Urban poverty among laid-off workers has become one of the major challenges confronting China due to the massive retrenchment of state employees since the 1990s. While a great deal of research has focused on the general situation or the analysis of aggregate-level data, the workers themselves have been given much less attention. Based on data from Shaanxi Province, this paper examines the current status of the former state workers and their families in the once-prosperous “City of Textiles,” a district of state-owned textile mills and affiliated residential areas where the risk of slum development and marginalisation of former state workers has increased since economic reform. These textile workers had devoted themselves to hard work, acted as communist zealots and performed family duties at the same time, believing that the government would take care of their families. However, the poverty induced by the layoff programme has not only altered their lives and deteriorated intra-family relationships, but has also pushed some laid-off workers into various illegal activities to maintain household finances and to pay for rapidly rising tuition fees and medical expenses. We contest the commonly held view that poverty faced by former state workers is of their own making and show that current government anti-poverty strategies are inadequate to deal with the problem.