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The Fragile Middle Class

Chapter One

In the early years of the Republic's third century, America stands more economically and militarily dominant in the world than ever before. The middle class, backbone of the Republic, has experienced one of the longest runs of economic prosperity in its history. Yet in the bright blue sky there is a line of clouds. We cannot know if it is just another summer squall or a terrible storm headed our way. Prognosticators examine the entrails in their economic models while the rest of us cross our fingers. Stolid middle-class people, such as ourselves, would naturally check the house for holes in the roof and rotten floorboards. We have done just that, and in this book we report what we have found.

To many molders of opinion, the notion that the middle class could be in crisis is remote, even unrealistic. Their part of the middle class is thriving, and they point proudly to the growing ranks of young high-tech millionaires as signs of the success of the great American economic engine. The proportion of Americans living below the poverty level has also declined, suggesting that the benefits of economic expansion have been widespread. To hint at economic vulnerability seems at best naive, perhaps unpatriotic.

For other Americans, however, the 1990s were economically frustrating and confusing. The median real income recovered to its 1989 level only in 1996. For many families, income rose during the decade only because two or more earners went to work. The popular press focused on these dual-earning families who managed thirty-minute suppers, juggled chores with aplomb, and sought quality time with their children. Less often noticed was that all of this work was barely keeping the family financially afloat. In fact, some of these miracle families only appear to be afloat. Lurking behind the suburban house, explicit in the divorce settlement, and implicit in the pediatrician's office, is burgeoning consumer debt. The middle-class way of life can be maintained for quite a while with smoke and mirrors-and many credit cards.

In this book we examine hard data about the forces pressing on middle-class Americans. Our focus is primarily on economic effects, although social and moral factors are very much on the table as well. We do not try to resolve the debates, but we can cast some important light on them. With data drawn from federal bankruptcy courts throughout the United States, we can examine the crash victims of the American economy to better understand the financial risks all middle-class Americans face. These data permit us to quantify the stress that arises from five sources: the increased volatility of jobs and income; the explosion of consumer debt with sky-high interest rates; divorce and changing parenting patterns that are increasing the number of single-adult households; the astonishing ability to treat medical problems-at astonishing prices; and the fierce determination that Americans have to buy and retain a family home at all costs.

Our understanding of these middle-class distresses began to emerge in earlier empirical work in the bankruptcy courts. In that study, reported in a book called As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America (1989), we found, to our surprise, that Americans in bankruptcy looked a lot like the rest of us. They were not a substratum of day laborers or housemaids but people with the characteristics of the middle class, though with lower-class incomes. Only so much could be learned from courthouse files about the middle-classness of bankrupts, however, so we undertook a second study, reported here, that added questionnaires about the personal characteristics of bankrupts, including their education levels, occupations, and other relevant data. On that basis, we report in this book that the bankrupts do represent a fair cross-section of the American middle class. On that basis, we have realized that our data from the bankruptcy courts was akin to a financial pathology of middle-class Americans. Because people's financial troubles so often arise from other sources, such as divorce or serious illness, they also reflect in part the social pathology of the great middle of American society.

Since World War II the increase in bankruptcy filings in the United States has been relentless, and recently spectacular. The increases accelerated during the 1980s and 1990s, frequently breaking records from quarter to quarter and year to year. Between 1979 and 1997 personal bankruptcy filings increased by more than 400 percent. The upsurge in personal bankruptcies during the mid-1990s was especially striking because it occurred during a widespread economic recovery. Burgeoning financial collapse in the midst of prosperity is particularly poignant and deeply worrisome.

The dynamics of capitalism, combined with a thin social safety net, guarantee that some families will always fail. Without universal health insurance to protect every family from the financial ravages of illness and without higher levels of unemployment compensation to cushion the effects of a layoff, each day, in good times and in bad, some families will fall over the financial edge. And in a market that provides access to almost unlimited amounts of consumer credit, some people will accumulate a debt load that eventually takes on a life of its own-swelling on compound interest, default rates, and penalty payments until it consumes every available dollar of income and still demands more. Just as the poor will always be with us, so will the bankrupt middle class. Yet what makes the phenomenon so noteworthy in our time is that the proportion of middle-class America finding its way to the bankruptcy courts has jumped beyond any reasonable expectation (fig. 1.1).

Will Rogers said during the Great Depression that America was the first country to drive to the poorhouse in an automobile. The automobile remains a potent symbol of the economic times and our financial mores. Americans are buying larger and more luxurious cars, complete with sound systems, computer monitoring devices, and four-wheel drive. These cars, trucks, and vans are better built and safer than ever before. But the breathtaking prices of these gleaming machines require most middle-class buyers to incur hefty debt, repayable over ever-longer periods at high interest rates. A single transaction encapsulates both prosperity and the risk of financial collapse.

The current prosperity is driven to a large extent by consumer debt, while inflation is largely tempered by downsizing and contract employment. Whether the combination of these factors is stable for the economy as a whole remains to be seen, but it is beyond doubt that they create instability for many American families. Even if one assumes that economic forces ultimately balance out, with new jobs and opportunities replacing old ones, transitional interruptions and reductions in income pose serious problems for families with monthly debt obligations. The combination of two elemental factors-increases in debt and uncertainty of income-contributes importantly to middle-class distress.

