The numbers of people going bankrupt in 2009 will likely be the second-highest total ever. With the recession and unemployment, nearly 130,000 families filed for bankruptcy just last month.

Very often on Clark Stinks, we'll get posters who express that the consumer champ shouldn't have any kind word to say about people who file for bankruptcy. Sure, some people contemplate going into bankruptcy like they're ordering a pizza. But for most it is a devastating life decision.

What's at the root of the bankruptcy trend? The easy answer is that it's a side-effect of the recession and unemployment. But so many who are facing a problem are doing so because they went into the recession with a large amount of debt at the time that they lost their job or had hours cut back.

Barron's reports that the debt level of the average American household stayed steady at 60% of personal income for decades, all the way through 1985. But today, Americans carry a debt-to-income ratio of 130%.

Slicing the same data another way, Barron's estimates that Americans used to carry debt equal to 20% of the nation's output of goods and services. Today, that figure is 100% -- five times the level of debt relative to the size of the economy.

Interestingly, the amount of monthly spending used to service debt is not up dramatically because of lower interest rates. Even so, it's still a 40% larger monthly "carry" (that is, what it takes just to service the debt) than a few short years ago.

The tie-in between people going bankrupt and the debt levels that exist in their lives is so concrete.

Clark despises debt because it puts you in a weakened position. Of course, some debt is the result of people getting hit with catastrophic illness or divorce. Mostly, however, it sneaks up on you with a little bit here and a little bit there to create a huge problem.

Let's face it, life is messy and you need financial breathing room. Think about that the next time you buy something you don't have the cash for. The consequences can be ugly.

Late pop star Michael Jackson was said to be $400 million in debt at the time of his death. Like many celebrities, he lived beyond his means.

Talents as diverse as actor Stephen Baldwin, former baseball player Jose Canseco and former basketball player Latrell Sprewell all lost their homes to foreclosure recently for the same reason.

In fact, the late Ed McMahon was only rescued from foreclosure by an anonymous Northern California real estate investor, according to The Wall Street Journal!

Professional athletes can make incredible amounts of money, but their earning window tends to be for a relatively short period of time. Kathleen Pender of The San Francisco Chronicle shares a couple of disturbing trends courtesy of Sports Illustrated magazine:

• 78% of former National Football League players go bankrupt within 24 months after they stop playing.
• Some 60% of former National Basketball Association players go bankrupt within 5 years of retirement.

What's going on here? Economists talk about "marginal propensity to consume" (MPC), an economic theory that says as income rises, spending rises in tandem.

So if you're not saving anything at all, that's a recipe for disaster when the money stops coming in. The King of Pop's $400 million debt helps up see why we should all be paying ourselves first.

Have you seen ads being run by the debt-settlement outfits on late-night TV? They promise to reduce your credit card debt to just pennies on the dollar without making you file for bankruptcy.

But that promise is an illusion. Here's the scoop: You usually pay an upfront fee to the debt-settlement firm, plus a monthly retainer. Their strategy is to get you to stop paying on your bills. They typically have you take the money you would have paid on monthly minimums and stash it in a savings account.

The basic idea is to make the credit card companies so desperate that they'll settle with you. The reality, however, is that you just wind up damaging your credit.

In fact, complaints about debt-settlement firms have doubled in North Carolina; tripled in Florida; and quadrupled in Oregon, according to The New York Times.

The reason these companies even exist goes back to 2005 when the bankruptcy laws changed in our nation. At that point, the banks stopped being cooperative with affiliates of the National Foundation for Credit Counseling (NFCC). They were cynically trying to force people into a position where they had no choice other than to pay up. The debt-settlement firms then popped up promising they knew how to defeat the banks.

The irony here is that the banks have now agreed to work with the NFCC again. A newly announced debt-management initiative offers reduced interest rates and the possibility to waive your late fees.

Bank United, the largest independent bank in Florida, failed this week. This is going to cost taxpayers roughly $5 billion. After the recent stress tests, it appears lots of smaller banks, ones that don't fall into the too-big-to-fail category, may not make it -- and we'll all be left holding the bill.

