Besides living expenses, a car is where most Americans spend the next largest chunk of change. This is the case for the upper-middle class and the workers with the country’s lowest wages. Some advocates of increased social mobility point to the car as the missing piece of the puzzle for the working poor. (See, for instance, here and here.)
Of course, there are significant problems working poor individuals face with car ownership or even leasing. Those with poor credit and lacking capital for a down payment can face exorbitant interest rates leading to debt on a run-down used car often at the same price as a nicer, brand new car. I know I put some readers to sleep with my last post, so I won’t get too technical in discussing bankruptcy-related issues here, but suffice it to say that the changes to the bankruptcy laws included a change relevant here that should be briefly discussed.
Say an individual owns a car worth $5,000 (book value) but owes $8,000 to the car lender. Normally, that $8,000 is an under-secured claim, but nonetheless secured by the car. Under the old law (pre-October 17, 2005), that person could file for bankruptcy under chapter 13 and alter the nature of the debt. The chapter 13 would allow the person to owe only the value of the car ($5,000) as a secured debt and render the remaining debt ($3,000 here) unsecured. The effect was that the person still had to pay the $5,000 or lose the car, but paid only a portion of the $3,000—in the same way that the person would pay a portion of his credit card debt. If the person had a 10% distribution in bankruptcy he paid $300 so the car debt drops from $8,000 to $5,300.
The new law changes this result. No longer can the over-secured portion of the car debt be “stripped” from the total. Car lenders evidently thought this would help them get more money for those cars. I join others in believing the end result is more likely a decrease in chapter 13 filings for debtors in such a situation, and many of the cars simply being surrendered (returned in satisfaction of the remaining debt) by those who still choose to file.
The advocates of car ownership for low-wage workers cited above seek to remedy the problems stemming from undesirable loans by offering low-interest loans (presumably through government assistance). But owning a car is not like owning a house. Cars (at least the cars we’re realistically discussing here) don’t appreciate, nor do they retain their value. This is known. What remains unknown is whether the used cars driven by our poorest workers will run without problems. The studies the same advocates rely upon indicate that workers with cars make more money each week and work more weeks each year. Car ownership apparently also has an empowering effect—though so does increased earning capacity in general. Yet a car adds a dimension of risk not properly considered in these reports. Older cars are known to break down, sometimes requiring them to be towed. Many workers at this level have little or no savings. All of a sudden such a worker can be faced with having to purchase a $500 part, paying for the tow, paying for labor to install the part, and all the while missing work (and therefore hourly pay). What if the car breaks down entirely or to an extent the worker simply cannot afford to fix? Now the worker must get to the old job without a car—perhaps easily accomplished but perhaps not.
To me, such a risk is the same as having to take your child into the emergency room, or having your spouse miss two weeks of pay after losing one job and before starting another. Many authors have noticed, after interviewing poor workers, that something as small as a few days without pay or one more bill tips the already sensitive balance between daily survival and disaster. Suddenly the rent is impossibly late, grocery money is tighter than ever, and so on.
What helps poor workers survive and potentially rise from poverty is not adding risk and expense, but reducing fixed costs, reducing the risk of unexpected costs, and promoting the mentality and logistics for fiscal responsibility.
[On a personal note, thank you to those who have continued to give me constructive criticism about the blog. It is very much an experiment in progress and will hopefully improve over time.]