Why going broke is a fact of life in America

The lack of limits on interest rates meant lenders could charge riskier borrowers more. Pioneers in this so-called "subprime" or "nonprime" market often reaped huge profits, enticing more and more lenders to follow their lead.

By the 1990s, the subprime gold rush was on. Subprime home loans comprised less than 5% of the mortgage market at the start of the decade and more than 20% by its end. Credit card issuers such as Providian, Metris and Capital One made subprime lending a specialty.

Credit offers follow quickly

The market is certainly substantial. By 2003, nearly 30 million American households either had no credit score -- because they don't use credit -- or had a credit score below 660, the usual cutoff for "prime" borrowers. That's according to CardWeb.com, one of the leading trackers of credit card trends.

Obviously, though, it's also a market fraught with risk. By 2001, many subprime credit card issuers watched their profits evaporate and defaults mount as the economy faltered. By 2003, losses soared to 19% in the subprime market, compared with about 7% in the general credit card market. Regulators shut down some subprime issuers and issued new guidelines that significantly restricted lending at most others.

Despite the crackdown, people who file for bankruptcy still report receiving credit card offers. Those who don't can apply for secured cards, which give borrowers a credit limit equal to the deposit they make with the issuer bank. Within 12 to 18 months, many of these secured cards automatically convert to regular, unsecured cards if borrowers have paid on time.

Getting mortgage loans isn't much more difficult. High-rate subprime loans are available less than a year after a bankruptcy filing, mortgage brokers say, while people two years out of bankruptcy can qualify for government-subsided Federal Housing Administration loans with rates only slightly higher (1/2 percentage point or so) than conventional loans.

'It feels good to be free!'

That's not to say bankruptcy comes without a cost. Financially, the higher interest rates bankrupts pay take a toll; Lorraine T. Kasmala of San Antonio figured the car she purchased after bankruptcy cost her twice the initial purchase price.

Finding places to live and jobs can be a trial, as well. Many bankrupts get turned down for apartments and jobs because of their filings, and pay more for car insurance, since many insurers use credit history as a factor in setting rates.

Then there's the stigma, which some debtors say they still feel despite their awareness that they're far from alone. Anna Inman of Memphis, who filed to erase $30,000 in medical and credit card bills, found the process "simple and relatively easy . . . though it was fairly humiliating on a personal level."

Still, many -- like Heather O'Konski of Clayton, Mo. -- feel they're better off financially and emotionally from having declared bankruptcy.

"The constant stress of having all of those bills hanging over my head is gone," said O'Konski, who eliminated $30,000 in medical bills and other debt. "The experience has made me much more responsible with money. . . . It feels good to be free!"

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

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