What if you are a depositor in a bank that ends up being seized this summer? The FDIC is extending the $250K insurance coverage for several more years, so while your deposit will be safe, the money you earn on that investment is subject to change. The acquirer of your bank may decide to change rates on your existing CDs, for example. While that may seem like a rip off, remember that it wasn't the acquirer who entered into a contract with you initially. The good news is you won't lose your seed money-- just the earning power that money may have originally had.

Britain is in danger of having its debt that the government sells (its version of Treasuries), downgraded to third world status. Like us, the British government has been spending money it doesn't have in an attempt to jumpstart its economy. And now, credit ratings agencies are calling into question their ability to honor these debts.

Why is this a scary thing for us? Britains' debt load by next year will be about 66% of their output of goods and services. America's debt load by next year, with all the deficit spending, will be almost 71%, a level of debt considered outrageous even in war time.

But forewarned is forearmed. We still have time to turn this around. The problem is that we're dependent on the kindness of strangers to keep our economy cooking these days. Communist China, for example, now holds over $1 trillion of our debt. But how do we really keep ourselves cooking? Simple. We don't spend money we don't have. Yes, it's complex with all the bailouts and promises flying around. So how do we come up with money? We could tax ourselves every which way -- or maybe, we conclude that government should be required to do less.

It's become normal in wealthy western culture to depend on government to "have your back." It previous times, we relied more on neighbors, relatives and charitable organizations to lend a hand. Maybe it's time to get back to that model. Executive producer Christa talks about a charity she saw on Oprah called Good News Garage that fixes cars for the needy to help enable their job search. Clark likes this. While it would be great if government was able to provide for all, right now it just can't afford that. So if you are doing reasonably well, now is a great time to give back and help out others. Clark supports a constitutional amendment that would require governments to balance their budgets. Sounds quaint, but it's a realistic step towards changing our relationship to government, and how much we expect from it. Clark thinks we as a country have gotten a little bit lazy. If we don't want to be downgraded to third world country status, we need to get it in gear.

Clark has some disturbing news to share -- just as the number of bankruptcy filings is likely to hit an all-time high in 2009.

According to The New York Times, banks are buying "trigger lists" from credit bureaus and independent data management firms. These lists compile info about who is in bankruptcy or otherwise in desperate financial shape. Once a bank obtains a trigger list, they target the people on it with horrible come-ons for new lines of credit.

Their "second chance" pitches offer you another shot at rebuilding your credit by opening more of it! One industry insider in the Times article referred to this segment of the market as "creative lending products."

You're typically expected to pay hundreds of dollars to apply for a credit card that may have annual fees of up to $200. Then you're given a credit line that's equal to what they charge you in fees -- so that the risk to the bank is nada. In addition, they charge you massive rates of interest.

Equifax has a proprietary way of culling names for trigger lists called the TargetPoint Predictive Triggers system. Basically, the bureau analyzes data to see a customer's propensity to open new lines of credit within 90 days. The exact formula, however, remains a "secret sauce," according to a spokesperson in the article.

Trigger lists are also common in the world of mortgages. When you apply for a mortgage, your info can be sold so that other marketers can call you and solicit your mortgage business.

This is so far out of line, according to Clark. Here we are in a time when we need to heal both the banking sector and our family budgets, and everybody is trying to slice and dice us to figure out how to take advantage of us. Shame on all involved parties.

Clark wants you to know about this so you can resist the temptation of "second chance" pitches. It's not a lifeline they're offering; it's an anchor around your neck that will make you financially drown.

IndyMac Bank -- a failing mortgage company and bank -- has been the subject of a classic "run on the bank" scenario. That makes this a great time for Clark to remind you that a run is not necessary -- unless you have excess money in a bank.

The reality is that a large number of banks will go insolvent during the next couple of years. Many will be invisibly absorbed or merged into larger banks. You as a customer will be fine as long as you don't exceed FDIC limits.

During our last rash of bank collapses in the '80s, approximately 8% to 12% of money was uninsured. Today, that figure has ballooned to nearly 40% -- especially among organizations, non-profits and small businesses.

The FDIC will insure your bank deposits up to $100,000 in the event of a bank collapse. But Clark advises a $90,000 personal ceiling -- so you don't have to forfeit any interest. When it comes to retirement accounts at banks, they're insured up to $250,000.

