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‘Why Middle Class Mothers and Fathers Are Going Broke’

There were over 1.6 million bankruptcy filings last year, up 7.4 percent from the previous year. And according to a new book, more people will end up in bankruptcy this year than will suffer a heart attack, than will be diagnosed with cancer or graduate from college, and it’s not who you would think. Elizabeth Warren is a Harvard law professor and bankruptcy expert and discusses these findings i

There were over 1.6 million bankruptcy filings last year, up 7.4 percent from the previous year. And according to a new book, more people will end up in bankruptcy this year than will suffer a heart attack, than will be diagnosed with cancer or graduate from college, and it’s not who you would think. Elizabeth Warren is a Harvard law professor and bankruptcy expert and discusses these findings in her new book “The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke.” She discusses the book on “Today.” Read an excerpt here:

Just the way she planned

Ruth Ann smiles when she talks about the summer she was pregnant with Ellie. Those were the good days, when life was working out just the way she had planned.

Dexter was five and learning to swim. Ruth Ann would pick him up from day care in the late afternoon, and the two of them would head for the town swimming pool. While Dexter thrashed about in the water, Ruth Ann would dangle her feet in the pool, waiting for her husband, James, to swing by on his way home from work. Dinners were late and haphazard, but no one cared. Ruth Ann’s life was exactly as she had wanted it, exactly as she had planned.

And Ruth Ann was a planner. In college, she had majored in accounting. It was respectable and dependable, a little bit the way Ruth Ann saw herself. After graduation, she resisted the lure of Houston or Dallas and moved back to her hometown, Wylie, Texas, where she could live near her parents, get some experience doing payrolls and tax returns, and build up a little savings while waiting to begin what she always thought of as her “real life.”

Real life began when she saw James Wilson, a friend from her high school days, who was managing a carpet and flooring store in Wylie. It was his hands, she would later say, his capable hands, the sure hands of a carpenter, that drew her to him. But it was something else as well. During her junior year at Texas Tech, Ruth Ann had broken off an engagement because she couldn’t shake the feeling that her intended was not the kind of guy she could count on. With James she felt she was marrying someone who would work as hard as she did to build a life together.

After a brief courtship, they married. A year later, in January 1994, Dexter was born. Ruth Ann was back at work in six weeks.

Three years later, Ruth Ann and James took a deep collective breath and jumped. They bought their first home. It wasn’t the house of their dreams, but it was the house they thought they could afford. The roof needed to be replaced and the kitchen hadn’t been updated in fifty years, but the house had three nice-sized bedrooms, a big yard, and, most important, at $84,000 it was within the couple’s price range. Ruth Ann recalls the day they moved, a happy confusion of uncles and cousins carrying furniture, while Ruth Ann’s Aunt Ida set up a big picnic in the front yard of the new home to feed both the movers and the neighbors. That night, Ruth Ann sank down in the big old tub in the upstairs bathroom and let the joy run through her.

Two years later, in September 1999, there was another cause for celebration: Ruth Ann gave birth to a little girl, Ellie. Nine weeks later, Ruth Ann returned to work and life settled down again.

Then it happened. Just after the 1999 Christmas season, when Dexter was six and Ellie was five months old, James’s boss announced that he was closing the store. A national megastore had opened a few miles away, and its huge floor-covering department was sucking away business. To save on costs, layoffs were effective immediately. James was out of work in one day.

James was frantic about finding another job. Like Ruth Ann, he didn’t want to disturb the life they had put together. But nothing came through that matched his previous salary. “After I lost my job I did odd jobs. Carpet cleaning, crazy stuff. I figured any work is better than no work.” Ruth Ann asked for extra hours at work, but her office was already overstaffed.

Cutting back was hard to do because they weren’t really spenders in the first place. Most of their money went for the basics — the mortgage, car payments, day care, and food on the table. They hadn’t realized just how tight their budget really was until they missed a mortgage payment three months after James lost his job. Both had been raised to pay their bills, and as an accountant, Ruth Ann had seen what happened to people who didn’t. But they held on to the belief that their situation was temporary.

Within six months they were two payments behind on the mortgage. To raise cash, they had had two garage sales; then they sold the antique dining set that James had refinished. Ruth Ann quietly asked family and neighbors if she could prepare their tax returns for $50 apiece.

