noftsinger asks. “You’d have to be blind, deaf and stupid not to see.”

Financial institutions have tracked the rise in bankruptcies and are taking action.

Capital One changed the way it handled its credit-card division about eight years ago. The division now emphasizes credit risk rather than credit volume, Sun says. “We’ve been very, very careful about it for a long time now, and it has really paid off,” she says.

Being more selective hasn’t hurt business. Since implementing the plan, Capital One’s accounts have risen from 1 million to almost 9 million. The company’s average credit limit is $3,600, much lower than the national average of $5,700. And Capital One’s charge-off rate – the percentage of credit that goes bad – is also among the lowest in the country.

Crestar hasn’t needed to change its policies much. The bank has always been careful in screening potential customers, Koling says. “We’re in business to lend money to credit-worthy customers,” he says. “As the economy has gotten more difficult, we’ve become more careful. To some extent we have tightened our credit standards; we’re being more selective. We look at credit across the board, at [the customer’s] capacity to repay.”

Even credit unions are feeling the rise in bankruptcies. The Virginia Credit Union in Richmond has tighter credit standards, says Jean Tudor, senior vice president of marketing and member services. “We’re looking to get more secured lines and collateral,” she says. “In the past, we did more unsecured credit. We’ve added more staff, and we’re trying to reach members ... before they become delinquent.”

Christine Chmura, chief economist at Crestar, says that in recent months, banks have been tightening up on their credit standards. “More banks were less willing to give credit on the consumer side,” she says, citing a November survey on bank lending practices prepared by the Federal Reserve System. “Some banks are reducing the amount of credit offered, and they’re requiring more information.” When banks send out pre-approved credit cards, they ask for information such as income, then reassess the amount of credit they will extend.

If the bankruptcy rise continues, banks might increase their interest rates, but Chmura expects the temporary credit crunch to taper off: “I see the situation for this washing out within the next year and credit becoming more available.”

Financial institutions aren’t the only ones affected by bankruptcies. Warren Snyder, director of the Small Business Development Center in Hampton Roads, warns that suppliers with tight cash flows can be crushed by delinquent clients.

“Getting into business is simple. It’s making it profitable and staying in business that is the hard part,” Snyder says. By the time most owners come to him for help, it’s too late. They end up having to file for bankruptcy. “It’s usually someone who has gotten overwhelmed,” he says.

Of course, many entrepreneurs are willing to gamble when it comes to credit. Texan Joseph Liemandt, a software maven who was the youngest member of last year’s Forbes 400, used credit cards as his primary source of financing during his company’s first three years.

Mixing business and personal credit isn’t rare in relatively small businesses. When Timothy Kolly started his public-relations firm in Richmond, he decided to bypass banks altogether. He dipped into his personal savings to get his business off the ground. “It seemed easier and less expensive,” he says. “I didn’t give up any control.” Kolly points out that his business is different from most in that it didn’t require a lot of capital to get started. Public relations, he says, doesn’t require a lot of expensive machinery. The most important equipment was between his ears.

More and more small businesses sink or swim based on the owner’s personal finances. When a small business goes under, it usually means the owner is in over his head too. In fact, small-business and personal bankruptcies are closely linked because usually the owner’s personal finances are intermingled with his business, says John W.L. Craig II, a clerk for the U.S. Bankruptcy Court for the Western District of Virginia.

The good news for businesses or individuals who do end up filing for bankruptcy is that it’s no longer a permanent black mark.

Take another look at Jeffrey Johnson. A few months before applying for the Crestar loan, he was laid off again, but he didn’t let that stop him. “When I got laid off at Pepsi-Cola, I said the heck with it. I’m not looking for any more jobs,” Johnson explains. The first two banks he approached laughed at him, but Johnson thinks he was rejected because of his business plan, not his credit history. Before approaching Crestar, Johnson and his wife took a class at the Small Business Development Center and devised a marketing plan. After that, getting the loan – and getting back on his feet – was a piece of cake.

Maybe Johnson’s financial success story can be viewed as a two-sided sign of the times.