The Two-Income Trap (34 page)

13
Betty Friedan,
The Feminine Mystique
(New York: W. W. Norton, 1984), pp. 206-207 (emphasis omitted).

14
This is the title of a book edited by renowned conservative Phyllis Schlafly:
Who Will Rock the Cradle? The Battle for Control of Child Care in America
(Nashville, TN: W Publishing Group, 1990).

15
IRAs and 401(k) plans, which allow workers to set aside pretax earnings for retirement, are the best-known examples. In addition, employer-sponsored Flexible Spending Accounts enable workers to put pretax dollars aside for qualified medical expenses. The Economic Growth and Tax Relief Reconciliation Act of 2001 grants federal tax exemption on earnings from state education saving plans when the money is used to pay for qualified higher education expenses.

16
“Saving the Wealthy,”
Baltimore Sun,
February 7, 2003.

17
SMR Research Corporation,
The New Bankruptcy Epidemic: Forecasts, Causes, and Risk Control
(Hackettstown, NJ, 2001), 94.

1
147 Cong. Rec. S1934 (2001) (statement of Sen. Hatch). Available at
www.senate.gov/~hatch
, “Statements,” April 15, 1999.

2
147 Cong. Rec. S1934 (2001) (statement of Sen. Hatch).

3
Henry J. Hyde, News Advisory, U.S. House of Representatives, Committee on the Judiciary (March 10, 1999). Available at
http://www.house.gov/judiciary/031099a.htm
[3/14/2003].

4
“Administration of the Bankruptcy Act,”
Report of the Fifty-third Annual Meeting of the American Bar Association Held at Chicago, Illinois, August 20, 21, and 22, 1930
(statement of Hon. Thomas D. Thacher, Solicitor General of the United States), p. 255. In the 1930s, Yale University researchers teamed up with the Department of Commerce to study the rise in personal bankruptcies. Their conclusion? The stigma associated with bankruptcy “has been gradually diminishing.” Victor Sadd and Robert T. Williams,
Causes of Bankruptcies Among Consumers
(Washington, DC: Government Printing Office, 1933), p. 5.

5
Cotton Mather,
Fair Dealing Between Debtor and Creditor
(Boston: 1716): “People there are, too many, who do bring Debts upon themselves, in such a manner, and in such a measure, that a Folly nothing short of Criminal, is to be charged upon them. And when they have brought such Debts upon themselves, their Delay to get from under them, is what also amounts unto a Crime, for which they are to be Indicted, as not having the Fear of God before their Eyes.”

6
Thorough histories of the early republic, such as Bruce Mann’s
A Republic of Debtors: Bankruptcy in the Age of American Independence
(Cambridge, MA: Harvard University Press, 2002), are replete with stories of the battles between debtors and creditors, and the canny ways in which each side tried to outmaneuver the other.

7
In one paper, the authors claim that stigma could be measured on a state-by-state basis. The authors identify several measurable economic factors, then claim that any rise in bankruptcy filings that is not explained by those economic factors must be caused by a decline in stigma. For example, they suggest that the people of Tennessee (who have relatively higher bankruptcy filing rates) must feel less shame than the people of Hawaii (who have relatively lower bankruptcy filing rates). See Scott Fay, Erik Hurst, and Michelle J. White, “The Bankruptcy Decision: Does Stigma Matter?” Working Paper 98-01, Department of Economics, University of Michigan (January 1998). In a later paper, the same authors use similar data to show that families who could benefit the most from bankruptcy (that is, the families whose debts are highest relative to their assets and state law exemptions) are most
likely to file for bankruptcy, thus proving—at least to these authors—that these families are somehow “strategic” in their use of bankruptcy, which supposedly means they feel no stigma. Scott Fay, Erik Hurst, and Michelle J. White, “The Household Bankruptcy Decision,”
American Economic Review
92 (June 2002): 706-718. Another study takes a similar approach, explaining as much of the variation in the use of credit cards as possible on the basis of economic factors, then declaring that families were more likely to file for bankruptcy in 1997 than they had been in 1995 because of a decline in stigma during that two-year period. David B. Gross and Nicholas S. Souleles, “An Empirical Analysis of Personal Bankruptcy and Delinquency,” 98-28-B, Financial Institutions Center, the Wharton School, University of Pennsylvania (November 1999). Other researchers look at social factors as well as economic factors. For example, one study focuses on the role of religion. The study assumes that Catholics have more moral qualms about filing for bankruptcy than, say, Methodists, Jews, or agnostics. F. H. Buckley and Margaret F. Brinig, “The Bankruptcy Puzzle,”
Journal of Legal Studies
27 (January 1998): 187-207.

