— San Diegans neck deep in debt may feel a noose tightening next month: a stringent new bankruptcy law goes into effect October 17, at the same time credit-card issuers will be boosting minimum monthly payments.

If San Diego's housing bubble -- one of the nation's most inflated -- pops or begins leaking next month, there could be a lot of pain, particularly if gasoline prices continue to rise. "In the last few years, [inflation-adjusted] wages have not been rising. These higher [debt] payments could put a lot of stress on people in San Diego," says economist Alan Gin of the University of San Diego.

The new bankruptcy laws make it more difficult to file for Chapter 7 and wipe out debts. Over the years, "What has made the economy so viable, so vibrant is that if you screwed up, you could file bankruptcy," says Louise Adler, bankruptcy judge in the Southern District of California for 21 years. Under the new law, "The ability to recover from a mistake has been cut off. Because of the law's restrictions, the economy may be damaged."

There is no question San Diegans' mortgage and credit-card debt are overstretched. Study after study shows that soaring home prices and lagging purchasing power have created one of the nation's biggest bubbles. PMI Mortgage Insurance Company of Walnut Creek publishes a market risk index. This summer, six of the largest U.S. markets had a 50 percent chance of suffering home-price declines. San Diego was third worst with a score of 528. The two higher ones were Boston and Long Island, 553 and 540, respectively. Just behind San Diego were San Jose, Santa Ana, and Oakland. Nationally, home prices have shot up 50 percent since 2000; in San Diego, it has been 118 percent.

Ryan Singer, economist for the San Diego Regional Chamber of Commerce, estimates that more than 80 percent of county mortgages taken out in recent months have had variable rates -- that is, the interest rate rises as general rates rise. The Federal Reserve has been pushing short-term rates up steadily. Half of mortgages are the very risky interest-only variety.

San Diegans' incomes are only a bit above the national average, while the cost of living is more than 50 percent higher. Given that home prices average more than half a million dollars, it's little wonder that mortgage and credit-card debt are dangerously high. More than residents of most cities, San Diegans have used home equity loans and mortgage refinancings to support their consumption.

"This economy is kind of a house of cards built on expectations that consumers will spend," says Adler. Consumer spending is 70 percent of the national economy and probably a higher percentage of San Diego's.

"People are using their houses as bank accounts," says Ross Starr, economist at the University of California, San Diego. "They will discover they are overdrawn." This will hit the economy. "The most vigorous part of the economy has been the real estate sector." People flood into the real estate sales business. The parlor game for consumers is buying homes, particularly condos, with debt and expecting to dump them at higher prices. New construction is booming. "When the bubble bursts, that sector will shut down." As the bankruptcy bill bites and minimum monthly credit card payments go up, October will be "an awkward month."

The new bankruptcy law makes it more difficult for consumers to file for Chapter 7 bankruptcy, in which all debts can be erased. To qualify, a person must pass a "means test." Families with incomes above the state's median may be required to file Chapter 13, which requires at least a partial payment. Those filing for a Chapter 13 will have to pay the full amount on their car loans regardless of the car's value. Ex-spouses of those filing for either Chapter 7 or Chapter 13 will find it easier to collect alimony and child support payments.

Presently, state law prevents banks from going after a person's assets in a home foreclosure. However, some people, often unwittingly, waive this protection when they refinance. Under the new law, it will be harder for those who have waived to keep the lenders at bay.

Under the new law, bankruptcy attorneys must certify clients' financial statements to the court and will be held responsible if statements are false. "This will raise lawyers' fees," says Michelle White, University of California, San Diego, economist.

Next month, people who have held a credit card for some time should get a surprise: each month, they will have to pay 4 percent of the outstanding balance on the card, not 2 percent. This move was dictated by the federal government's comptroller of the currency in 2003. The phase-in for new customers began in the summer, and October is the big month for existing customers. It's not small change. Almost 40 percent of credit-card holders pay only the minimum balance, according to Cardweb.com.

The average household credit-card balance is around $9000, according to Boston's Babson Capital. Previously, families paid a minimum of $180 a month. Now, they will have to pay $360 each month. In San Diego, those balances are probably higher, so people will pay more than $360 a month. Delinquencies are expected to rise. The consumer savings rate has been running around zero in the last several months and is probably lower in San Diego.

Americans' attitude for years has been "I'll borrow to the hilt to eat, drink, and be merry, and if my ship comes in and I'm rolling in dough, I'll repay my debts. If not, or if unexpected problems arise, I'll file for bankruptcy," says New Jersey-based economist A. Gary Shilling. But that's about to change, especially in metro areas such as San Diego.

The reforms arriving next month aren't necessarily bad ones, although both Adler and White have problems with the bankruptcy legislation, and Gin thinks the higher credit-card payments will produce strains. There is no question that people have abused debt and bankruptcy laws. However, lenders are more to blame. In the last decade, credit-card issuers have aggressively passed out cards. Lending to lower-rated credits has become an industry. The lenders didn't get punished in this new legislation, notes Adler.

But don't just blame the lenders. The basis of the American economy is consumption financed by debt. The economy's health is measured by its growth, and its growth is dependent on consumer spending and debt. But consumer debt is too high, income isn't growing, and jobs keep disappearing overseas. "It may implode," warns Adler. A perfect storm is brewing -- and San Diego may be in the eye of it.

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