broke women’s working lives in east asia studies in social inequality editors David B Grusky, stanford university Paula England, new york university e d i to r i a l b oa r d Hans-Peter Blossfeld Mary C Brinton Thomas DiPrete Michael Hout Andrew Walder Mary Waters b ro k e How Debt Bankrupts the Middle Class Edited by Katherine Porter stanford university press stanford, california Stanford University Press Stanford, California ©2012 by the Board of Trustees of the Leland Stanford Junior University All rights reserved Copyright in this work does not extend to the chapter by Brian Bucks which was written as a work of the United States Government and is in the public domain No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or in any information storage or retrieval system without the prior written permission of Stanford University Press Printed in the United States of America on acid-free, archival-quality paper Library of Congress Cataloging-in-Publication Data Broke : how debt bankrupts the middle class / edited by Katherine Porter pages cm Includes bibliographical references and index ISBN 978-0-8047-7700-1 (cloth : alk paper) — ISBN 978-0-8047-7701-8 (pbk : alk paper) Bankruptcy—United States Debt—United States Consumer credit—United States Middle class— United States Finance, Personal—United States I. Porter, Katherine (Katherine M.), editor of compilation HG3766.B76 2012 332.70973—dc22 2011015040 Typeset by Bruce Lundquist in 10/13 Sabon This book is dedicated to Teresa Sullivan, Elizabeth Warren, and Jay Westbrook, who taught us about studying families in bankruptcy contents chapter one Driven by Debt: Bankruptcy and Financial Failure in American Families Katherine Porter p a r t i The Debtor Next Door chapter two A Vulnerable Middle Class: Bankruptcy and Class Status 25 Elizabeth Warren and Deborah Thorne chapter three Out of Balance? Financial Distress in U.S Households 40 Brian K Bucks p a r t i i Starting Right, Ending Wrong chapter four Home Burdens: The High Costs of Homeownership 65 Jerry Anthony chapter five College Lessons: The Financial Risks of Dropping Out 85 Katherine Porter chapter six Striking Out on Their Own: The Self-Employed in Bankruptcy 101 Robert M Lawless viii Contents p a r t i i i Hurting at Home chapter seven No Forwarding Address: Losing Homes in Bankruptcy 119 Marianne B Culhane chapter eight Women’s Work, Women’s Worry? Debt Management in Financially Distressed Families 136 Deborah Thorne p a r t i v The Hard Road Out chapter nine The Do-It-Yourself Mirage: Complexity in the Bankruptcy System 157 Angela Littwin chapter ten Less Forgiven: Race and Chapter 13 Bankruptcy 175 Dov Cohen and Robert M Lawless p a r t v The Once and Future American Dream chapter eleven Borrowing to the Brink: Consumer Debt in America 195 Kevin T Leicht c h a p t e r t w e lv e The Middle Class at Risk Jacob S Hacker 218 appendix Methodology of the 2007 Consumer Bankruptcy Project 235 Katherine Porter Acknowledgments 245 Notes 247 Bibliography 273 Contributor Biographies 297 Index 301 broke contributor biographies Jerry Anthony is associate professor in the School of Urban and Regional Planning at the University of Iowa and the director of the Housing Policy Program at the University of Iowa’s Public Policy Center He researches housing, land use, and international planning His article “The Effect of Florida’s Growth Management Act on Housing Affordability” was named one of the most influential papers published in the planning profession’s flagship publication, Journal of the American