Even before the recession, the security blanket for the middle class was wearing thin. Our middle class works hard for fewer tax breaks than the wealthy and fewer social benefits than the poor. Over the past few decades, middle-class wages have been largely stagnant. Now the results of a new study by Elizabeth Warren of Harvard Law School and Deborah Thorne of Ohio University finds that as of 2007, bankruptcy has become a phenomenon of the middle class.
In the past, three factors protected the financial stability of middle-class workers: education, equity (home) and employment. No longer.
It used to be if you could get a college education, you were assured of a job that paid well enough to support a middle-class standard of living and provided adequate health insurance. Today that education comes with a price tag that’s a liability. Many students graduating with bachelor’s degrees are carrying approximately $40,000 in student loans. According to the study, in 1991, 46.5 percent of people who filed bankruptcy had college degrees. By 2007, that figure had increased to 58.9 percent.
Home ownership used to be one of the best investments you could make. Today, one in four mortgages is under water. While Western New York bypassed the housing boom/bust, the middle class here followed the national trend of using their homes as ATMs.
Equity has been eaten away by home equity loans and lines of credit. Too frequently families have to use their home equity to pay for uncovered medical expenses. A portion of the bankruptcy cases we file every year are a result of uncovered medical expenses.
When credit card companies lobbied Congress for revisions to the bankruptcy code, they claimed interest rates would go down, saving the average family $300 a year. The new law took effect in October 2005 and bankruptcy filings temporarily declined, but interest rates did not.
In February, the Credit Card Act of 2009 will take full effect, ensuring card holders have sufficient notice of due dates and rate and fee changes. However, we have yet to see limits on the amount of interest credit card companies can charge.
The middle class is adjusting by spending less and saving more, however, unless banks modify under-water mortgages, hold the line on interest rates and we have significant health insurance reform, middle-class workers will remain vulnerable and we will continue to see them in bankruptcy court.
Just as small business has been the backbone of our economy, the middle class has been the backbone of our society. We need to protect this backbone by providing affordable education, new regulations of the banking system that are fair to consumers and banks and affordable health care.