U.S. middle class increasingly falling into bankruptcy

Staci Schubert’s career has taken her from New York to California, from graphic designer to website designer to sales executive. Most recently, she launched a business as a designer of handbags and accessories.

Staci Schubert’s career has taken her from New York to California, from graphic designer to website designer to sales executive. Most recently, she launched a business as a designer of handbags and accessories.

At 40 and with such accomplishments, Schubert is Middle Class America. She and her counterparts have long been the nation’s backbone, because their steady jobs and purchasing power have helped drive our economy.

But Middle Class America has two faces, a new study shows. Schubert is that other Middle Class America, too.

After earning $275,000 annually, Schubert used most of her savings to start her business in 2003. The earliest days of the recession in 2007 slowed sales, and she fell behind on business and personal bills. Credit card debt reached $65,000.

She tried to find a full-time job without much luck, because the job market was saturated. Temporary freelance design work couldn’t cover her bills.

So in January 2008, she filed for Chapter 7 bankruptcy, becoming one of nearly 1.1 million consumer filers that year.

A new study by Elizabeth Warren, Harvard Law School Leo Gottlieb professor of law, and Deborah Thorne, Ohio University associate professor of sociology, finds that personal bankruptcy has become a largely middle-class phenomenon led by filers who are college-educated and owners of homes. According to the study, “The Vulnerable Middle Class: Bankruptcy and Class Status,” the shift occurred even before the Great Recession.

More than 100,000 middle-class families filed for personal bankruptcy every month in 2007, says the report, which was provided to USA TODAY but will be released in a book next year. Those who filed in 2007 were in worse financial shape than those who had filed in 2001.

“The bankruptcy filings are a warning about the risks now facing middle-class Americans,” says Warren, chair of the Congressional Oversight Panel on the Troubled Asset Relief Program (TARP). No longer can they count on a college education, a good job and homeownership to protect them from financial collapse.

“It’s horrifying for people who are not used to anything but an upward trajectory,” says Bob Anderson, a bankruptcy lawyer in Wilmington, N.C. “They are used to calling the shots.”

Schubert agrees.

“I’m a highly educated, middle-class woman,” says Schubert, who is the single parent of a two-year-old son, Lincoln. “Until now, I have never in my life been unemployed.”

In 2005, the bankruptcy law was changed to make it harder to file bankruptcy. After it took effect, filings dramatically dropped. But this year, filings are climbing and are expected to total 1.5 million, the level they were at before the tighter law took effect.

Warren and Thorne say their data show that the change in the law was not a scalpel that cut out only those deliberately not paying their bills. These days, it’s ordinary middle-class Americans, not a marginalized underclass or high-stakes gamblers, who are most apt to experience financial failure.

Poor savings habits, health problems and excess spending have traditionally been causes of bankruptcy. But the study finds that college education and homeownership, the traditional strategies for wealth building, may not be enough to guarantee financial security.

“As these time-honored wealth-building strategies become higher-risk undertakings, the middle class may face even greater economic instability in coming years, suggesting that in the modern economy, the path to prosperity may be far more perilous than anyone imagined,” the authors conclude.

The proportion of bankruptcy filers who have been to college, whether they dropped out or graduated, increased from 46.5 per cent in 1991 to 58.9 per cent in 2007, the study finds.

“The data was taken from the boom years,” Warren says, noting that it takes a long time to analyze and produce it. “I’m almost afraid to look at the data now.”

Instead of graduating from college with upward mobility, many Americans are overwhelmed with college debt and few job opportunities, according to the study.

Schubert, who didn’t have college loans, thought she had it figured out.

“I graduated from a top art design school in the country,” she says of the Rhode Island School of Design. “Opportunities always came.”

After filing for bankruptcy in 2008, Schubert hasn’t found a full-time job but has been doing freelance design work. She says she has designed a new handbag line and is looking for investors to help recharge her business.

“For decades the middle class counted on homes as an economic lifeboat,” Warren says.

Now, homes are sinking families instead of stabilizing them, as home values plummet.

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