This book touched a nerve with families around the country. Perhaps we should not have been surprised. Families are facing economic stress as never before:
• This year, more women will file for bankruptcy than will graduate from college.
• Seventy percent of all Americans (roughly 140 million people) say that they are carrying so much debt that it is making their home lives unhappy.
• The number one New Year’s resolution in America in 2004 is to get out of debt (overtaking losing weight for the first time).
• This year, more children will live through their parents’ bankruptcy than their parents’ divorce.
And we heard from another group of Americans: those who shape the policies that mold this country. In a few short months,
The Two-Income Trap
was quoted publicly by Senators John Kerry, John Edwards, and Ted Kennedy, Representative Richard Gephardt, and former Vermont Governor Howard Dean. They told moving stories of the drastic changes that have taken the American family by storm in a few short decades. And they spoke of the need for change—and of policies that can move toward a better America. Credit industry regulation and limits on usury, which are featured prominently in this book, were endorsed by nearly all of the Democratic presidential
candidates. Disability insurance has gotten a new look from legislators on both sides of the aisle. Leading thinkers in public education are considering the implications of the
Two-Income Trap
on school reform. The Center for American Progress, The New America Foundation, Drum Major, Demos, and The Century Fund have all turned up the volume in pressing issues related to families’ economic stability. In a remarkably short time, there are stirrings of change in the political landscape, changes that may move the economic plight of the middle class to the forefront of the national agenda.
Changes are also occurring at dinner tables across America. Families have shared their stories with us—and their plans to change. Every day we talk with mothers and fathers, grandmas and young singles, who are concerned about their futures and who are determined to make their families more secure. Families are taking to heart the lessons of the Financial Fire Drill, as they evaluate the risks they face in a whole new light.
This book is dedicated to improving the lives of the hard-working, play-by-the-rules families who are learning the hard way that the rules have changed. These pages speak to the hopes and fears of today’s middle class. It is our deepest desire that we can help Americans understand how the financial rules have changed, and how they must now play smarter than ever. We hope that we can help more families make changes—the kind that can protect them from disaster and help them build a brighter future.
The past several months have strengthened our faith in America’s great middle class. They are under assault, but they are fighters. They want to know the truth about what is going on, and they are willing to work hard to protect themselves.
The Two-Income Trap
tells a harrowing tale, but it also speaks of survival and triumph. America’s middle class is ready to fight back.
APRIL 2004
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Just the Way She Planned
R
uth Ann smiles when she talks about the summer she was pregnant with Ellie.
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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.
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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.
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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.
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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.
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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.
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