Coffee Break: Bankruptcies hitting middle-class families hardest

It's a piece of nonfiction called "The Two-Income Trap," by mother-and-daughter authors Elizabeth Warren and Amelia Warren Tyagi.

Elizabeth Warren is the Leo Gottlieb Professor of Law at Harvard Law School and co-author of "As We Forgive Our Debtors" and "The Fragile Middle Class," as well as three bankruptcy law casebooks. In 1998 she was named one of the National Law Journal's 50 Most Influential Women Lawyers in America.

Warren's daughter, Amelia Warren Tyagi, has worked as a consultant with McKinsey & Company and is co-founder of HealthAllies, a health benefit firm.

"The Two-Income Trap," (Basic Books, 2003; $26 hardcover) is based in large part on the 2001 Consumer Bankruptcy Project, a vast research project that included interviews with actual families that filed bankruptcy.

As I said, it's the scariest thing I've read in years, and it's a must-read for anyone who's thinking about starting a family or buying a home.

It addresses the reality of bankruptcy in America, the predatory lending practices that help fuel it, and it explodes the popular myths that allow most of us to pretend that bankruptcy is somebody else's problem.

Middle class crisis?

Who is declaring bankruptcy in America? According to "The Two-Income Trap," it's families primarily middle-class families.

Why are they going bankrupt? The conventional wisdom for some time has been that bankruptcy results primarily from credit card overspending, i.e. irresponsibility on the part of the bankrupt.

However, credit card overspending, victimization by crime, bad investments, natural disaster and all other explanations account for only 13 percent of bankruptcies, according to the 2001 Consumer Bankruptcy Project.

The reasons about a million families are going broke each year are threefold: job loss, medical problems or divorce/separation. Those three factors account for 87 percent of bankruptcies.

The authors lay out how our society has changed, tracing the changes in family economics since women began to work outside the home in the 1970s, the "bidding war" for housing in good school districts, and the devastating effects of deregulation of the lending industry. The results are startling.

"The Two-Income Trap" points out, among other things, that:

• Today's two income family, while earning 75 percent more money than the one-income family of a generation ago, actually has less disposable income;

• Families' financial troubles stem not from buying luxury items and eating out, but from committing to long-term fixed costs, such as home mortgages and car payments;

• Families with children "are more than twice as likely to file for bankruptcy as their childless counterparts; and

• Having children is now the single best predictor that a woman will end up in financial collapse.

Solutions

While the picture painted by "The Two-Income Trap" is grim, the book also provides a number of innovative solutions to the problems of the middle class. Readers may not agree with all these ideas, but they are definitely food for thought.

For example, to combat the bidding war for housing in the best schools districts, the authors recommend a system of public school vouchers. The idea is that public schools would end up competing for students and the public dollars they bring with them.

To address predatory lending, the authors suggest that Congress reinstate usury laws, which cap the amount of interest that can be charged on loans. Prevented from charging its riskiest borrowers 26 percent interest, the industry would reform itself, tightening its lending standards and thereby keeping more families out of abysmal debt.

The final chapter of the book, "The Financial Fire Drill," outlines how families can assess their current risk, and offers suggestions on how to get out of the two-income trap.

This book is well worth your time.

Clarissa French is editor of Springfield Business Journal.