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Katherine Porter’s book, Broke: How Debt Bankrupts the Middle Class, is a group of essays based on the 2007 Consumer Bankruptcy Project. The 2007 CBP collected basic information on substantially all Chapter 7 (liquidation) and Chapter 13 (partial repayment plans) cases filed for five consecutive weeks in early 2007, and selected 1000 cases per week for detailed study. The researchers collected data from a) the petitions filed by the debtors, which contain enormous detail about their financial condition; b) other court records; c) questionnaires from about half of the cases; and d) interviews of about 20% of the filers. That is a wonderful cross-section of Americans whose finances were destroyed just before the Great Crash.
Each chapter explores a single aspect of this study. The principal investigators on the study are experts in law, economics, political science, psychology, and sociology. The rich data provides fascinating insights into the causes and effects of bankruptcy. It confirms some expectations and raises fascinating issues that could not have surfaced in a less complete investigation. I practiced bankruptcy law for 25 years, representing corporate and individual debtors and creditors, and bankruptcy trustees, and I can say that most of the statements about individual debtors ring true to me.
Porter describes the book In Chapter 1, which you can read here.
Here are some of the interesting findings:
1. Bankruptcy is a middle class phenomenon, contrary to the myth that it is primarily a way for the poor to get rid of debts. Almost all filers are, or were within two years of filing, members of the middle class, by income, home ownership, education or job.
2. People who file bankruptcy are in deep financial distress. For example, the median bankruptcy filer has a negative net worth. In contrast, the median family in financial distress according to the Federal Reserve Board’s Survey of Consumer Finances has a slightly positive net worth. Of course, both are substantially below the median net worth of all families, which was $120,600 in the 2007 Survey.
3. It is not likely that bankruptcy filers could work their way out of debt. The median unsecured debt in the CBP study was $33,387, while the median monthly income was $2,266; it would take 15 months of income to pay the debt, not counting additional interest. Other debt, including car loans and mortgage payments just add to that figure. Bankruptcy is truly the last resort.
4. People used to think home ownership and education were the tickets to middle class status. Now both are horrible financial problems for many people. Data from the CBP shows that for families where the cost of home ownership exceeded 30% of income, the average loan to value ratio of the home was 145%. Even for families whose cost of home ownership was less than 30%, the average house had no equity.
As to education, Porter shows that attending college without attaining a four year degree is a losing proposition for those who have to borrow. Bankruptcy filers with some college education have debt to income ratios similar to people with only a high school education. Recent headlines give some idea of the student loan problem, as total student loan debt has reached the $1 trillion level. This is non-dischargeable debt, meaning that vast numbers of people have handicapped themselves trying to get a place in the middle class.
5. About 14% of the bankruptcy cases in the CBP are filed by people who were self-employed. We are bombarded with stories about self-made people, but we never hear about the failures. By most measures, these are at the bottom of the pile financially. Most of them borrowed on credit cards, meaning that their interest rates are very high, hurting their prospects for profitable self-employment. Many have borrowed from family, and from retirement accounts which are exempt from claims of creditors. Bankruptcy hurts them very badly.
6. Financial problems cause tremendous emotional strain. The data from the CBP says that women suffer more emotional stress than men, but both are hurt. Many marriages cannot take the stress, and break-ups lead to further financial problems even after bankruptcy as they establish two households. Losing a home is especially stressful. It is an admission of utter failure, and it has terrible impact on children.
7. Perhaps the most surprising finding is that more African-Americans file Chapter 13 than the population as a whole. The authors of Chapter 10 say that this is because their lawyers steer them to Chapter 13 even when they might be better off in Chapter 7. This will require further study.
8. At the same time debt was increasing, wages were stagnant, and people maintained their consumption patterns by borrowing. In 2005, the Bankruptcy Code was amended to make it more difficult, time-consuming and costly to file. After people decided to file, they remained stressed for a much longer time period, adding to the misery. Simultaneously, the safety net was slashed. The CPB data was gathered before the Great Crash, so we can only assume things are worse now.
9. Once government strictly regulated lending, both for home loans and unsecured debt, and provided strong support for education, especially at state universities and community colleges. Social goods were provided through employment, such as support for health insurance and defined-benefit pensions. All that is gone now, replaced by policies that force each family to operate all by itself.
Porter and her collaborators offer suggestions for changes that might make minor differences. But the message of Broke is simple: middle class life is harder for people to attain and maintain.