What’s the single best predictor of bankruptcy?

The answer may surprise you

Elizabeth Warren is an American attorney, law professor and a candidate for the United States Senate. She built her career studying bankruptcy and credit issues on families’ household finances, authoring several books, including two books she wrote with her daughter, Amelia Tyagi. In one of these books, The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, Ms. Warren and Ms. Tyagi uncovered some startling statistics.

The risk of motherhood

According to Ms. Warren and Ms. Tyagi, “Motherhood is now the single best indicator that an unmarried middle-class woman will end up bankrupt.”

This is supported by the most recent poverty data issued by the US Census Bureau. Families headed by a single mother have a 31.6 percent poverty rate. In comparison, families with a single father have a 15.8 percent poverty rate, and families headed by a married couple have a 6.2 percent poverty rate.

But it’s not merely single moms. The authors attest that “having a child is now the single best predictor of bankruptcy and this holds true even for families with two incomes.”

More stats from The Two Income Trap

• According to data from the US Federal Reserve, one in eleven single parents are more than 60 days past due on their bills – compared with one in 30 married couples who don’t have children.

• Of single mothers who purchased a home in the 1980s, more than one in ten had lost their home by 2002 due to foreclosure.

• Approximately 200,000 single mothers go bankrupt each year. That translates into one in every 38 single mothers.

• Single mothers who have been to college are nearly 60 percent more likely to end up bankrupt than their less educated sisters (yes!); 52 percent are homeowners and nearly 80 percent are over the age of 30.

How it happens

It is not as if double-income middle class families are using the second income merely for savings and luxuries – research shows that most are just making ends meet. When divorce happens, these couples are faced with the same costs as they had originally plus the added costs of another household once separated. Single parents are left having to work doubly hard to compete for the same housing, school tuition and childcare that double-income families struggle to afford.

Ms. Warren and Ms. Tyagi write: “Despite all the progress, middle-class single mothers are no more financially secure today than they were a generation ago. Indeed, our data show that despite their amazing advancements at work, in school and in the courts, these women are actually less secure than they were just twenty-five years ago.”

What’s a mom to do?

While Ms. Warren is using her position to lobby for public policy changes in education costs, housing reform and lending regulations, what can a mother do to firm up her own family’s financial stability? Married or single, here are five things to consider.

1. Be smart about your taxes – Many families are not taking full advantage of child care credits nor planning their income tax-efficiently. It is worth consulting with an accountant to make sure that you are getting the most out of what you earn and credits you may qualify for.

2. Put your savings first – Even if you laugh at the thought of saving (where will that come from?!), setting aside even a small amount every single month for your retirement and your kids’ college fund will add up and compound interest will be your best friend. If your employer provides matching funds in a registered savings program, don’t miss out on this – it’s free money.

3. Insure yourself – When there is no back-up income plan, you must ensure you have enough disability and life insurance to cover your income in the event you can’t work or you die before your kids are grown. Make sure you comparison shop because rates between different insurance providers will vary a great deal.

4. Get an estate plan – Even if you think you have very little to leave, it’s critical you have a will in place so that your estate doesn’t get tied up in the courts. You should name the guardian for your kids, spell out how you want your assets distributed and make sure it’s signed and dated by a third-party to make it legally binding.

5. Talk to your kids – Of course you don’t wish to burden them with financial stress, but it’s healthy to allow your children to learn and understand about family budgeting and the opportunity costs of certain expenses. Kids will adapt to changing circumstances more readily if they feel you’re being honest with them.

Bankruptcy and baby protection

As they will be the first to tell you, your kids didn’t ask to be born. They are blissfully unaware of the financial damage they leave in their wake – and frankly, that’s the way it should be. As a mother, the best way you can protect and preserve the innocence of your kids’ childhoods is to first protect and preserve your own financial stability.

 

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