Pushed off the financial cliff.(Consumer Debt - Report)(Industry Overview)

Millions of ordinary middle-income consumers are skating on the edge of financial ruin. A half step ahead of their clamorous creditors, they know that a job loss, sudden illness, leaking roof, or divorce can easily topple budgets that are already weighed down by barely affordable mortgages, car payments, and credit-card debts.

The refuge of last resort from bill collectors, lawsuits, and foreclosures, of course, is bankruptcy. But the price is steep--loss of possessions, loss of dignity, and a ruined credit record debtors will be forced to live with for a decade.

Despite those disincentives, every year since 1996 more than a million households--a--large proportion of them headed by college-educated and white-collar workers who had never dreamed their comfortable lives and high expectations would crash and burn--have had to seek relief from their debts in bankruptcy. Already, personal bankruptcies in 2001 could exceed the 1998 record of 1.4 million, according to SMR Research Corp., a credit-industry research firm in Hackettstown, N.J.

The only alternative for 30 years has been the nation's credit-counseling agencies, an emergency 911 service for people in financial distress. Funded chiefly by creditors who hope to recoup some of their money from insolvent borrowers, these nonprofit agencies originally aimed to help people pull themselves out of their borrowing pit through a debt-repayment plan, a creditor-approved arrangement that allows consumers to repay their unsecured debts at reduced interest rates. Last year, an estimated 3 million borrowers turned to credit counselors for help.

With the economy slowing and consumers' load of revolving debt topping $680 billion--a more than tenfold increase over the past 20 years--the number of floundering borrowers turning to credit counseling is sure to grow.

A new bankruptcy reform bill, which has passed both the House and Senate and which President Bush says he'll sign, will make matters even worse. Under the new law, anyone contemplating bankruptcy must first be briefed on the credit-counseling option. Robert Manning, a research fellow at the University of Houston Law Center and author of "Credit Card Nation," anticipates that within a year of the law's passage, the number of people asking counseling agencies for help could increase by one-third. "Counseling agencies will be absolutely overwhelmed," he says.

Those who fail under the new system could face a protracted period of financial pain. Under current law, debtors declaring bankruptcy could file for Chapter 7 protection, through which their unsecured loans (mainly credit-card charges and medical bills) would be erased, but they could lose their assets (including their home and cars, but excluding retirement savings). Or they could opt for Chapter 13, which would oblige them to repay creditors but let them keep their possessions.