As Ruth Ann and James learned, the dance of financial ruin starts slowly but picks up speed quickly, exhausting the dancers before it ends. Few families have substantial savings, so they usually run out of cash within a month or so. Soon the charges start mounting up for the basics of life — food, gasoline, and whatever else can go on “the card.” When there still isn’t enough to go around, the game of impossible choices begins. Pay the mortgage or keep the heat on? Cancel the car insurance or the health insurance? Meanwhile, interest and late fees have piled on, making everything more expensive. Ruth Ann and James got a small reprieve from family. James’s parents kicked in $4,000 and Ruth Ann’s brother lent them $1,500. But these temporary infusions of money were just that — they covered the minimum payments for a few months, but they didn’t begin to provide a way out of the hole. Before it was over, Ruth Ann had taken to parking the station wagon behind the elementary school and walking the six blocks home, figuring the bankers wouldn’t repossess her car if they couldn’t find it.

A neat stack of manila folders on Ruth’s bedroom bureau told the story of how quickly their carefully planned lives had unraveled. The first folder held a letter from the county threatening to foreclose on their home for failure to pay taxes, along with past due notices from the mortgage company. Other files held a variety of bills totaling $12,000, and Ruth Ann’s carefully documented IOUs to their families.

The end for Ruth Ann and James came with a bang. One evening Ruth Ann walked into the living room to hear Dexter, now seven, on the phone, talking to a bill collector. “My mom doesn’t do that, and you shouldn’t call here any more. Leave us alone.” When he heard her enter the room, he whirled around, his eyes wide. He slammed down the phone and ran out of the room. Ruth Ann wasn’t sure whether Dexter was afraid or angry, but she knew this had to stop.

Ruth Ann was more financially sophisticated than most women. As an accountant, she knew that it was time to see a bankruptcy attorney. Filing for bankruptcy would give them some time to repay their bills, and it would prevent the bank from foreclosing on their home, at least for a few more months. It would also ensure that Dexter wouldn’t have to answer any more collection calls. That night Ruth Ann told her husband what they needed to do. James never said a word. He just walked out to his pickup truck, sat in the front seat, and cried.

One in seven

Ruth Ann and James didn’t know anyone at their church or at work who couldn’t pay their utility bills or make their car payments, let alone someone in so much trouble they would have to file for bankruptcy. Or at least, that’s what they thought.

In fact, Ruth Ann and James probably knew plenty of families who were in just as much trouble as they were. The odds were certainly in favor of it. Over the past generation, the number of American families who have found themselves in serious financial trouble has grown shockingly large. In a world in which our neighbors seem to be doing fine and the families on television never worry about money, it is hard to grasp the breadth or depth of financial distress sweeping through ordinary suburbs, small towns, and nice city neighborhoods. People like Ruth Ann and James, typical American families who are doing their best to make a good life for their children — working hard, paying their bills, and playing by the rules — lose it all when disaster strikes.

Because they filed for bankruptcy in 2001 in northern Texas, Ruth Ann and James were among the 2,220 families interviewed as part of a Harvard University-based research project. One of us (Elizabeth) has been studying families in financial trouble since graduating from law school in 1976. I am a professor at Harvard Law School, where I teach the commercial law curriculum, which means that I specialize in the laws about debts and money. The other of us (Amelia) has an MBA from Wharton and a businessperson’s view of economics. We are both working mothers, representing two generations of families. And we have something else in common: We are mother and daughter.

The idea behind this book took root in the spring of 1999, when Elizabeth was reviewing some preliminary data from an early phase of the Consumer Bankruptcy Project. I had begun to thumb through a stack of computer printouts to verify the accuracy of the sample. All the points were checking off fine, when my attention was suddenly drawn back to a single line on the page: the number of women in the sample. In 1981, about 69,000 women had filed for bankruptcy. The data on my printout indicated that by 1999 that figure had jumped to nearly 500,000 — an unimaginable leap. I guessed that the data had been entered wrong — maybe someone had added a couple of zeroes somewhere — or, worse still, our research team had somehow pulled way too many women into their sample, inadvertently producing a huge distortion in the numbers. Frustrated, I tossed the printout in the trash, assuming we would be forced to throw out months of work.

