The following quotes were taken from a website where people can anonymously share their life experiences. Try to guess which experience they’re describing:
“Every time I tell someone … they disappear from view and [I] never hear from them again.”
“The one thing that bothers me the most is the lying and covering up I have to do.…I’m too embarrassed to tell my friends – but on the other hand I want to, so they realize why I’ve turned into a hermit and stopped socializing.”
“My only issue is will I be able to find true love. If I [meet] a nice guy will they accept all my flaws? I question whether I should just stay single and not date anyone …”
The anguished tone of the quotes might lead you to believe that these individuals suffer from an embarrassing, possibly contagious disease, or that they have a dark secret in their pasts. But the actual source of their distress is something that seems far less serious: bankruptcy. After all, times have been tough since the financial crisis, and with the exception of 2014, well over a million people have filed for bankruptcy each year since 2008. While it’s nothing to brag about, bankruptcy is nothing to be ashamed of, either.
Yet for many people, bankruptcy and the emotional turmoil that precedes it can be life-altering events. Research has shown that the stress of high debt can consume people’s attention and damage their mental and physical health. An Associated Press-AOL Health poll found that people with high debt stress reported significantly higher levels of a number of ailments, from ulcers and migraines to anxiety and depression – and even a dramatically higher rate of heart attacks. And while bankruptcy often alleviates the pressures of high debt, it carries a unique social stigma that can heavily impact a person’s relationships and career prospects for years to come. Although the stereotype is often unfair, bankruptcies are widely seen as personal failures caused by irresponsible spending habits. They’re on the public record for up to a decade. And for many employers, they can be decisive factors in whether or not a job candidate gets hired.
Yet a remarkable statistic casts these struggles in a more hopeful light: The 1.1 million people who ﬁled for personal bankruptcy in 2012 had a median income of $2,743 a month, while their median monthly expenses were $2,769. This means that on average, people facing bankruptcy were just $26 a month away from making ends meet.
Granted, life is more complex than the story these statistics tell, and group averages don’t convey the sudden unexpected expenses or income losses that often trigger individual bankruptcies. But these numbers do suggest that the gap between their income and expenses is potentially manageable. And for those with gradually emerging financial problems, a small boost to their regular income could go a long way. Clearly, the key to helping people at risk of bankruptcy lies in both bridging this income-expense gap, and helping them manage irregular incomes and unpredictable expenses that often plague low-income individuals.
It may sound surprising in the ongoing aftermath of the 2008 financial crisis, but the financial services industry could offer an elegant solution to both of these problems.
One in four American households lack access to traditional financial services like bank accounts, leading them to depend on costly alternatives like payday loans and check cashers, which cost them an average of $2,412 a year in interest and fees. Eliminating that expense would represent almost a whole month’s worth of additional income for underserved families. Simply reducing it by a quarter could more than bridge the average income/expense gap for those who file for bankruptcy.
But the financial services industry can offer more than just the traditional benefits of a bank account. The industry is demonstrating an increased interest in designing innovative products that smooth low-income customers’ income and provide flexibility for unexpected expenses. Financial institutions like Community Trust Prospera are providing “frictionless savings” accounts that let customers pre-commit to depositing a small amount every time they cash a check, which builds up their savings to cover future shortfalls. The startup Even is offering interest-free credit to low-income workers, to help them make ends meet between paychecks. And Meed lets members who help build the community, earn a revenue stream through their banking activity, where banks in its network give 50% of the credit interest they earn from Meed users back to the member community. Even major players like American Express and US Bank have gotten into the game, offering low-fee pre-paid debit cards and secured credit cards that make affordable deposit and payment services and credit available to people with a shaky financial history.
This new focus on the part of the financial industry is undoubtedly motivated in part by self-interest, as technology and shifting economic trends have made the lower-income market larger and more profitable in recent years. But if this newfound attention helps them manage their financial challenges and avoid the trauma of bankruptcy, low-income consumers are unlikely to complain.