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Bankruptcy Borne of Misfortune, Not Excess

 Excerpt from The NY Times, Sunday, September 3, 2000

     A decade ago, in a widely praised analysis of bankruptcy filings, three scholars destroyed the myth that most of those seeking refuge from creditors were blue-collar workers.  People in every occupation go bankrupt in rough proportion to their numbers, they found.  

     Now, in "The Fragile Middle Class" (Yale University Press, 2000), the same three writers - Elizabeth Warren, Teresa A. Sullivan and Jay Lawrence Westbrook- have refined their research and shown that behind most bankruptcy filings lies misfortune, not profligate living.

   Ms. Warren, a Harvard Law School professor, says the findings suggest that the recent slight decline in bankruptcy filings nationwide is misleading.  The next time the business cycle hits bottom, she said, many people who are now solidly employed may find themselves out of work with bankruptcy as their only recourse.  Following are excepts from a recent conversation.

Q.  What did your latest analysis reveal about the finances of middle-class Americans?

A.  The number of middle-class families declaring complete financial failure exploded from 313,000 in 1980 to 1,281,000 in 1999.  And they were much deeper in debt.  In 1981, these people owed non-mortgage debts equal to nine months of income, compared to more than 22 months in 1997.

Q.   Don't people file for bankruptcy because they misused credit, lived beyond their means?

A.   In the same way that dead bodies help pathologists understand illness in a living population, the people in bankruptcy help us learn about the economic risks facing families generally.  Many people in bankruptcy were solid bill payers until something knocked their legs out from under them.  For two-thirds of these people, it was loss of a job, for 40 percent it was a serious medical problem and for 20 percent it was the economic fallout of divorce.  

     Some were loaded up with debt already, but many others were swamped trying to survive joblessness, illness or divorce- risks which all middle-class Americans face.  The bankrupt debtors are the ones who didn't survive economically.

Q.  You and your colleagues write that in the last two decades, government policies have shifted risks from capital to labor.  What does that mean for families?

A.  The American economy has benefited from agile companies that can quickly shed or add workers, often on a contract basis without fringe benefits such as health insurance.  But this agility for companies brought vulnerability for workers, through interrupted employment and medical bills not covered by insurance.  The question we face as a society is how much of the economic risk of job loss and medical problems should be borne individually by each family and how much should be spread among everyone.  The portion of families who are failing economically in this new environment has increased by fourfold over the past two decades, and we need to recognize that there is no free lunch, that the new policies that made companies agile also impose costs.

Q.  You write that it makes sound economic sense to have a two-income family.  Why? 

A.  Two incomes represent the only strategy most people have to spread the risk of unemployment or catastrophic medical bills.  Our data show that is either spouse is unemployed, that chance that the family will be in bankruptcy skyrockets by about 320 percent.  Following divorce, the chances of filing bankruptcy triple, and that risk falls again, statistically, only when a divorce woman remarries.  The bankruptcy data show that a two-earner family is not a matter of choice, but of economic survival.

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