Bankruptcy and Children

When we think of family bankruptcy, we picture single moms and dads agonizing over unpaid bills, parents dreading another foreclosure notice, or searching for an apartment for the family after losing the family home.  According to Elizabeth Warren, professor of law at Harvard Law School, more children will be listed in their parents’ Bankruptcy than will sign up for Little League, adopt a dog from a humane society, or get braces on their teeth.

Personal Consumer Bankruptcies are similar to divorce in the emotional damage caused to the children in a family.  Much research has been done to chronicle the pain suffered by children when their parents divorce.  Unfortunately, the effect of financial distress on children in middle-class families has gone relatively unnoticed.  In families facing insurmountable financial difficulties, the children are very sensitive to the emotional, financial, and other difficulties that the parents experience.  This is true of whether the family has an intact married couple or a single mom or dad.  If you add financial difficulties to a family’s normal stresses in today’s culture, the children’s suffering is often increased exponentially. 

Money problems are often cited as a cause for divorce, and children are extremely sensitive to the suffering of either one or both of their parents in bankruptcy.

Researching their book, The Two-Income Trap, Why Middle-Class Mothers and Fathers Are Going Broke Elizabeth Warren and Amelia Warren Tyagi were surprised to find that the majority of families filing consumer bankruptcies in America in this decade were not in bankruptcy court because of irresponsibility, excessive consumer spending, luxury item sprees, dishonesty, or fraud.   Professor Warren was surprised to find that a large percentage of families filing bankruptcy were there because they had stretched themselves to purchase a home in a school district where their children could receive a good education.  As long as everything went smoothly, there was no problem. If there were financial setbacks, such as unemployment, medical illness or divorce, the family often went belly-up. 

Most families who end up filing Bankruptcy never dreamed they would end up in such a financial difficulty.  The children are normal children who go to school, laugh, and play, and look to their parents for wisdom, guidance, security, and stability.  It has probably happened to many of your friends and acquaintances and you are just not aware of it.  Bankruptcy still causes much shame and people want to hide their troubles.

Different parents have different approaches in helping their children face financial obstacles.  Some parents are so embarrassed by what they view as their own moral or personal failure that they decide not to tell their children anything.  Not informing the children and not involving all members of the family in the reality of financial circumstances can cause greater harm than the disaster itself.  Without information, knowledge, or guidance, children feel insecure, become isolated, and begin to suffer from deep-seated shame.  Wounds and scars may be inflicted which take a lifetime to heal.

It is damaging to children in a family bankruptcy to model negativity and defeatist behavior.  Children are intelligent, and while immature, they can be extremely sensitive to the reality of issues the facing their family.  If they see their mother crying or their father depressed they know it is not because the lawn needs mowing. They might discover a foreclosure notice taped on the front door or answer the phone and listen to harassing creditors and rude debt collectors.  The worst thing a parent can do is to lie to the child.  If the telephone is cut off because the bills were not paid, tell the children the truth.

Professor Katherine Newman quotes an unemployed father excusing deceiving his son:  “in his school, everybody’s father is the head of this and that.”  So I said, “You just tell them your dad was VP of a company and he just refused to go on an overseas assignment.” The father then instructed his son to tell his friends that he had just started his own firm.   This deceptive approach leaves children feeling confused, afraid, and shameful and does not prepare them adequately to face challenges in their own lives. 

We have found that the best way to help children go through bankruptcy or any financial difficulty in a family is to involve the whole family with honesty.  Depending on the age of the children, the parents should gather the whole family together and tell them what is going on.  This information can be tailored to be appropriate to each age group.  The parents should be positive and tell the children that the family has a plan.  Parents should formulate a plan that is realistic, and includes the steps of the end to be achieved.  Talking to a qualified bankruptcy attorney, getting professional advice, knowing all of the options available is the first step to financial recovery.  Families should be aware that they are vulnerable when they have financial distress, and they should be extra cautious.  The Internet as well as the rest of our society is replete with con-men and scams. 

By including the children in the decision-making process you can lessen the trauma experienced by them.  The advantages that knowledge, awareness and information give to adults can benefit children as well.  Children whose parents respect and trust them enough to involve them in the families’ struggles prepare them for success in the future.  Parents should use bankruptcy and financial recovery as an opportunity to keep American values of hard work, honesty, a can-do attitude, and the overcoming of obstacles. 

A good resource for parents to use in helping their children cope with financial adversity is They Went Broke. This book chronicles many famous and ultimately successful people who lived through financial distresses including bankruptcy.  Many of these celebrities recovered and were ultimately very successful.  If children can identify themselves with Presidents Samuel Adams and Thomas Jefferson, movie stars Debbie Reynolds and John Wayne, and businessmen like Walt Disney, they are more likely to survive bankruptcy with positive self-esteem. 

Parents can also encourage their children to be thankful that we live in America at a time where bankruptcy is legal.  In other countries and other cultures, a person who could not pay his debt was put in debtor’s prison.  In America, a family can file for bankruptcy without shame, get a fresh start, and go on to be successful.

One study that was done on children suffering financial distress was completed by Susan E. Mayer entitled “What Money Can’t Buy: Family Income And Children’s Life Chances”.   Ms. Mayer found that children ages 5 – 7 whose parents experienced a significant drop in income, were more likely to experience lower test scores and behavioral problems in the classroom.  Another study found that adolescents from families in financial distress are more likely to experience low self-esteem.

While academic studies have shown the negative affects on children through Bankruptcy are real, in our practice, we have observed parents who go through these difficulties with faith, hope, love, and a positive attitude can greatly alleviate the pain and distress their children experience.  Most parents who go bankrupt end up there because they have worked so hard to better their children and help them succeed.

By Carolyn Aiken

Elizabeth Warren and Amelia Warren Tyazi, The Two-Income Trap, Why Middle-Class Mothers and Fathers Are Going Broke (New York: Basic Books, 2003) page 176-177.

Ibid. pp. 15-20.

Falling From Grace by Katherine Newman

Roland Gary Jones, Esq. They West Broke?! Bankruptcies and Money Disasters of the Rich & Famous (New York: Gramercy Books, 1999.)

Cambridge, MA: Harvard University Press 1997, pp. 76 - 77

Family Economic Hardship, Parental Support, And Adolescent Self-Esteem Social Psychology Quarterly 54, December 1991, pp. 353 - 353