In the world of credit unions, there's an organization called the National Credit Union Administration (NCUA) that ensures deposits to the same limits as the FDIC. But be aware that in some instances, a credit union may only be covered by a state guarantee pool. This is riskier than the NCUA.

Speaking of going insolvent, cheap clothing retailer Steve and Barry's has filed for bankruptcy. Right now, they're planning to keep all stores open and honor all gift cards. This coming holiday season is one during which you don't want to give gift cards -- especially those from retailers and restaurants that may be here today and gone tomorrow.

CLARKONOMICS: If you've been hearing the Clarkonomics sounder more often, it's driven by your calls and questions about the economy in these difficult times. Personal bankruptcy filings are up about 40% from a year ago. This can't all be blamed on the housing crisis. Beginning in 1998 through 2006, there was always more money available that could be borrowed: HELOCs, credit cards, etc.

First off, Clark always discouraged taking credit card debt and rolling it into a HELOC. Second, he also discouraged people from doing consolidation loans. Such moves were like rearranging deck chairs on The Titanic, not changing course to avoid the iceberg. You are not paying down debt if you just swap one debt for another. Then the music stopped and people could no longer do cash-out refis or HELOCs. So they turned back to credit cards and even borrowed from their 401(k) plans -- a sure way to destroy financial security for decades down the road.

But now it's a new day. You can no longer borrow so freely. "Fresh start" bankruptcies should still be your last resort. Before you become a statistic, trying visiting NFCC.org for free or low-cost debt management advice. Remember that bankruptcy can stay on your credit for 10 years. Do this early on, instead of waiting until the last minute when you're really squeezed. Finally, you must change your relationship with money. Don't purchase something if you can't pay cash for it. The real enemy of Clark's advice is all those "no money down" ads for furniture, big-screen TVs and more.

Millions of people facing foreclosure are being tempted with ads about filing for bankruptcy as a way out of their problems. This may not affect you directly, but perhaps you know a friend, family member or co-worker who is going through this. So let's consider a couple of scenarios and see if the bankruptcy option holds water. If you bought your home in the last two or three years and almost immediately fell behind on payments, then the reality is that you may not be able to keep your home. But that doesn't automatically mean foreclosure. Try instead to arrange a short sale with your lender's permission. This may help the lender avoid the usual $70,000 cost of foreclosure, while it will help you avoid the stigma of foreclosure. Approach your lender several times if you don't initially get the answer you want. A second alternative to bankruptcy would be to arrange for something called a deed in lieu of foreclosure. This is like a voluntary turn-in of your property. This will probably appeal to lenders in states where they'd have to incur the expense of going to court to proceed with foreclosure. One thing to keep in mind about bankruptcy is that while it may help you today, it will not help you in the long run. Sometimes the best option is to allow foreclosure to proceed if it's unavoidable. It's like closing a bad chapter in your life and moving on. Let's consider one other kind of scenario. Say you're a longtime owner who has fallen on hard times now but has a good payment history. Then you might want to seek a loan modification, forbearance or a Chapter 13 bankruptcy filing as a last resort before you lose your home. With Chapter 13, you can remain in your home and develop a workout if you already have demonstrated a good payment history. Bear in mind that Clark's really over-generalizing here. He's laying out a road map, and you need to see where you fit on the road.

Clark has taken about 8 calls over the last several months that he thought were UFO questions with no connection to each other. People have been telling Clark they're getting harassed by collectors over debts that were wiped away when they filed for bankruptcy, or that debts that had been thrown out in bankruptcy court are showing up on credit reports as outstanding. Then Clark read Business Week's recent cover story "Prisoners of Debt" and it all made sense: Certain banks, collection agencies and credit bureaus are working together to undermine existing bankruptcy laws. When you file for Chapter 7, you get a bad mark on your record for 10 years. The tradeoff is that you also get to wipe out any credit card debts clean and clear. You usually first go through an evaluation process to see if you should pay a portion of your debts back under Chapter 13. Today you can only do Chapter 7 if your situation is hopeless.