The Bankruptcy Laboratory

In the 1980s, we undertook an empirical study of the debtors who filed for bankruptcy. That study, Phase I of the Consumer Bankruptcy Project, involved about 1,550 debtors from ten judicial districts around the country who filed for bankruptcy in 1981. We examined a systematic sample of 150 consumer bankruptcy cases filed in 1981 in each of ten federal court districts spread across three states: Illinois, Pennsylvania, and Texas. The data collected in Phase I emphasized the financial condition of the debtors, especially their debts, assets, and income. We used the detailed financial and demographic information from these bankruptcy files to draw a picture of those Americans who fell all the way into bankruptcy. We found that the bankruptcy laws served as a social safety net for middle-class people caught in financial reversal. Because of bankruptcy, people who were once solidly middle class did not lose everything and fall into the lower class. Declaring bankruptcy allowed them to shed debt, recover from pressing medical bills, and otherwise free up their income so that they could concentrate on their current bills-groceries, utilities, and medical care-as well as on their old home mortgages, car loans, and taxes. They might not keep much property after bankruptcy, years later they are likely to be still making substantial debt payments, and bankruptcy certainly did not guarantee them a job or good health. What declaring bankruptcy did for them was provide a chance-often a last chance-to retain their middle-class status. They could deal with some of the debts that threatened to move them out of their homes, take away their property, encumber their future incomes, and force them to live with a steady stream of debt collectors. They might sink lower in the middle class, but by dealing with their most overwhelming debts, they could preserve a handhold on their way down the social and economic ladder.

In the 1990s, we undertook Phase II of the Consumer Bankruptcy Project. This study, reported here, was based on a larger sample of people who filed for bankruptcy during 1991 in sixteen federal districts. Once again, the data reveal a middle-class population of bankrupts. For this project we obtained written surveys from debtors in bankruptcy and the court records for the debtors in five of the districts. As a result, we now have more nonfinancial information about these families and their financial collapse. Throughout this book we look both at the court data and the survey data to explore who these people are and to outline their financial woes.

In this book we explore the persistence of the stereotype that bankruptcy is a lower-class, not a middle-class, phenomenon. We also examine the evidence that, even though some upper- and lower-class Americans may find themselves in bankruptcy court, bankruptcy is a largely middle-class phenomenon. As measured by the key nonmonetary measures we can develop-information about educational levels and occupations-the people in bankruptcy are solidly middle class. And even the monetary data, which show a substantial portion of the debtors in poverty, contain evidence of the debtors' once-middle-class financial lives: their educational attainments, their formerly higher incomes, and their substantial rates of homeownership hark back to an earlier time of more middle-class financial, as well as social, status. The middle class is, of course, a huge portion of the American population. The families in bankruptcy are a good, though not perfect, cross-section of America by age, by gender, by race, by marital status, by ethnicity, by citizenship status, by employment status. If the world were a more comfortable place for middle-class Americans, we would not be writing this book-or at least one with this title. Instead, bankruptcy would be a distant phenomenon, a last resort for the uneducated, chronically unemployed margins of society whose improvident debts outstripped their meager incomes. In short, we would write a book about them, not about us.

The debtors in our sample include accountants and computer engineers, doctors and dentists, clerks and executives, salesclerks and librarians, teachers and entrepreneurs. They are middle-class folks who are supposed to be gathering around the barbecues on the patios outside their three-bedroom, two-bath houses, not waiting to be examined under oath by their creditors in austere federal courthouses. The debtors were the first to succumb to difficulties that also face many of their fellow citizens. They are like the proverbial canaries in the mineshafts; the bankrupt debtors comprise an early warning system for all Americans. They are a silent reminder that even the most secure family may be only a job loss, a medical problem, or an out-of-control credit card away from financial catastrophe.

The Study

In Phase II of the project, we expanded our study to cases filed in 1991 in sixteen districts spread across five states: all the districts in Illinois, Pennsylvania, Texas, and California and two of the three districts in Tennessee. We thus studied the same ten districts profiled in Phase I and added six districts in two states. The five states we sampled accounted for 31 percent of all bankruptcies in the United States in 1991. With 150 cases in each district, we had a sample of about 2,400 cases.

With the cooperation and help of the Office of the U.S. Trustee and the Administrative Office of the United States Courts, we asked the individuals filing for bankruptcy in these sixteen federal judicial districts to complete a questionnaire that provided information on their age, education, occupation, marital status, race or ethnicity, and citizenship. When married couples filed jointly, we asked for information about both spouses. We also collected financial data from the court records for the sample of 150 debtors in five districts, one district in each of the five states. Chapter 2 gives an overall picture of the demographic, social and economic profiles of the debtors. The grittier details of the study design and a copy of the questionnaire are set forth in Appendix 1.

The final question in the survey asked debtors to explain why they had filed their bankruptcies. There we hoped to uncover more information about the factors that put people at financial risk. Some people gave only terse responses-"too much debt, too little income" -while others poured out complex stories about faithless ex-spouses and gave detailed medical histories. In the next six chapters, we develop more data both from the debtors and from a variety of other sources to explore the fractures in the middle class that they have identified.

We quote many of the debtors' explanations in the course of this book to give the reader a genuine, unfiltered glimpse at the difficulties with which these people were confronted. The debtors' names and other identifying information have been disguised to protect privacy, but their words are uncensored and uncorrected, and the financial and demographic details are accurate as the debtors reported them to us and to the courts. The debtors are not composites; they are real, live people who went through the bankruptcy system. In addition to telling their stories, we also quantify their collective responses and analyze them statistically. Again, our methods are detailed in Appendix 1.

We try to interpret these data to create a coherent picture of the stresses middle-class Americans face today. We are keenly aware of the value judgments that creep into any discussion of information about American families, particularly data dealing with such topics as debt and the failure to honor one's promises.

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Excerpted from The Fragile Middle Class by Teresa A. Sullivan Copyright © 2001 by Teresa A. Sullivan.
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