The research team went back into the field for more data, initiating the 2001 Consumer Bankruptcy Project, which would evolve into the largest study ever conducted about families that had failed financially. I soon learned that there was something wrong, but it wasn’t the data sampling. In just twenty years, the number of women filing petitions for bankruptcy had, in reality, increased by 662 percent. As I soon discovered, divorced and single women weren’t the only ones in trouble; several hundred thousand married women filed for bankruptcy along with their husbands.

Our research eventually unearthed one stunning fact. The families in the worst financial trouble are not the usual suspects. They are not the very young, tempted by the freedom of their first credit cards. They are not the elderly, trapped by failing bodies and declining savings accounts. And they are not a random assortment of Americans who lack the self-control to keep their spending in check. Rather, the people who consistently rank in the worst financial trouble are united by one surprising characteristic. They are parents with children at home. Having a child is now the single best predictor that a woman will end up in financial collapse.

Consider a few facts. Our study showed that married couples with children are more than twice as likely to file for bankruptcy as their childless counterparts. A divorced woman raising a youngster is nearly three times more likely to file for bankruptcy than her single friend who never had children.

Over the past generation, the signs of middle-class distress have continued to grow, in good times and in bad, in recession and in boom. If those trends persist, more than 5 million families with children will file for bankruptcy by the end of this decade. That would mean that across the country nearly one of every seven families with children would have declared itself flat broke, losers in the great American economic game.

Bankruptcy has become deeply entrenched in American life. This year, more people will end up bankrupt than will suffer a heart attack. More adults will file for bankruptcy than will be diagnosed with cancer. More people will file for bankruptcy than will graduate from college. And, in an era when traditionalists decry the demise of the institution of marriage, Americans will file more petitions for bankruptcy than for divorce. Heart attacks. Cancer. College graduations. Divorce. These are markers in the lives of nearly every American family. And yet, we will soon have more friends and coworkers who have gone through bankruptcy than any one of these other life events.

And the lines at the bankruptcy courts are not the only signs of financial distress. A family with children is now 75 percent more likely to be late on credit card payments than a family with no children. The number of car repossessions has doubled in just five years. Home foreclosures have more than tripled in less than 25 years, and families with children are now more likely than anyone else to lose the roof over their heads. Economists estimate that for every family that officially declares bankruptcy, there are seven more whose debt loads suggest that they should file for bankruptcy — if only they were more savvy about financial matters.

Unseen dangers

Who are the families in so much trouble? Most are like Ruth Ann and James — ordinary, middle-class people united by their determination to provide a decent life for their children. Like James, many had been felled by a layoff or a business failure; someone who glanced at this year’s tax return might label them as poor. But very few were chronically poor. For most, poverty was only temporary, a setback in an otherwise solidly middle-class life. When membership in the middle class is defined by enduring criteria that don’t disappear when a pink slip arrives — criteria such as going to college, owning a home, or having held a good job — more than 90 percent of those in bankruptcy would qualify as middle class. By every measure except their balance sheets, the families in our study are as solidly middle class as any in the country. And they are united by another common thread: Most of these families sent two parents into the workforce.

By the usual logic, sending a second parent into the workforce should make a family more financially secure, not less. But this reasoning ignores an important fact of two-income life. When mothers joined the workforce, the family gave up something of considerable (although unrecognized) economic value: an extra skilled and dedicated adult, available to pitch in to help save the family during times of emergency. When Junior got sick, the stay-at-home mother was there to care for him full-time, without the need to hire a nurse. If Dad was laid off, Mom could enter the workforce, bringing in a new income until Dad found another job. And if the couple divorced, the mother who had not been working outside the home could get a job and add new income to support her children. The stay-at-home mother gave her family a safety net, an all-purpose insurance policy against disaster.

If two-income families had saved the second paycheck, they would have built a different kind of safety net — the kind that comes from having plenty of money in the bank. But families didn’t save that money. Even as millions of mothers marched into the workforce, savings declined, and not, as we will show, because families were frittering away their paychecks on toys for themselves or their children. Instead, families were swept up in a bidding war, competing furiously with one another for their most important possession: a house in a decent school district. As confidence in the school system crumbled, the bidding war for family housing intensified, and parents soon found themselves bidding up the price for other opportunities for their kids, such as a slot in a decent preschool or admission to a good college. Mom’s extra income fit in perfectly, coming at just the right time to give each family extra ammunition to compete in the bidding wars — and to drive the prices even higher for the things they all wanted.

