The Two-Income Trap - Elizabeth Warren [41]
There are some important wrinkles in the consumer bankruptcy code. Unlike corporations, individuals must wait until the seventh year after filing for bankruptcy before they will be permitted to file again (a period drawn from biblical references).20 Another wrinkle is that families have a choice about which form of bankruptcy to use. The first option, Chapter 7, permits a debtor to wipe out his debts in just a few months. In Chapter 13, the debtor files for bankruptcy in order to buy some time to pay what he owes, rather than to get rid of his debts altogether. The family works out a repayment plan, under which it commits to living on a sharply restricted budget for the next three to five years, handing over the remainder of each paycheck to a trustee who distributes it among the creditors.21 Only after the payments are complete can the family discharge any debts that remain unpaid.22
In order to escape their debts, families must publicly disclose all their financial dealings, show their personal budgets to their creditors, and submit to supervision by a court-appointed trustee. For ten years, their credit reports will document their bankruptcy, making everything from car insurance to house payments more expensive. In some parts of the country, their names will be published in the newspaper. With online searches, the fact of their bankruptcy may pop up whenever someone tries to find them via the Internet. Future employers will discover the bankruptcy if they run a credit check (now a routine screening process for many jobs), which can lead to embarrassing explanations or, worse, a lost chance for a much-needed job. Most important, the family will still owe a large chunk of its debts—the home mortgage, the car loan, the taxes, the student loans, and so forth—even after filing for bankruptcy. But if a family is willing to go through all that, it can have at least some of its debts erased, no questions asked.
So is it possible that Judge Jones is right and today’s families are using the bankruptcy courts more liberally than they used to? Once again, the data just don’t support that argument. If a growing number of people were looking for the easy way out, then we would expect to find that families in bankruptcy today are in relatively better shape than those who filed a generation ago. For example, we might find that they have smaller debt loads relative to their incomes, with the clear implication that at least some of those folks could pay off the debts if they tried a little harder. Instead, just the opposite has happened. Today’s bankrupt families are deeper in debt than their counterparts just twenty years earlier, and their overall financial picture—assets and debts—is worse.23 In 1981, the median family filing for bankruptcy owed 80 percent of total annual income in credit card and other nonmortgage debts; by 2001, that figure had nearly doubled to 150 percent of annual income. Even the credit industry, which has the most to gain from prying a few more dollars out of bankrupt families, estimates that only about 10 percent of families who file for bankruptcy could actually afford to repay even a portion of their discharged debts (although independent academics put that number closer to 1-2 percent). The remaining 90 percent are tapped out, too broke for even their creditors to bother with.24
There are other signs that families are not rushing headlong into bankruptcy at the first sign of trouble. The average person who filed for bankruptcy reports spending more than a year struggling with his debts before filing. Before they finally gave up and filed for bankruptcy, 50 percent of the families had their utilities or telephone shut off for non-payment and nearly 60 percent did without needed medical care in order to save money. Indeed, one in five of these college-educated, home-owning families in bankruptcy said they had done without food at some point before filing because they simply couldn’t afford it. By the time they sought refuge in the bankruptcy courts, the average family