Business Week discovered that Capital One, Bank of America, Chase and Discover are ignoring these bankruptcy laws -- by accident or on purpose -- and illegally selling debts to collection agencies so they can go after you. This flouts the law of the land, whether you agree with it or not. When a Chase lawyer was questioned by a judge about why they've sold bankrupt debts, the lawyer replied that it happens all the time. The Business Week article says the banks claim this is all an unintentional mistake. But there's a clear pattern here: First the lenders fail to wipe out the debt when you file for bankruptcy. Then they sell it off to collectors and score some cash. Next the collectors try to illegally collect the money. Finally, the credit bureaus act as co-conspirators by listing debts on your report that aren't valid. So if you've filed for bankruptcy and are caught in this vicious circle, contact the banks and bureaus by phone and in writing. Try getting them to update the status of your legally expired debts. If that doesn't work, go back to the bankruptcy court where you filed and talk to the judge.

Clark and Christa returned today from Milwaukee, the first stop on Clark’s 2007 book tour. While there, he met a young man who was considering filing for bankruptcy. He had gotten a bunch of credit cards in college and had racked up $3,000 in debt. Clark was floored. There is no reason that the man should file for bankruptcy. But the collectors had gotten it into his head that he had no other choice. There are several problems with this picture. First of all, credit cards are way too available on colleges today. Students should get a few credit cards in college. It’s a good way to start establishing good credit. But they have to watch their spending. Secondly, collectors behave like creeps and should be held liable for their actions. If you get a call, record it and tell the collector that they are being recorded. Lastly, bankruptcy is mentioned way too often and easily these days. It should be the very last option anyone chooses, not an avenue for financial planning.

The country’s new bankruptcy law has been in effect for one year now. In the time leading up to that change, nearly 2 million Americans filed for bankruptcy. That’s 1 in every 57 families who filed before the deadline. Since the new law went into effect, filing has collapsed. That’s great news. Clark wants to remind you about the new rules that go along with the law in case you’re thinking of filing. First of all, you are required to see a credit counselor before you can file. If you can work out a payment plan or work through your money troubles in counseling, you avoid having to file for bankruptcy. The trouble is that many people file when it’s past too late. Of those going for counseling, only 3 percent are able to avoid filing. In addition, many of the “counselors” in the program were actually phonies just trying to take taxpayers’ money. So, the IRS has been busy revoking licenses and bankruptcy courts have had trouble finding resources for people. You want to check for legitimate services at nfcc.org. Also, if you make an income that is below the average in your area, you still file the old way. But if your income is above the average in your metro area, you have to file Chapter 13. Are you feeling danger signals in your life? If you have credit card debt that is more than 1/3 of your annual income. So, if you make $50,000 a year and your unsecured debt is more than $16,000, you are in trouble. So, get out all of your credit cards and add up all of the balances. If it’s more than 1/3 of your income, you need to rethink how you’re handing money.

If you owe a debt to a credit card company and that company uses an in-house collector, that bank can use any tactic to come after you. Aside from harming you physically or threatening to put you in jail, in –house bank collectors can do just about anything to get the money you owe. It’s a special exemption under the rules of the Fair Debt Collection Practices Act. But most debts are turned over to third party companies who use these threatening tactics even though it’s illegal for them to do so. As a result, people are getting scared into filing bankruptcy. Clark saw a sign the other day, saying “Bankruptcy Is Still An Option.” That’s a step most people don’t need to take, but these creditors convince people there is no other way. It’s best to honor your debts and pay them a soon as you are on your feet. But according to the FDCPA, collectors must follow these rules: 1) A collector cannot call you after you’ve told them not to do so. 2) A collector cannot call you at work. 3) A collector cannot tell other people about your debt. 4) A collector cannot threaten you (with court, jail or other). And lastly, please don’t ever give a collector your bank account information or give them post-dated checks. You want a written agreement about how the debt will be paid before you pay a cent.

The new bankruptcy law is in effect, and apparently word has gotten out about it. In the weeks prior to the new law taking effect, people filed for bankruptcy in record numbers. People who did are still working with attorneys who are trying to handle the load. But basically their debts will be wiped out for the most part. The same is not true for people who file now. If you file now, you have to go to credit counseling first. This part has gotten off to a rough start because the IRS is in the process of decertifying many of the credit counseling agencies in the country. Once people have gotten the voucher that they’ve gone to counseling, they must try to show that they deserve a “fresh start.” Most people will not qualify, however, and will have to enter into a five-year plan to pay back most of the money owed. All kinds of forms must be filled out in the process. Obviously, the objective is to deter people from filing for bankruptcy. Clark hopes people choose not to spend money they don’t have so they never have to face the idea of bankruptcy. Prevention is the best cure!

