🔒Bankruptcies are on the rise among the well-educated and well-off

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A healthy paycheck, a college degree and an AARP membership — indicators of prosperity or red flags for bankruptcy? Once considered signs of financial stability, a good-paying job, higher education and advancing age have become harbingers of insolvency, according to a new report by a Maine financial nonprofit.

Nationally, the rate of bankruptcy among those earning more than $60,000 annually has spiked 66% over the last five years, according to research by the Institute for Financial Literacy in South Portland. Equally as alarming: The filing rate by degree-holders jumped 20% between 2006 and 2010, while Americans ages 45 and older saw a jump of 19%.

"Our research is cracking that myth that a college education protects you from financial distress," says Leslie Linfield, founder and executive director of the nonprofit institute. While those with only a high school degree or GED made up the majority of bankruptcy filers, their ranks dwindled as holders of bachelor's degrees grew, accounting for more than 13% of all filers in 2010.

The IFL's survey included responses from more than 52,000 people who sought credit help through the institute, which counsels people facing bankruptcy nationwide.

New Census data aligns with the institute's findings, showing young adults are delaying marriage, buying fewer homes and living with their parents in record-setting numbers due to financial hardship. They face the highest unemployment levels since World War II.

Not so golden years

Linfield, however, is unnerved by the outlook for the older crowd. "The most alarming statistic, of all the data we've accumulated, out of all the research, is the age data," she says. "We are seeing the aging of the bankruptcy debtor." For the first four years of the study period, those aged 35-44 represented the majority of bankruptcy filers. But in 2010, the 45-54 age group took the lead, representing 28.5% of all debtors.

Linfield's distress lies in bankruptcy's historic origins. "The Founding Fathers put it right into the Constitution," she says, motivated by memories of the debtors' prisons of Great Britain. "[Bankruptcy] was the first personal right, the Bill of Rights came later. The idea was an economic fresh start, so you could become a productive, contributing member of society."

But if you're 54 and have wiped out your retirement accounts in a desperate bid to avoid bankruptcy, precious little time remains for a financial rebound. "Are you really afforded that economic fresh start that the Founding Fathers envisioned?" Linfield asks.

At Molleur Law Offices, a bankruptcy and consumer rights firm with offices in Biddeford and Portland, older filers are struggling with employment options, says attorney Jennifer Hayden. "The older populations, in some sectors, are falling victim to job loss," she says. "They're having a hard time in this economy getting re-employed."

All too often, people raid their 401(k)s to stave off insolvency, even though those assets are protected during bankruptcy, leaving them impoverished after finally filing, Linfield says. "Human nature is we're going to fight and fight, even to our own detriment," she says. "If we were businesses, we'd be very unemotional about these decisions. We'd be looking at our balance sheets and saying, 'Should I put more money into this or liquidate and start over?'"

While the report doesn't include business bankruptcy filings, small business owners who claim their business income as personal income at tax time would be reflected in the data. And Linfield points to findings with implications for entrepreneurship. Asian-Americans — a demographic in which small business ownership is prevalent — accounted for 4.5% of all debtors in 2010, up from 2.1% in 2006. Meanwhile, the self-employed represented 10.74% of bankruptcy filers last year, a nearly 30% jump over 2006.

In Maine this year, 2,582 bankruptcy petitions, including individual and business filings, have appeared on court dockets through August. That's about 300 shy of the total in August of 2010, a year when insolvencies hit their highest point since major bankruptcy law reforms in 2005.

'No one is immune'

For the growing number of bankruptcy filers earning upwards of $60,000 a year, Linfield's "guerilla budgeting" tactics can be hard to swallow. For more than 25 years, she's advised clients on the financial brink to account for housing, food and transportation, then strip away all the remaining luxuries and discretionary spending. "They don't want to give up private school for their children," she says. "They say, 'I have to get my hair and nails done,' or 'I have to golf so I can network.'"

While the majority of bankruptcy filers earn $40,000 a year or less, the well-off can have a harder time accepting the prospect of bankruptcy. They've earned degrees, nabbed good jobs, purchased homes and taken other steps that traditionally warded off financial ruin. Including getting married — the study found that married couples represented more than 64% of all bankruptcy filers in 2010, a rise from 57.2% in 2006, while divorced and single debtors are dropping. Women still represent the majority of filers, but their ranks are falling as men's increase, gradually narrowing a gender gap in insolvency filings.

"No one is immune from what's happening," Hayden says. At Molleur Law Offices, workers in the building trades, among other sectors, have been hit especially hard, she says. "It really spans the generations and the educational levels. Single people, married people, people with children, older people."

The top cause of financial distress respondents cited last year was overextension of credit, the leading factor since 2006. Reduction of income, such as a pay cut or switch to a lower-paying job, came in second in 2010, followed by unexpected expenses and job loss. The nationwide reduction of professional office jobs has Linfield dubbing this a "white-collar" downturn. "This recession was not hitting the fishermen, the farmers, the lumber industry or factories, because so many of those jobs are already gone," she says. "That was two recessions ago."

Institute for Financial Literacy
260 Western Ave., South Portland
Founded: 2002
Executive director: Leslie Linfield
Employees: 45
Annual budget: $3.1 million
Services: Bankruptcy counseling, financial educator certification, consumer research, financial literacy education
Contact: 221-3600
www.financiallit.org

Jackie Farwell, Mainebiz senior writer, can be reached at jfarwell@mainebiz.biz.