Planning Association He has received the “Excellence in Planning Education” award for teaching from the Iowa chapter of the American Planning Association Brian Bucks is an economist at the Federal Reserve Board where he works on the Board’s Survey of Consumer Finances His research focuses on household finances and financial decisions, including the measurement of household wealth and well-being Bucks received his Ph.D in economics from the University of Wisconsin–Madison in 2004 Dov Cohen is professor of psychology at the University of Illinois, where he also has an appointment in the College of Law He is coauthor of Culture of Honor and coeditor of The Handbook of Cultural Psychology and Culture and Social Behavior He was previously on the faculty at the University of Waterloo Marianne B Culhane is dean of Creighton University School of Law, where she has long taught commercial law and bankruptcy She has served as the Robert Zinman Scholar in Residence at the American Bankruptcy Institute and as the Southeastern Bankruptcy Institute Distinguished Visitor at Georgia State Law School She is a coauthor of When Worlds Collide: Bankruptcy and Its Impact on Domestic Relations and Family Law (2005, 3rd ed.) and BAPCPA: Evaluation of Using IRS Standards to Calculate a Debtor’s Monthly Disposable Income (2007) 297 298 Contributor Biographies Jacob S Hacker is the Stanley B Resor Professor of Political Science at Yale University and a resident fellow at the Institution for Social and Policy Studies He is the author of several books, including The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream (2008, rev ed.), and with Paul Pierson, Winner-Take-All Politics: How Washington Made the Rich Richer—and Turned Its Back on the Middle Class (2010) He is an expert on economic security, the privatization of risk, and the politics of U.S health and social policy Robert M Lawless is professor of law and codirector of the Illinois Program on Law, Behavior, and Social Science at the University of Illinois where he specializes in bankruptcy, consumer credit, and business law He is the author of numerous scholarly articles and the coauthor of Empirical Methods in Law Lawless also administers and contributes to Credit Slips, a blog discussing bankruptcy and credit issues Kevin T Leicht is professor and chair of the Department of Sociology and director of the Iowa Social Science Research Center at the University of Iowa His research examines the relationship between globalization and economic development His recent books include Post-Industrial Peasants: The Illusion of Middle Class Prosperity (2007, with Scott Fitzgerald), Handbook of Politics: State and Society in Global Perspective (2010, with J Craig Jenkins), and Social Change: America and the World (2010, 6th ed., with Charles L Harper) Angela Littwin is assistant professor at the University of Texas School of Law Her research and teaching interests include bankruptcy, consumer law, and commercial law Her recent work includes research on credit card use among low-income women and the relationship between the consumer credit system and domestic violence Katherine Porter is professor of law at the University of California Irvine School of Law In 2010–2011, she was the Robert Braucher Visiting Professor at Harvard Law School She is an expert in consumer credit law and has testified several times before Congress Her published research addresses mortgage servicing, financial education, and consumer bankruptcy Deborah Thorne is associate professor of sociology