Bankruptcy filings have hit an all-time high now that the deadline for the new bankruptcy law is approaching. People are running for cover in such high numbers that Clark isn’t sure how the bankruptcy courts are going to be able to process all these claims. At the same time, people affected by Hurricane Katrina need to file now but can’t get everything in order by the deadline. Many of these people were financially sound before the hurricane hit, but now they’re devastated and most of the paperwork they need was destroyed. There has been a lot of pressure to issue waivers to those people and Clark supports that wholeheartedly. Well, the Department of Justice waived the requirement to obtain credit counseling for hurricane victims. But that is the one thing Clark thinks people should have. It would be smarter to waive the strict paperwork requirements for Katrina victims. Many disaster victims still owe money on their homes, but in many cases there is no home and these people have no jobs. As a country we can help these people who were devastated by an act of nature, and Congress needs to step in.

You’ve heard the news about Delta filing for Chapter 11, but what does it mean to you. Although most of the news has concerned the effect on individuals, Delta’s bankruptcy will also influence businesses. People just want to know what happens. So, Clark is here to tell you that nothing happens. Airlines have had a long history of seeking compensation and protection from bills when they file for bankruptcy. This is just another chapter. If you’re holding flights on Northwest or Delta, your flights are fine. The only caveat is that holiday travel can be severely disrupted when an airline files for bankruptcy. So, Thanksgiving and Christmas this year may be tough. It’s common for airlines to eliminate 15 to 20 percent of their aircraft when it happens. So Clark recommends reconfirming your schedule a month and then a week before you go. You should also break your addiction to using Delta’s and Northwest’s frequent flyer programs cards. You never know what could happen with these programs, so stop trying to earn miles. If you have miles, use them! Also, people are speculating that Delta could be absorbed by bankrupt Northwest. But that is pure speculation. Employees are going to get eaten alive. There will be paycuts and layoffs, just as there were at USAir and United. This is the unfortunate part. Employees always get hit the worst. But for consumers, it will simply mean better service. Just don’t buy into the speculation about buying stocks. The stocks are worthless, and that is just bad advice. Clark hopes the employees of the companies end up okay, but it’s going to be tough before it gets easy.

The new bankruptcy law is steadily approaching. The new law is not at all “debtor friendly” like the old one was. In fact, it’s being termed “creditor friendly.” People will not be able to set aside debts as easily as they used to, and they’ll have to take counseling classes before filing. Also, the new law has no provision for natural disasters. In the case of Hurricane Katrina, many people have partially insured losses or uninsured losses that now are worth nothing. Others will have to demolish their homes if they haven’t been already. It’s something that cries out for action from Congress, even though the banks will protest. The bankruptcy bill was inspired by banks and it is tougher by design. But people shouldn’t be beaten when they’re down or punished when they’ve already been punished by a natural disaster. Clark is going to call the American Banking Association to try and convince the organization to add a hardship clause for victims of natural disasters.

You’ve probably heard about the new bankruptcy law that goes into effect in October. Many people are in favor of the new law because so many previous filers have abused the law and this one is much stricter. Under the new law, you’ll have to go to credit counseling before you ever start the program. And you’ll have to repay your debt. If you fail to make your payments, you will have to start over from scratch until you do. Clark is in favor of the new law because he has suffered huge losses from former tenants who filed bankruptcy while living in his properties. There is no way to make everyone happy in this process, but something has to change. Our debt levels are huge today as a nation and as individuals. So, if you’re considering filing for bankruptcy, you need to do it before mid October. Or, work on paying off your debts before then. Otherwise, the bite will hurt quite a bit more down the road.

A new bankruptcy law is going into effect this fall. It is much more complicated and much tougher on people trying to get out of debt. As a result, people are rushing to bankruptcy lawyers to file under Chapter 7. There are several different bankruptcies, but consumers usually use either Chapter 7 or Chapter 13. With Chapter 7, you set aside your debts. And under Chapter 13, you pay back your debts. Under the new law, you will no longer be able to file Chapter 7 by choice. You’ll have to go through several steps to be eligible to file, and then you’ll have prove you can’t pay back any debt. Most people will have to set up a payment plan to pay back the debt. And if you fail to make your debts, the whole thing falls through and you start all over. The whole idea is to make paying back debts so painful that they change their relationship with money and handling finances.

