More middle class bankruptcies

USA Today reports on a new study of how personal bankruptcies are working their way up the socio-economic ladder, increasingly affecting better educated families and homeowners.

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.

Since this study contains data through 2007 only, it's a safe bet that conditions have deteriorated significantly since that time, particularly in light of housing market distress making a similar move up the socio-economic ladder.

It's all about jobs, lifestyles, and debt loads, many families now finding that employment can vanish quickly, causing a more gradual decline in spending, whereas debt never seems to go away unless drastic measures are taken - like filing for bankruptcy.

Traditional savings is likely to make a big comeback in the years ahead as the "wealth building through asset appreciation" approach to personal finance is rapidly losing favor.

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% in 1991 to 58.9% 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."

There are few compelling human interest stories in here - all somewhat sad but, apparently, representative of the financial distress in the middle class these days (that is, if you can call someone who was making $275,000 a year "middle class").