and Wagner Teaching Fellow at Ohio University For the past decade, her research agenda has focused on economic inequality—specifically, consumer debt and consumer bankruptcy She has authored articles on social mobility, stigma, gender, Contributor Biographies 299 medical debt, reasons for elder debtors’ bankruptcy, and financial well-being after bankruptcy Elizabeth Warren is the Leo Gottlieb Professor of Law at Harvard Law School She recently served as an assistant to President Barack Obama and the special advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau From 2008 to 2010, Warren was the chair of the Congressional Oversight Panel for the Troubled Asset Relief Program She is the author of more than one hundred scholarly articles and several books, including The Two-Income Trap (2004, with Amelia Tyagi Warren) and The Fragile Middle Class (2000, with Teresa A Sullivan and Jay Lawrence Westbrook) index Administrative Office of the United States Courts (AO), 104–105 Affordable Care Act, 219 American Dream, 3, 7, 12, 33, 109, 119–120, 196, 206, 215–218, 226– 227, 229, 234 American National Election Studies, 227 Bankruptcy, generally: alternatives to, 11; benefits of, 122; complexity, 162–163, 174; costs of, 155–159, 173–174, 267n24; informal, 58, 258n41; racial disparities, 14, 177, 181–188, 249n48 Bankruptcy law: 2005 amendments, 6, 21, 115, 152, 157, 162, 167, 176, 266n37; attorney representation in, 14, 169, 267n15; Chapter 7, 17–19, 175, 249n55; Chapter 13, 17, 19–20, 57, 123, 176, 249nn54, 263n13; Chapter 11, 272n2; chapter choice, 17, 175–176, 178, 185, 188– 190, 249n53; discharge, 184n14; effect on credit scores, 20, 249n60; effect on relationships, 136–138, 146–151, 153; emotional distress of, 137, 140–146, 153; forced home sale, 122, 263n11; inaccurate advice online, 173, 268n32; legal fees, 20, 157–158, 162, 169; 173, 266n1; limited liability, 233; payouts, 171, 267n26; process, 17–20; provisions to help homeowners, 123; risk of, and college, 12, 93, 261n21; technical deficiency motions, 167–168 Bankruptcy Database Project at Harvard, 40–41, 254nn1, Bankruptcy, debtors: asset ownership, 51; average debt, 90–91, 260n14; college attendance, 97, 261n33; education of, 25, 29–31, 250n1, 252n18; educational attainment, 85–87, 89, 122–23, 161, 259nn1–4, 260n7; gender differences, 13, 137–39, 141–153; home equity, 56, 257nn36–37; homeownership, 33– 36, 38–40, 51–53, 58–59, 121–125; incentives, 58, 258n39; income, 26, 89, 250n4; occupation of, 28, 31–33, 250n9; race of, 180–191, 226; selfemployed, 109–114, 216; student loans and, 97–98, 261nn34–35; types of debt, 55; views of, 10 Bankruptcy filings: 6, 20, 47–48, 60– 61; businesses, 104–105; incomplete schedules, 49, 257n34; medical costs, 220; rates of, 16–17, 39, 254n34; self-employed, 104–109 Bankruptcy, pro se: clerks, 172; demographics of, 158–163; 301 302 Index nonlawyer petition preparers, 159, 170–172, 266n5; outcomes of, 163– 169, 171, 267n10; procedural errors, 167; rate of filing, 158, 266n2; rate of dismissal, 168, 267nn13–14 Bankruptcy, reason for filing: 11, 25–27, 59–60, 90, 215–16, 258n42, 260n13; homeownership, 81–83, 122, 134–135; loss of income, 28, 251n11 Bernstein, Jared, 88, 223, 260n9 Biden, Joe, Bill paying, gendered division: 137, 139, 151–152 Bostic, Raphael, 69 Braucher, Jean, 179 Brin, Sergey, 101 Brookings Institution, 178 Business funding, 110 Business start-ups, 102 Caplovitz, David, 146 Carroll, Sarah, 83 Chapter 7, 17–19, 101–102, 123; filers of, 175–177 Chapter 13, 19–20, 115, 123; filers of, 175–177; in