You may have heard there is a new bankruptcy law on the horizon. It will end how bankruptcy works as we know it. For instance, you’ll have to attend credit counseling if you want to file. That has never existed before. Also, if your income is higher than the median for your state, you’ll be required to pay back a portion of the debts you owe. So, depending on how much income you have, the rest of your money will go toward your creditors. Bankruptcy has been kind of a lark in recent years, but it’s about to get much more serious. For example, people will have to make 60 consecutive on time payments. Do you really want to be under a court ordered payment plan for five years? It’s up to you to handle debt because the consequences are going to be much tougher come October 2005.

Did you know that 1.56 million families filed for bankruptcy in 2004? That is roughly one in 68 or 69 families. It’s down about three percent from 2003, but it’s still pretty high. People file for all kinds of reasons including medical problems and divorce. But the starting point is usually the level of debt we carry. And there is always another lender willing to lend us money. It’s about to get even more precarious now that Congress is about to enact a law that targets the middle class specifically. Essentially, the middle class will no longer be able to “set aside” debts in bankruptcy. They’ll have to have a repayment plan. Chapter 7, which wipes debt clean, will still be available to the lower economic classes. But the clincher is the provision for the very wealthy. The millionaire provision sets up an “asset protection trust” that will make it possible for people to keep their possessions and assets and never have to pay a penny back. In other words, middle class folks will have to pay back most of their debts, but wealthy people can have their slate wiped clean. It’s simply not right and it’s not any kind of reform. In fact, it’s theft. It’s basically taking money from one class to benefit another. Clark wonders who has been bought off to make this happen, and he hopes someone puts a stop to it out of sheer embarrassment.

For the past seven years, the U.S. Congress has tried to change the bankruptcy laws to make it more difficult for individuals to erase their debts. Typically, that is a Chapter 7 bankruptcy when your debts disappear and you start over. But Congress is very close to passing a bankruptcy law that involves a “means” test. This means that if your income is at or above the average for your area, you will not be permitted to file a regular bankruptcy. Instead, you’ll have to work out a plan with your creditors. It’s almost sure to pass both houses, and there will be a new day involving debt. Consumer debt has surpassed $2 trillion collectively, and about one in every 70 families files for bankruptcy each year. For years it was a life-changing event that caused someone to file bankruptcy. Medical bills, divorce or other life changing circumstances often trigger financial crisis. But, more and more, it’s just debt that we can’t seem to escape. People buy too much, get lost in bills, which causes interest rates to go up. And the black hole seems impossible to crawl out of. Many consumers are paying between 20 and 35 percent interest on credit cards, so it’s hard to keep your head above water. Do not impulse buy! You can easily slip into debt, and filing for bankruptcy won’t be an easy way out anymore.

Delta is moving closer and closer to bankruptcy. Another step in that direction happened yesterday with the formation of a creditor’s committee. It usually happens during bankruptcy, but Delta’s situation is so precarious that it’s happened beforehand. Vendors, pilots and debt holders are all involved and are getting prepared for one of three scenarios. The first is called a “non-judicial reorganization,” which means that the company doesn’t file for bankruptcy but everyone agrees to steps that would normally take place during the bankruptcy process. Basically, workers take pay cuts, benefit cuts and agree to work more hours. People who are owed by Delta agree to receive less. Everyone involved takes a hit. American was able to do this, but it’s very rare. Stockholders have the greatest risk if Delta files for bankruptcy, so that is what the company tries to prevent. The other two options involve different forms of bankruptcy. The first is called a “pre-packaged bankruptcy.” Everyone on the committee works out what they are willing to do, the stockholders get wiped out. It’s a quick in and out proposition. The last and most difficult is the type of bankruptcy in which United is involved. United had no other choice because it had worked nothing out with creditors. So the company is still struggling to come up with a working plan in bankruptcy. So, for employees, the non-judicial plan is the best scenario. For passengers, a pre-packaged deal is the best because the company will come up with all kinds of deals. Passengers will also benefit if the company files for bankruptcy. But the airline will not shut down, regardless of what Delta does.