Uncommon Sense

7 ways to fight off bankruptcy

Editor's note: Columnist MP Dunleavey and eight other women have come together online to strip away the myths surrounding money, lay bare their assets and liberate themselves from debt. Follow the quest for financial fabulousness of these "Women in Red" every second Monday in Dunleavey's column on MSN Money.

Over the last two decades, bankruptcy rates among women have been rising at a frightening rate.

Some 69,000 women filed for either Chapter 7 or Chapter 13 bankruptcy in 1981. By 2001, according to research by Harvard law professor Elizabeth Warren, women filing independently or as part of a couple numbered close to a million.

As part of a small, brave band of Women in Red who struggle against the financial forces of darkness in the world, I have to ask why -- and what can we do to protect ourselves?

A lack of financial stability

Obviously, being female doesn't predispose you to bankruptcy any more than, say, having brown hair. But the research seems to indicate that women are more likely to end up in certain economic straits that can lead to bankruptcy.

Contrary to the stereotype that those who file for bankruptcy have irresponsibly spent themselves into a hole, nine out of 10 women were forced into bankruptcy by a job loss, medical emergency or divorce.

These are the same factors that send many men into bankruptcy, says Warren, co-author of "All Your Worth." But a woman's hold on economic security tends to be more tenuous to begin with -- particularly if they have children.

Warren's data, based on Chapter 7 and 13 filings, make it scarily clear:

• For unmarried men, the bankruptcy rate was 6.3 cases per thousand.

• For unmarried women, it was 7.2 cases per thousand.

• For married couples without children, it was 7.4 cases per thousand.

• For married couples with kids, the rate about doubles to 15.3 per thousand.

• And for single women with kids, the bankruptcy rate nearly triples to 21.3 cases per thousand.

Single women alone comprise almost 40% of all bankruptcy filings.

Bankruptcy's red flags

What's going on? "Women often start off with lower incomes, and they're particularly vulnerable after a divorce, when they're typically bearing the brunt of the child-care burden," says Travis Plunkett, legislative director of the Consumer Federation of America.For example, Marian, the newest member of the Women in Red, has not filed for bankruptcy. But she has many of the classic warning signs:

• She's a single mom. When Marian's husband left eight years ago, she was left to raise her three children without any child or spousal support. "Divorce isn't a picnic for men or women," says Warren, "but the economic strain falls disproportionately hard on women," who are often left to care for children or aging parents. "They have every cost that married couples do, and they're trying to do it on one income."

• She didn't have a steady income. Also, like a lot of moms with very young children, Marian worked from home, helping out in her husband's business. In the event of a split, women without a full-time job or the skills to get one are the most financially unstable, says Harlene Miller, a bankruptcy lawyer in Santa Ana, Calif. "They (don't) have a significant employment base so they're less able to get out in the marketplace to start supporting themselves."

• She wasn't paying attention to money matters. With three children and a struggling business, it's no wonder Marian pushed aside the bigger financial questions -- like how they would repay the family loans that floated their enterprise. Luckily, their families forgave those debts, but many women pay a price for keeping their heads in the sand, says Miller. She cites a client whose husband died suddenly at age 50, leaving her with over $100,000 in credit card debt that she'd had no idea about. "It's imperative for all women, as a matter of survival, to be involved in the family's finances," she says.

• She took on more debt than she could handle. In her 17 years as a bankruptcy attorney, Miller has seen women pile up tens of thousands of dollars in credit card debt to get by. Marian did exactly that, tapping the equity in her home (which had been paid off) to borrow $100,000. She used the money to pay off a personal loan and medical bills and to cover her son's tuition at a special-needs school.

• Many women don't adjust their lifestyle quickly enough. This is less true of Marian, who used her college accounting degree to get a job after the divorce and recently started her own business. But Warren says many women are vulnerable to going broke because they don't face the realities of what it takes to survive on one income and adjust speedily.

Nor would women's risk of bankruptcy be lowered much if they got more support from their ex-spouses, Warren says. "The increased cost of raising children has far outstripped the increase in child support."

"You do better if there are two parents, but the reality is that any parent is at much greater risk of collapse," she says. "It's parents who are pushing themselves to their limits to buy houses in decent school districts. It's parents who are struggling to pay for health insurance and a second car and good child care."

"And if a married couple can barely make it on two incomes, a single mother won't be able to make it on one and a quarter," assuming she gets that support from her ex, Warren adds.

Steer clear of bankruptcy court

Obviously, there are some times when filing for bankruptcy may be a woman's best or only solution. But despite being financially at risk, Marian would benefit little from filing for bankruptcy, Miller says.

Most of Marian's debt is secured, i.e. tied to her house. That debt would not be discharged, or forgiven, in a bankruptcy case. Women with unsecured debt, like credit card debt, used to have a better chance at seeing their financial slate wiped clean.

But a new law that took effect in late 2005 is far more stringent and focused on getting people to repay their debts, not walk away debt-free.

If you feel that bankruptcy might be your best choice, Miller advises consulting with a full-time bankruptcy lawyer who can help you decide if it's worth the consequences.

Meanwhile, if you feel you're at risk for bankruptcy based on these five financial risk factors, and especially if you're a married woman on the brink of divorce, act now to protect yourself:

• Get savvy. If you're not on top of your finances, now is the time to take a crash course (and read lots of Women in Red articles, of course).

• Divide your debts. Cancel all joint credit cards and other debts.

• Claim your assets. Make sure your name is on the title to the house and on all investment accounts.

• Shore up your career now. Don't wait for divorce, layoff or illness to strain your income.

• Scale back your lifestyle now. "If you're getting divorced, you need to live on 50% of what you're used to," says Warren.

• Know your rights. In the event of divorce, the IRS allows you to file an "innocent spouse" claim, if you feel you don't owe certain taxes.

• Get financial counseling. Depending on your circumstances, you may not need bankruptcy if you can learn to live within your means.