contrast with Chapter 7, 18, 177–80, 188–189 College: benefits of, 94, 261n24; completion rate, 92, 260n18; financial risks of, 97; pressure to attend, 86, 92 Consumer Debt, 7, 14–16, 195, 204– 207, 216–217 Consumer Financial Protection Bureau, 15, 216 Consumption, 8, 217, 248n37 Corporate Profits, 201 Cost of living, 199–201 Credit card charge-offs, Credit Cardholders’ Bill of Rights, 8, 248n32 Credit constrained, 11, 43, 255n9 Credit, democratization, 209 Credit regulation, 205–206, 209, 216 Debt: collection, 6; compared to 1970s standards, 207–214; cost of, 16, 115; credit card, 209; depression, 144– 145, 151–152; divorce, 138, 147, 149–151, 153; entrepreneurship, 102; high payment-to-income ratio (PIR), 43, 255nn13–14; household, 4–5, 207–211, 215; insomnia, 143, 144, 151–152, 265n22; measuring 47–48, 257nn29–30; medical 38; social inequality, 195; strain on marriage, 137, 149–150; stress of, 136, 141–143, 151–152; unsecured, 53–56, 113–114 Debtors See Bankruptcy debtors Deleveraging, 2, 8, 15–16, 248n33 Deregulation, 196, 200, 214, 217, 230 Dew, Jeffrey, 146 Dodd-Frank Wall Street Reform and Consumer Protection Act, 49, 65 Downward mobility, 2, 11, 218, 247n1 Earned Income Tax Credit, 229 Economic inequality, 15, 230 Economic Security Index (ESI), 224–225 Economic security: 15, 42–43, 219– 220, 227–229; restoring, 230–234 Education: attainment of bankruptcy filers, 29–30; risks of, 39, 96–99; relation to earning power, 88–89, 260nn9–10; student loans for, 92–96 Eggum, John, 80 Entrepreneurship, 116, 232 Families: finances of, 6; financially distressed, 136–153; financial security of, 7, 42–45 Financial distress, 7; criteria, 44–45, 255n20; defined, 44; indicators of, 3, 247n3; measures of, 11; suffering silently, 7, 248n28 Financial security See Economic security Financially vulnerable, 11, 40–42, 44, 255n8 Financial profiles of bankruptcy filers, 58–59 Foreclosure, 6, 13, 81–83, 119–120, 226 Friedman, Milton, 70 Gladieux, Lawrence, 260n10 Google, 100 Great Recession, 2–3, 6, 8, 16; media coverage of, 7, 247n29; causes, 8, Greenspan, Alan, 8, 248n31 Great Risk Shift, 219–223, 226 Hacker, Jacob, 201 Han, Song, 259n3 Haurin, Donald, 129 Health Insurance, 220–221; portability, 232; regulation 219 Home Affordable Mortgage Modification Program (HAMP), 7, 67, 83, 120 Home equity: loan, 78, 80; negative, 58, 258n40; home values, 122, 129 Homelessness, 127 Home loss: after bankruptcy, 123–125; consequences, 129; replacement shelter, 125–126; rate of, 226; resulting in multifamily households, 127, 263n19; tenure in lost home, 127–128; wealth decline, 222 See also Foreclosure Homeownership: age and, 70, 75; as status symbol, 133; concern for children as motivator, 130–131; education and, 71, 76; marital status and, 75; measuring rate of, 66–67; medical problems and, 133; psychological importance, 132–133; race and, 69, 76; rates, 5, 33–36, 56, 247n19, 253n25, 257n38; risks of, 12, 39; sweat equity, 133–134; wealth and, 68, 75 Homeowners: age of, 70, 75; characteristics of bankrupt, 72; Index 303 delinquent or in foreclosure, 120, 263n6; education of, 71, 76; family structure of, 70, 75–76; income of, 73–75; race of, 69, 76 Households: borrowing of, 14–15; class status of, 36–38, 253n30; debt-toasset ratio, 213–14; income of, 4, 26–28; mortgage loan characteristics, 77; savings of, 43 Household debt, contraction of, 8, 248n33 Housing bubble, 35–36, 216 The Illusions of Entrepreneurship, 102 Income disparity, 26–27 Income, 4, 26–28, 198, 223 Income inequality, 199–200 Income, instability of, 201, 223–225 