The Two-Income Trap - Elizabeth Warren [57]
The bad news isn’t over. The public face of divorce implies that the biggest struggle facing a divorcing couple is the fight over who-gets-what. Think of Donald and Ivanna Trump, or former General Electric CEO Jack Welch and the ex-wife who broadcast his lavish compensation package to an eager public. Long, protracted battles, plenty of he-said-she-said drama, and a debate in the local newspapers over who-deserved-what makes for juicy stories. But today’s middle-class families don’t just split up the home, the bank accounts, and the kids. They must also split up the debt. And unlike the bank accounts, they don’t get just 50 percent apiece. They each face 100 percent responsibility for any debts they both signed their names to.
Source: Analysis of Consumer Expenditure Survey. For more information on calculation of discretionary income, see above and see chapter 2.
FIGURE 5.2 Discretionary income, before and after divorce
When a husband and wife file for divorce, they may tear up the contract between themselves, but they cannot tear up their obligations to the rest of the world. Kenesha Brooks, a California mother of two, got a very expensive lesson in the law of legal liability. She discovered that her ex-husband had been keeping his business afloat on the couple’s credit cards: “I didn’t work in the business and didn’t have anything to do with what happened.” The family court judge agreed with Kenesha, ordering her ex to pay child support and to pay off all of the couple’s debt. But his business failed, and Kenesha’s ex-husband could not find a high-paying job. Instead, he drifted into odd jobs at minimum wage. He never paid back any of the credit card or utility bills, so the interest, penalties, and late charges compounded month after month—while Kenesha thought they were all being paid. Eventually, the balance swelled to more than $50,000, a sum that was more than double her ex’s annual salary. So the creditors went after Kenesha, who soon discovered that in the eyes of the law that governs debtors and creditors, it doesn’t matter who ran the family business or what agreement the couple has worked out between them. If both names are on the original loan documents, and if one spouse misses a payment, the creditors have every legal right (and every incentive) to go after the other one—and that holds true regardless of what the divorce court orders. The couple may decide not to share their lives any longer, but their economic fortunes will remain united for many years.
A generation ago, when the average family didn’t even have a credit card, postdivorce debt splitting wasn’t all that important.29 But today, a family begins divorce proceedings deep in a financial hole, so that negotiating who pays which debts can be a matter of survival. Sometimes the judge will simply split the debt down the middle, ordering each to pay half. In other cases the judge will order lower child-support payments in return for a father’s commitment to take on the whole load of debt. One way or another, both parents pay for the fact that they face divorce already awash in red ink. Over the past generation, average savings has dropped from 11 percent of income to negative 1 percent, while credit card debt has climbed from 4 percent of income to 12 percent (see Figure 5.3).30 As a consequence, the modern mother starts out her postdivorce life with higher fixed costs, more debt, and less money in the bank—a recipe for financial disaster.
Trying to Compete in a Two-Income World
The single mother is under enormous pressure to scale back, but scaling back is now harder than ever. A generation ago she had to compete with male-breadwinner families for a house in the suburbs.
Source: Analysis of data in SMR Research Corporation, The New Bankruptcy Epidemic.
FIGURE 5.3 Less savings, more debt
Everything that defined a middle-class life for children in her community—decent schools, a safe car, health insurance—was typically purchased with the income of a higher-earning male, which made it tough for a divorced mother to keep