The average two-income family earns far more today than did the single-breadwinner family of a generation ago. And yet, once they have paid the mortgage, the car payments, the taxes, the health insurance, and the day-care bills, today’s dual-income families have less discretionary income — and less money to put away for a rainy day — than the single-income family of a generation ago. And so the Two-Income Trap has been neatly sprung. Mothers now work two jobs, at home and at the office. And yet they have less cash on hand. Mom’s paycheck has been pumped directly into the basic costs of keeping the children in the middle class.

At the same time that millions of mothers went to work, the family needed the stay-at-home mom (or a costly replacement) more than ever. The number of frail elderly, most of whom must depend on family for daily care, spiraled upward. Hospitals began discharging patients “quicker and sicker,” expecting the family to pick up the task of nursing them back to health. With Mom in the workforce, parents were faced with a painful choice between paying for expensive care and taking time off work. At the same time, the divorce rate continued its upward climb. This situation was compounded by a leaner-and-meaner business climate that closed plants and laid off workers with alarming frequency. In this tougher world, millions of two-income families learned the price of living without a safety net.

Inevitably, the Two-Income Trap affected the one-income family too. When millions of mothers entered the workforce, they ratcheted up the price of a middle-class life for everyone, including families that wanted to keep Mom at home. A generation ago, a single breadwinner who worked diligently and spent carefully could assure his family a comfortable position in the middle class. But the frenzied bidding wars, fueled by families with two incomes, changed the game for single-income families as well, pushing them down the economic ladder. To keep Mom at home, the average single-income family must forfeit decent public schools and preschools, health insurance, and college degrees, leaving themselves and their children with a tenuous hold on their middle-class dreams.

What about single-parent families, the group that has no choice about getting by on one income? Not surprisingly, they are in even worse shape than their married counterparts. But the magnitude of the problem for single-mother families shocked us. If current trends persist, more than one of every six single mothers will go bankrupt by the end of the decade. The usual explanations for why these women are in trouble — “deadbeat dads” who don’t pay child support, discrimination in the workplace, and so forth — cannot account for the growing distress. Today’s middle-class single mothers have better legal protection, higher salaries, more child support, and more opportunities in the workplace than their divorced counterparts of a generation ago, yet they face a much greater likelihood of financial collapse. We estimate that over the past twenty years, the number of single mothers in bankruptcy has increased more than 600 percent.

So why are these women in so much trouble? We will show that changes in the family balance sheet before a couple divorces explain much about the vulnerability of today’s single mothers. Married parents are in trouble because they have spent every last penny and then some just to buy a middle-class life for their children. As a result, today’s newly divorced mother is already teetering over a financial abyss the day she signs her divorce papers. She has nothing in the bank, and the family’s fixed costs stretched the limits of two incomes, let alone one. She hasn’t a prayer of competing with double-income families to provide her children with what have come to be seen as the basic requirements of a middle-class upbringing.

Is the only solution for all the mothers to scurry pell-mell back to the hearth? It may sound like a tidy resolution, but it won’t work. Like it or not, women now need those paychecks to pay the mortgage and the health insurance bills. Their incomes are committed, and calling for them to abandon those financial commitments would mean forcing them to give up their families’ spot in the middle class. No, the real solution lies elsewhere — in addressing the reasons behind the bidding war and helping all families, both dual- and single-income, to get some relief.

The Two-Income Trap is thick with irony. Middle-class mothers went into the workforce in a calculated effort to give their families an economic edge. Instead, millions of them are now in the workplace just so their families can break even. At a time when women are getting college diplomas and entering the workforce in record numbers, their families are in more financial trouble than ever. Partly these women were the victims of bad timing: Despite general economic prosperity, the risks facing their families jumped considerably. Partly they were the victims of optimistic myopia: They saw the rewards a working mother could bring, without seeing the risks associated with that newfound income. And partly they were the victims of one another. As millions of mothers poured into the workplace, it became increasingly difficult to put together a middle-class life on a single income. The combination has taken these women out of the home and away from their children and simultaneously made family life less, not more, financially secure. Today’s middle-class mother is trapped: She can’t afford to work, and she can’t afford to quit.

A mother’s story

Both mothers and fathers are trapped in the same sinking boat, but it is mothers who have been the special targets of change over the past generation. It is mothers who left the home en masse, transforming generations of family economics. It is mothers who must do it all, tending to home and children while managing full-time jobs outside the home. And it is nearly always mothers who preserve the remnants of the family in the aftermath of divorce.