Income, measuring, 28, 47, 256n26 Income stagnation, 195, 204, 215 Iowa Youth and Families Project, 146 Jacoby, Melissa, 134, 240 Kahneman, Daniel, 227 Kennickell, Arthur, 43, 255n18, 256n23 Kornbluth, Karen, 223 Lawless, Robert, 73, 240 Lending, racial discrimination, 209 Li, Geng, 259n3 Li, Wenli, 83 Local legal culture, 179–180, 183, 186, 189 Loss aversion, 227 Low-control chores, 138–140 Luo, Michael, 263n19 Lupica, Lois, 129 Lusardi, Annamaria, 43, 255n18 Mann, Ronald, 112, 152 Marger, Martin, 28–29 Marriage, effect of bankruptcy on, 136–138, 146–151, 153 304 Index McKinney-Vento Homeless Assistance Act, 131, 135 Medical Debt, 48, 60 Mian, Atif, Middle class: homeownership as measure of, 28, 251n14; financial fragility, 8; generally, 196–198, 206, 214–217, 223, 229–230; measures of, 3, 26, 29, 250nn2–3; shared qualities, 5, 247n19; three levels of, 28, 251n13; shift of risk to, 218 Middle Class Task Force, 3–4 Mishel, Lawrence, 260n9 Mobile homes, 79–80 Modigliani, Franco, 70 Mortgage debt: bankruptcy filers, 79–80; generally, 205, 208, 216; underwriting of, 77–78 Mortgages: adjustable rate, 78, 80, 119, 205; qualifying for, 36, 77–84, 120, 253n28 See also Homeownership Net standardized wealth, 73 Neustadter, Gary, 178 Newman, Katherine, Nguyen, Eric, 130–131 Obama, Barack, 3, 6, 219 Occupational prestige, 31–33, 255nn19–20, 256nn21–23 Oliver, Melvin, 28, 33 Overconsumption myth, 103 Page, Larry, 101 Panel Study of Income Dynamics, 204, 223 Paulsen, Jeff, 239–240 Pensions, 220–222 Perna, Laura, 260n10 Porter, Katherine, 80 Poverty Guidelines, HHS, 26, 250n6 Piggyback loans, 78, 80 Productivity gains, 201–203, 217 RAND, Refinancing, 128 Rental housing, 78 Retirement benefits, 221–222 Rosenthal, Stuart, 129 Savings, low, 44, 255n19 Shadow unemployed, 223 Shane, Scott, 102 Shapiro, Thomas, 28, 33 Small Business Administration (SBA), 107 Small business debt, 112–115 Social inequality, 195, 199–200 Social safety net, 220–221, 232 Socioeconomic status, 26, 197 State of the Nation’s Housing, 68 Stone, Michael, 68 Student loans, 39, 86, 92, 260n16; burden, 94, 96, 261nn22–23, 25; discharge, 98, 261nn40, 43; risk of default, 95 Sufi, Amir, Sullivan, Teresa, 11, 45, 70, 81, 179, 235, 259n1 Surette, Brian, 69 Survey of Consumer Finances (SCF), 40–42, 46–48, 85, 254nn5–7, 256nn22–25, 259n3 Tax Reform Act of 1986, 78 Thorne, Deborah, 126, 239, 243–244 Tversky, Amos, 227 Twomey, Tara, 80 Tyagi, Amelia Warren, 130, 204 U.S Chamber of Commerce, 115 Wage growth, 15, 205 Wages, productivity-enhanced, 196– 197, 203 Warren, Elizabeth, 11, 45, 70, 81, 130, 151, 179, 204, 235, 259nn1–2 Wealth, household, 5, 51–53, 226 Westbrook, Jay, 11,45, 70, 81, 179, 235, 259n1 Willis, Lauren, 128 Index Wolff, Edward, Zagorsky, Jay, 129 305 s t u d i e s i n s o c i a l i n e q ua l i t y Making the Transition: Education and Labor Market Entry in Central and Eastern Europe edited by irena kogan, clemens noelke, and michael gebel 2011 Class and Power in the New Deal: Corporate Moderates, Southern Democrats, and the Liberal-Labor Coalition g william domhoff 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Cataloging-in-Publication Data Broke : how debt bankrupts the middle class / edited by Katherine Porter pages cm Includes bibliographical references and index ISBN 978-0-8047-7700-1 (cloth : alk paper) — ISBN 978-0-8047-7701-8... Waters b ro k e How Debt Bankrupts the Middle Class Edited by Katherine Porter stanford university press stanford, california Stanford University Press Stanford, California ©2012 by the Board of