8
Fay, Hurst, and White, “The Household Bankruptcy Decision.” The Panel Study of Income Data, a long-term study of family finances conducted by the University of Michigan, is held up as about as perfect a cross-section of American households as researchers can construct. Only aggregate data are reported, and individual responses are held in the strictest confidence. The families in the study willingly share information about their incomes, their purchases, their debts, their investments, and scores of other financial data with the researchers. And yet, when these families were asked about whether they had filed for bankruptcy, only about half of the predicted number confessed to a bankruptcy filing. Either the sample is badly skewed, which no researcher has claimed, or the families concealed their bankruptcy filings. The authors report these facts, although they do not draw the inference that the study subjects were reluctant to report their bankruptcy filings.

9
Michelle J. White, “Why It Pays to File for Bankruptcy: A Critical Look at the Incentives Under U.S. Personal Bankruptcy Law and a Proposal for Change,”
University of Chicago Law Review
65 (Summer 1998): 685-732. White shows that about 17 percent of U.S. households would profit from filing for bankruptcy—and yet, for some reason (presumably at least somewhat influenced by a sense of shame or stigma), they don’t file. Despite this finding, White is one of the coauthors of another paper (cited above) claiming that stigma has declined.

10
Congressman Rick Boucher is one of many who have used this term: “Bankruptcies of convenience are driving this increase [in bankruptcy filings]. Bankruptcy was never meant to be used as a financial planning tool, but it is becoming a first stop rather than a last resort. . . .” Congressman Rick Boucher, Hearing on Bankruptcy Reform and Financial Services Issues, Senate Banking Committee (March 25, 1999). Available at
http://banking.senate.gov/99_03hrg/032599/boucher.htm
[3/14/2003].

11
147 Cong. Rec. S2374 (2001) (statement of Sen. Murray).

12
Constance M. Kilmark, “Inside the World of the Troubled Debtor,”
Journal of Bankruptcy Law and Practice
10 (March-April 2001): 257-278.

13
The exact figure is 84.3 percent of the families interviewed.

14
Judge Edith H. Jones and Todd J. Zywicki, “It’s Time for Means-Testing,”
Brigham Young University Law Review
(February 1999): 177-249.

15
The bankruptcy laws have their own section of the United States Code, 11 U.S.C. sections 101 et seq. Within that section are the various “chapters.” The first chapters in the code lay out rules applicable to all bankruptcies. Chapter 7 governs the liquidation bankruptcies of both individuals and businesses, Chapter 11 deals primarily with business reorganizations, Chapter 12 governs the restructuring of family farms, and Chapter 13 is for families trying to repay debts over time.

16
Businesses may file for Chapter 11 if they want to try to reorganize, or Chapter 7 if they are to be liquidated immediately.

17
11 U.S.C. section 541.

18
The variation is extreme. Half of all the states have exemptions of $20,000 or less, and six states permit multimillion-dollar exemptions. The National Bankruptcy Review Commission recommended that Congress put a floor and a ceiling on homestead exemptions. At various times, the Senate proposed to cap homestead exemptions pegged variously at $125,000 to $250,000, although the House rejected such caps. But neither the House nor the Senate ever moved to create any floor for homestead exemptions. For many families with high mortgages relative to value, the exemption debate is a distant abstraction: They have no home equity to protect.

19
11 U.S.C. section 523.

20
11 U.S.C. sections 727(a)(8) and (a)(9). The law is more specific: A debtor is eligible for a discharge only after six years have passed. In fact, many families file for Chapter 13, try to make payments, and then drop out of the system when they cannot pay. They received no discharge, so they are eligible to file again. In our study, 5 percent of the Chapter 7 filers had filed for bankruptcy at least once before, and 31 percent of the Chapter 13 filers had been in bankruptcy previously, presumably filing, refiling once, and even refiling a second time, trying to get their financial lives straightened out.

21
11 U.S.C. section 1325(b).

22
11 U.S.C. section 1328(a).

23
In 1981, the median nonmortgage debt-to-income ratio for families in bankruptcy was 0.79. In 1991, the ratio had climbed to 1.06. In 2001, the ratio was 1.5.