Even for a married couple, financial failure is disproportionately a woman’s problem. A husband and wife who have been struck by financial disaster look more or less the same on paper. They share the same assets, they owe the same debts, and they have the same black marks on their credit reports. But behind the curtain of marriage, there are important differences.

In this age of nominal equality between husbands and wives, in the most intimate aspect of their lives — family finance — couples reveal a surprising traditionalism. Research shows that on average, a husband is three times more likely than a wife to take primary responsibility for managing the family’s money. But as a couple sinks into financial turmoil, this responsibility tends to shift. As families fall behind on their bills, it is wives who roll up their sleeves and do what must be done. Wives who deal with foreclosure notices, wives who plead with creditors for more time to pay, and wives who insist on seeking credit counseling or legal help. And, like Ruth Ann, it is wives who ultimately decide when it is time to file for bankruptcy. Among couples who seek credit counseling or file for bankruptcy, the split over who was responsible for dealing with the bills was exactly reversed from that of secure families: three-quarters of the wives were exclusively responsible for trying to extract their families from their financial quagmire.

This shift is not merely a mundane realignment of responsibilities within the household, a simple variation on the routine decisions that he will mow the lawn while she folds the laundry. Rather, it is a signal of serious discord within a marriage. In financially troubled families, women who managed the money alone were twice as likely to describe themselves as very dissatisfied with the arrangement than the men who took on that task. Many women, exhausted and frustrated by all that accompanies the descent into financial ruin, find that just when they most need help, their husbands have disappeared.

Men, for their part, often feel that their failure to provide for their families calls into question not just their abilities in the labor force but also their identities as husbands, as fathers, and as men. Perhaps it should come as no surprise to discover that financial problems and marital problems are statistically linked. Study after study shows that money is a source of contention in most marriages, but it is particularly problematic for couples that are financially unstable. For a family living on the edge, every purchase must be scrutinized, creating flash points for conflict in marriages that are already overly stressed. With no one close at hand to blame for layoffs at work or exclusions in the health insurance policy, it is all too easy to turn frustration and anger on one another. Couples slip into an endless round of “should haves,” second guessing themselves — and each other — for decisions long past. He should have worked the night shift when he had the chance, she should have kept driving the old car, he should have bargained for a better price on the home, she should have spent less on groceries. For some, words give way to physical blows in an ever-escalating battle to assess blame. A bankruptcy trustee we interviewed explains that by helping families use the bankruptcy courts to get protection from their creditors, “I’m in the abuse-prevention business. Every time I help a family get straightened out financially, I figure I saved someone a beating.”

Make no mistake: Financial distress is a problem for both men and women. Accordingly, we will tell the stories of both mothers and fathers in the pages of this book. But we do not want to leave the impression that these phenomena are entirely gender-neutral. They are not. Mothers are 35 percent more likely than childless homeowners to lose their homes, three times more likely than men without children to go bankrupt, and seven times more likely to head up the family after a divorce. And so, in the pages of this book, we will tell a story about families, about children, and, especially, about mothers.

Having children, going broke

This book will tell the story of how having children has become the dividing line between the solvent and the insolvent, and how today’s parents are working harder than ever and falling desperately behind even with two incomes. It is also the story of how this state of affairs is not some unavoidable feature of the modern economy, or, for that matter, the inevitable by-product of women’s entry into the workforce.

We write this book so that Ruth Ann and all the mothers like Ruth Ann, along with politicians and pundits, child advocates and labor organizers, pro-family conservatives and liberal feminists, will take a serious look at the economic forces that have battered the American family. We want them to see the hard numbers — and to gasp. But most of all, we want them to see that there is a way out. There are changes that can happen — real changes, practical changes, meaningful changes. Changes that can be made in Congress, in state legislatures, in school boards, and in families. Changes that can make it so that the average parent can once again spend her nights fretting about potty training and prom dresses, not about home foreclosures and overdrawn bank accounts. Changes that can make America’s great middle class secure once again.

Excerpted from, “The Two-Income Trap: Why Middle-Class Mothers And Fathers Are Going Broke,” by Elizabeth Warren and Amelia Warren Tyagi. Copyright 2003. All rights reserved. Reprinted by permission of Basic Books a member of Perseus Books Group.