Two incomes, more debt?

As a bankruptcy expert, Elizabeth Warren has seen the devastating effects on families when their finances collapse. She has also watched the number of bankruptcies escalate, rising 400 percent in the past 25 years. By the end of the decade, she says, an estimated 6 million families with children - 1 in every 7 such families - may declare bankruptcy. This year, more children are going through their parents' bankruptcies than their parents' divorces.

But Ms. Warren, a law professor at Harvard, rejects the conventional theory that overconsumption - squandering money on big-screen TVs, McMansions, restaurant meals, oversized cars, and luxury vacations - is to blame for insolvency and all those maxed-out credit cards. Instead, she points to the high cost of housing and education - fixed expenses that can quickly create a sea of red ink when families face layoffs, illness, or divorce. Skyrocketing healthcare costs add to the problem.

Ironically, Warren sees Mom's paycheck - a family's second income, the very asset meant to provide more financial stability - as a potential culprit rather than an economic cure. When middle-class mothers began entering the workforce en masse, she explains, their incomes gave parents more money to spend on housing. This created "frenzied bidding wars" for homes in desirable school districts. A deregulated mortgage industry compounded the peril by allowing homeowners to assume larger mortgages.

As a result, Warren says, dual-income families have less discretionary income and are more vulnerable economically than their single-breadwinner counterparts in the past.

She spells out her unusual theories in "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke" (Basic Books), written with her daughter, Amelia Warren Tyagi.

"Two parents working hard at two jobs is not a guarantee against economic disaster," Warren says in a phone interview. "Today's parents feel they have no option but to pour enormous energy and all of their economic resources into getting their children into decent schools."

Problems arise, the authors add, when couples commit both incomes to fixed expenses. "Families aren't going broke because of one extra pair of Nikes," says Ms. Tyagi, a business consultant. "Families are vulnerable because they've stretched the fixed costs they have to pay month in, month out, no matter what. If something goes wrong and you face a period of unemployment, there's no way to cut back on the mortgage."

The No. 1 question every two-income couple needs to ask, Warren says, is whether their family can survive without one income. If not, she urges them to create an emergency backup plan as a hedge against the possibility that one of them will lose their income at some point.

The authors shun the conventional advice financial advisers often give, such as: Keep track of every penny. Don't eat out too often. Save on dry cleaning. They take the opposite approach, encouraging families to enjoy treats. If a layoff or illness occurs, the money allocated for these small pleasures can buy necessities.

Barbara Bergmann, an economist and a senior research associate at the Council on Contemporary Families, disagrees. She criticizes their theory that working mothers' salaries are partly to blame for the high rate of bankruptcies, calling it "totally fallacious." And she takes issue with the notion that the money mothers earn has fueled bidding wars.

According to the Bureau of Labor Statistics, Ms. Bergmann says, housing costs have risen 5.1 percent a year since 1970, when married mothers began entering the labor market in substantial numbers. During the same time, prices of consumer goods have gone up by almost the same amount, 4.9 percent a year.

She notes that rising mortgage payments include the home-equity loans people use to finance cars, renovate houses, and pay off credit-card debt.

For some two-income couples, cutting back on expenses remains important. In the early years of their marriage, Joe and Kristie Tamsevicius of Gurnee, Ill., faced more than $30,000 in credit-card debts. Mrs. Tamsevicius, who worked her way through college, had student loans to pay off. The arrival of two children added more expenses. "Babies are money-eating machines," she says. "They need so much."

By paying careful attention to what they spent, the couple gradually paid off their debts. They now have $40,000 in investments and savings. Among other cost-cutting measures, they drive to southern Wisconsin to shop for food, reducing their grocery bills from $180 a week to $110.

Last month, Mr. Tamsevicius, who does specialized computer programming, was laid off. To protect their assets, he has refinanced his truck, saving $200 a month. A rental property they own also brings in $300 a month. He plans to join his wife as a partner in her Internet business, Webmomz.com.

As Warren and Tyagi note, a second income produces extra expenses. Creighton and Liza Abrams live in New Jersey and work in New York, he as a public relations executive, she as a marketing director. Their dual incomes require two expensive commutes, totaling $20 a day. Child care siphons off almost $2,000 a month and now costs more than their mortgage. They have "reasonable" credit-card debts and a small school loan, plus a car loan.

"Saving for two college educations while paying off a college education and saving for two retirements is tough," Mr. Abrams says. "We need to buy new appliances and paint the house, but we also want our first vacation in two years." Each choice will cost about $2,000. "If we killed off the credit cards, we could wipe out the college loan faster, then pay for the car and have an extra grand a month. That would really put us ahead."

How can parents avoid the two-income trap Warren and Tyagi describe? Sending Mom home is not the answer, they insist. Most families cannot afford to live on one salary. Instead, the authors advise couples to try to pay fixed expenses - mortgage, car, preschool tuition, health insurance - from one salary.

Other remedies require policy changes. Warren and Tyagi call for reregulating mortgages to require larger down payments for first-time home buyers. These have shrunk from an average of 18 percent in the mid-1970s to about 3 percent today. They propose public school vouchers, allowing parents to choose schools, thus freeing them from the need to live in high-priced neighborhoods. And they rail against usurious practices by credit-card companies, proposing caps on high penalties for late payments.

"Bankers who wear $3,000 suits and starched shirts are now charging interest rates that Jimmy the Leg-breaker didn't charge 25 years ago," Warren says. "Nobody sounds the alarm. The consequence is a wealth transfer of tens of billions of dollars every year from middle-class families to a handful of big banks."

A new study by Demos, a nonpartisan public-policy group in New York, supports that view. In the 1990s, the report finds, the average family's credit-card debt rose by 53 percent; middle-class families saw a 75 percent increase in that debt. For very low-income families, the figure shot up to 184 percent.

"Deregulation of the credit-card industry has allowed companies to take advantage of tough economic times," says Tamara Draut, coauthor of the study, "Borrowing to Make Ends Meet." The group wants Congress to rein in aggressive lending practices.

Whatever a family's economic challenges, they can be compounded by a cultural silence about money. Tyagi calls financial distress "the last great taboo." She notes that people will go on nationwide television and talk about intimate details of their lives, but they won't tell their own families that they're getting calls from collection agents who want to repossess the car.

In a study conducted by the authors of more than 2,000 families in financial trouble, more than 80 percent said they didn't tell anyone, even when their difficulties stemmed from a job loss or illness, rather than overconsumption.

Many financial planning books ignore this kind of domestic fiscal crisis. "They tell how much to put in your 401(k), how to choose an IRA, but they tend to leave out the folks who are trying to decide whether to pay the health insurance or the car insurance," Tyagi says.

To those facing heavy debts, she offers reassurance, saying, "You're not alone. There are families at the PTA, at church, at work who are in just as much trouble as you are. They just don't talk about it." Emphasizing that most of those in financial straits are not immoral people trying to sneak away from their debts, she says, "It could happen to any of us. Families must try to overcome that shame and talk about it."