24
Personal Bankruptcy: A Literature Review,
CBO Papers (September 2000). Available at
http://www.cbo.gov/showdoc.cfrm?index=2421&sequence=0
[3/3/2003], See Marianne Culhane and Michaela White, “Taking the New Consumer Bankruptcy Model for a Test Drive: Means Testing Real Chapter 7 Debtors,”
American Bankruptcy Institute Review
(Spring 1999): 28-75. In a sample
of 1,041 Chapter 7 cases, the authors found only six debtors who could repay their debt. See discussion in chapter 6.

25
Adam Fifield, “For the Repo Man, These Are Good Times: The Sluggish Economy Makes for Busy Nights in a Ticklish Job,”
Philadelphia Inquirer,
December 29, 2002. The rate of mortgage foreclosure increased from 0.31 percent in 1979 to 1.1 percent in 2002. Unpublished data, “Foreclosure at End of Quarter, U.S. (Unadjusted %),” Mortgage Bankers Association of America (2002).

26
Statement of Senator Orrin Hatch Before the United States Senate Committee on the Judiciary (May 21, 1998). Available at
http://judiciary.senate.gov/oldsite/ogh52198.htm
[3/14/2003]: “[The proposed bankruptcy bill] has new safeguards against the fraud and abuse that costs hardworking Americans.” The American Bankers Association estimates that 10 percent of all bankruptcy filings (approximately 150,000 filings in 2001) are fraudulent. Eric Gillin, “Events Conspire Against Bankruptcy Reform,”
The
Street.com
,
posted January 10, 2002. Available at
http://www.thestreet.com/markets/ericgillin/10006456.html
[3/14/2003]. “What we have a problem with are the individuals who understand how the system works but choose to abuse it, and we estimate that’s about 10 percent of all bankruptcy filers,” said Catherine Pulley, spokeswoman for the American Bankers Association.
All Things Considered,
National Public Radio, July 26, 2002. The industry meaning of “fraud and abuse” is fairly aggressive: The industry also claims that about 10 percent of all families currently in Chapter 7 (or 7 percent of bankrupt families overall) could pay
something
to their creditors if they went on a stringent, court-imposed budget for five years. Evidently failure to pay that “something” by giving up every dollar of disposable income to creditors is, according to this group, “fraudulent.” It is important to note that the credit industry does not accuse these families of any acts that would be considered fraudulent in a legal sense, such as providing false information on a credit application, violating the bankruptcy laws, or lying under oath. Indeed, there is no accusation that these families have deceived anyone (which is usually the meaning of “fraud”), either the courts or their creditors. The industry claims of how many families could repay has never been corroborated by any independent source. See discussion in chapter 6.

27
18 U.S.C. sections 152, 157.

28
For a more detailed discussion of how a bankruptcy case is initiated, see Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook,
As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America
(New York: Oxford University Press, 1989), pp. 20-45.

29
Many of the families in the bankruptcy system go to high-volume attorneys who advertise widely and who make their money by standardizing procedures and minimizing the time the attorney spends with the client. Often called “bankruptcy mills,” these law offices may or may not give good legal advice, but it is clear that what they tell their clients is fairly routinized. See, e.g., Teresa A. Sullivan, Elizabeth
Warren, and Jay Westbrook, “The Persistence of Local Legal Culture: Twenty Years of Evidence from the Bankruptcy Courts,”
Harvard Journal of Law and Public Policy
17 (1994): 846-850; reprinted in Charles J. Tabb,
Bankruptcy Anthology
(Westbury, NY: Foundation Press, 2002).

30
In 1980 there were 291,000 personal bankruptcies, just 19 percent of the 1.5 million personal bankruptcies that were filed in 2002. If fraud alone accounted for the entire increase in bankruptcy filings, then there would have been more than 1.2 million (1.5 million minus 291,000) fraudulent filings in 2002—or 80 percent of the total filings.

31
Among bankrupt families with children, 71.5 percent report a job loss, a reduction of income, or other job-related problem as a reason for filing. Fifty-three percent report a medical problem, which includes all filers who reported $1,000 or more in unpaid medical bills, who had at least two weeks of unpaid leave from work because of an illness or disability, or who explained that they filed for bankruptcy because of a medical problem. Family breakup, cited by 19 percent of families with children, includes those who reported “divorce or family breakup” as a cause of bankruptcy. Families with children cite at least one of these problems in 86.9 percent of all cases. The remaining 13.1 percent give either a different reason or no reason at all.