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Two economists at Brigham Young University in Provo believe they have found an answer to the puzzling question of why the rate of personal bankruptcy filings vary so greatly from state to state.
Professors Lars Lefgren and Frank McIntyre said that much of the differences in the filing rates among the states can be explained by their wage garnishment laws, the number of their residents who end up filing for bankruptcy multiple times and the percentage of young, middle-class residents.
"Some states have laws that make it more difficult for creditors to go after a delinquent debtor's paycheck," Lefgren said. "And those states tend to have lower bankruptcy rates than those [states such as Utah] where it is easier for
Utah, which ranks 21st in the number of bankruptcy filings per 1,000 residents, is one of the states where it is relatively easy for creditors to garnish a debtor's wages, Lefgren said. "There is very little protection for debtors," Lefgren said.
Lefgren and McIntyre reported their findings in a paper titled "Explaining the Puzzle of Cross-State Differences in Bankruptcy Rates" that was published in the current edition of the Journal of Law and Economics .
Steve Kroes of the Utah Foundation, which has conducted studies on Utah's bankruptcy rate, said Lefgren's and McIntyre's study is "pretty darn impressive" for explaining as much as 70 percent of the difference in the filing rates among the states.
"We had tried to look at the issue from a demographic and social perspective -- family size and income levels," Kroes said. "But we couldn't reach any conclusions that really stood out. But, we never zeroed in on the garnishment issue."
Lefgren said if a state makes it difficult for creditors to garnish wages, it is easier for debtors to ignore the debt. "And that can create an informal default [on the debt] rather than a bankruptcy."
However, debtors who find that their wages are being garnished may be more likely to declare bankruptcy to stop those to whom they owe money from dipping into their paychecks, Lofgren said.
Another factor that increases a state's rate is the percentage of its residents who, when they do seek relief in the bankruptcy court, file for Chapter 13 rather than Chapter 7.
Under Chapter 13, debtors are given the opportunity to set up a plan that allows them to repay a part of what they owe over time, typically three to five years. Under Chapter 7, debts generally are wiped out completely.
Lefgren pointed out that in many cases, those who file for Chapter 13 fail to keep up with their payment plan and their bankruptcy gets dismissed.
"At that point, what we often see are those debtors filing for bankruptcy again," Lefgren said. "So we are getting people counted in the bankruptcy statistics multiple times for the same debts."
Utah ranked ninth among states in the number of Chapter 13 filings for the 12-month period ended March 31, according to the Administrative Office of the U.S. Courts.
Lofgren said that bankruptcy filings also tend to be higher in states where a large percentage of the population is 25 to 29 years old and has annual household income between $30,000 and $60,000. "States with larger concentrations of younger, middle class people tend to have higher bankruptcy rates."
In Utah, 9.2 percent of the population is between 25 and 29 years old while nationally only 6.9 percent of the population falls in that age group, according to 2007 estimates from the U.S. Census Bureau.
