In the process of representing hundreds of clients in Bankruptcy Court – both in Georgia and South Carolina – I have had the opportunity to witness thousands of bankruptcy hearings where debtors were questioned under oath about their finances. The scope of the testimony covers not only what led debtors to have to file for bankruptcy, but also covers their education, income and expenses. Inevitably, financial distress is caused by one of the following four factors: domestic issues (divorce/separation); employment issues (job loss/reduction in hours); medical problems; and mismanagement. Sometimes several of these factors may be present, i.e health problems could lead to loss of employment. Debtor testimony at their bankruptcy court hearings will almost always reference one of these factors as the reason for filing. While the creditor lobby places undue emphasis on the fourth factor (mismanagement), it is more often than not the first three that led to the bankruptcy filing.
Recently, I have observed certain trends emerging among debtors in Bankruptcy Court.
1) Single mothers are easily the largest identifiable group of bankruptcy filers, whether they are divorced, separated, or never married. Statistics indicate that women tend to earn less than men, and even if they are receiving child support, it may not be sufficient to cover the actual costs of raising a child. Single mothers who file for bankruptcy are also more likely to live with their parents or some other relative due to their inability to maintain an independent household on their income alone.
2) A corollary to number 1 is that child support is becoming harder to collect. Many times it is paid informally, rather than through a court order, which makes payment difficult to enforce. This is especially true if the individual responsible for the support is self-employed, or lives in another state. Even if there is a court order in place, the father or mother who is responsible to pay the support may be unemployed.
3) A college education is no guarantee of financial freedom. The number of individuals filing for bankruptcy who have professional degrees has escalated significantly over the last 5 years. Now, more than ever in recent history, job loss can occur in any sector and at any level of management.
4) A corollary to number 3 is that an overwhelming number of individuals who file for bankruptcy have some amount of student loan debt. Even for a debtor who is actively employed in their chosen field of study, the student loan debt accumulated in order to obtain that degree may exhaust their take-home income, leaving little or nothing for savings. It is worse for those individuals who are still in school, or who have abandoned their studies, as they are burdened with student loan debt without the degree necessary to obtain employment with income suitable to pay it back.
5) Very few debtors have cars without a lien. Most of time the cars are financed at the time of purchase. Unfortunately, even when those cars are paid off, they are eventually used as collateral for some type of title pawn. As a result, there is rarely a time when the car has been paid off long enough to accumulate any savings.
6) The good news is that a majority of employed debtors have some type of deferred-income savings plan, such as a 401(k) or 403(b). The bad news is that almost all of them testify that they have a loan against the plan, or have suspended contributions due to their financial distress.
A single-mother struggling one income may not seem out-of-place in Bankruptcy Court. But the college-educated debtor with a 401(k) plan may not fit the profile of the type of individual who files for bankruptcy. The lesson to be learned is that good decision-making is essential – in life, labor and even love. No matter how secure you are in your profession, workplace or relationship, always have an emergency strategy. The next blog will provide a checklist of pre-emptive measures which can be taken to prevent, reduce or mitigate potential financial disasters.
-Zane Leiden