A family's tale: From middle class to unemployed

A punishing wave of layoffs has pushed some people right over the edge financially. For a New Jersey couple and their 2 young sons, the recession has meant tumbling from a comfortable suburban life into a spiral of credit card debt.

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By Catherine Holahan, MSN Money

In less than six months, Richard and Maria Lipowski went from solidly middle class to struggling to make the rent.

Last year started well for the family. A construction worker with the New Jersey Laborers' Union, Richard Lipowski was benefiting directly from the nationwide building boom then entering its final phase. He earned $60,000 to $70,000 a year, enabling his family to lease a comfortable suburban home and afford regular meals at local restaurants and family vacations to the Caribbean. The couple even had money left over to put toward the purchase of a house where their two young boys, ages 3 and 2, would have more room to play.

But by mid-2008, the housing bubble had burst, construction had slowed, and the Lipowskis' bills had ballooned out of control. In April, the Lipowskis' older son, Frank, had emergency surgery to close a hole in his heart. Nearly overnight, the family's savings turned into thousands in credit card debt. Frank is autistic, and that has entailed medical expenses as well.

Autism bills adding up

Then, in November, Richard Lipowski lost his job. His take-home pay was chopped in half, from $4,000 a month to about $2,000 in unemployment insurance. Despite spending cuts, the family's credit card debts swelled to $25,000.

"It's all on the credit cards," says Richard Lipowski, the family's sole breadwinner. "We are struggling with minimum payments."

Many in the middle class can empathize with the Lipowskis' circumstances. Years of high fixed expenses and negligible savings have left many middle-income families ill-equipped to sustain losses of income. Unemployment insurance often covers little more than a middle-income families' rent or mortgage. The rest of the living expenses often go on credit cards, leaving families buried in debt.

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As the recession deepens, stories like the Lipowskis' are becoming more common. In March, the nation's unemployment rate reached 8.5%, a 25-year high.

"Anyone who is in the construction industry, the real-estate business, the financial sector and the manufacturing sector . . . is in deep trouble," says Rebecca Blank, an economist with the Brookings Institution, a Washington, D.C., public-policy think tank. Though manufacturing and construction employ only 15% of the labor force, those industries provide salaries for a disproportionate number of low- and middle-income workers, many of whom never fully recovered from the recession earlier this decade.

One in every five U.S. construction workers is unemployed, according to the Department of Labor.

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Unemployment likely will worsen before it improves. Typically, unemployment peaks six months to a year after a recession ends, Blank says. She points to the recession of 1981-82 as an example. Unemployment remained high well into 1983, though it peaked in December 1982 at the tail end of the recession.

Federal Reserve Chairman Ben Bernanke has targeted the end of this year for the economy to start recovering. If he is right and history repeats, the labor market won't improve until well into 2010.

"That is bad news particularly for young workers entering the labor force or for the people who have already become unemployed," Blank says.

More help for the unemployed

The government expanded unemployment insurance late last year. Previously, individuals in most states could receive benefits for a maximum of 26 weeks -- based on a percentage of their income that varies by state. The federal government extended that last year by up to 20 additional weeks for states with high unemployment and up to 33 additional weeks in states with extremely high unemployment.

The $787 billion stimulus plan also provides other aid for the unemployed. It ensures that the 20-week extensions will last through 2009 and, starting this month, provides an extra $25 per week in each unemployment check. It also expands unemployment programs to cover low-income folks who had not earned enough to qualify for assistance. It provides help for medical bills as well. Under the plan, the government will pay 65% of the cost of "continuation of health coverage" plans, known as COBRA insurance, for nine months.

Additional unemployment benefits will help families such as the Lipowskis pay the rent if jobs remain scarce. But it won't help them make a dent in their debts or stop racking up new ones.

In this economy, debt has become even more difficult to sustain. Credit card defaults are at their highest rates in more than two decades. Citigroup reported that more than 9.3% of its customers had defaulted in February. Capital One reported an 8% default rate for that month.

Such high default percentages have prompted some credit card companies to raise interest rates. Capital One recently sent customers notice of increases. Others, such as JPMorgan Chase, have begun charging annual fees of $120 to holders of cards with lower interest rates.

Higher rates leave families such as the Lipowskis in an untenable situation: unable to truly afford credit but unable to live without it.

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Because Richard Lipowski's unemployment checks are slightly less than half his former salary, he pays an outsized portion of his monthly income on rent. About 55% of his unemployment payments go to rent. The remaining 45% is split among utilities, transportation, food and medical bills. Any other expenses go on the credit cards, some of which charge interest rates as high as 15%.

Medical costs alone could easily consume the rest of Richard Lipowski's unemployment insurance. He and his wife spend more than $700 each time their 3-year-old sees his autism specialist and gets refills for a long list of dietary supplements and immunity-strengthening vitamins. The ability of such supplements to help autism is a subject of intense debate, and many medical insurance plans do not cover them.

'You try to do whatever you can'

At first meeting, it's difficult to believe the Lipowskis' son is ill. A handsome boy with a broad smile, welcoming personality and curious nature, Frank seems like most young kids. He immediately recognizes a microphone brought by a reporter and sings "Happy Birthday" into it with the gusto of a kid preparing for "American Idol." But he can't conduct a conversation at the level of other children his age. The autism has slowed Frank's speech development so that while words come easily, sentences don't.

As a result, the Lipowskis buy their son special educational DVDs and books aimed at improving autistic children's communication abilities. Each DVD costs $25. There are no funds left over for these materials, so Maria Lipowski puts them on a credit card. And the bills increase.

"We will do whatever we have to do," she says. "Like every other mom, you try to do whatever you can for your child."

Not many jobs out there

For Richard Lipowski, that means showing up to work, even if there is no work to be had. Each weekday, he goes to his union's hiring hall in Jersey City in hopes of getting a job. His chances are slim. Jobs are offered first to the union members who have been out of work the longest, provided they have the requisite skills. Occasionally, a worker on the list is ill, freeing one job for the next person in the queue. It is also possible that a job may require skills beyond those held by the guys ahead of Lipowski in line. But with so few jobs available, the odds are against him.

He knows that, yet he still shows up.

Lipowski is hopeful that the billions earmarked for construction in the Obama administration's stimulus package will improve his chances. Construction-related spending in the package -- largely designated for schools, infrastructure and energy-related projects -- could top $160 billion, according to the Engineering News Record, an industry publication.

"Not only will it produce jobs through the local guys, it puts money back into the hands of suppliers, to the guys that transport all the construction material," says Richard Lipowski.

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Maria Lipowski is looking for something else in the stimulus package: aid to parents of special-needs children. The package includes $12.2 billion in federal funding for special education.

To the extent that such aid could fund the cost of education for Frank, it could provide more help to the family than even a second income could. The slack labor market has made it difficult for Maria Lipowski to find work. Even if she were to land a job, her income would barely offset the cost of child care for her 2-year-old, let alone provide the specialized care Frank needs.

More valuable to the family at home, Maria Lipowski has concentrated her efforts on cutting the budget. All the food is cooked at home. She no longer shops for clothes or buys name-brand items. She entertains the kids in the house.

Even so, the cutbacks don't offset even the interest their credit cards rack up. Every day Richard Lipowski is out of work, the weight of his family's debt grows.

"It is taking a toll on me," he says. "It is definitely a struggle."

Produced by Darragh Worland/ Graphics by Joe Farro

Published April 2, 2009