Associate Professor of Economics, Brigham Young University
Interviewed by Grace Leong
For a number of years, Utah has had the dubious distinction of having one of the highest bankruptcy rates in the nation. Unexpected medical bills, inadequate health insurance, layoffs, divorce, poor financial management skills, and excessive credit card debt are among some reasons cited. In fact, a Utah bankruptcy court official predicts rising unemployment and the ongoing recession are expected to lift the total number of filings to around 15,000 by the end of the year, up 62 percent from a year ago.
But just how accurate is that data?
A new study by two BYU economists, Lars Lefgren and Frank McIntyre, published this month in the current edition of the Journal of Law and Economics, found that Utah's high bankruptcy rate stems from its wage garnishment laws, the number of Utahns who end up filing for bankruptcy multiple times and the relatively high percentage of young, middle class residents with moderate incomes.
"Our high bankruptcy rates prior to 2005 were due more to some people in Utah filing for bankruptcy multiple times, rather than growing numbers of people filing bankruptcy," Lefgren said.
And the state's wage garnishment laws, which offer very little protection for debtors, also motivated more people to file for bankruptcy to stop creditors from dipping into their paychecks.
• After Congress passed the bankruptcy reform bill, known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, bankruptcies plummeted from a record-shattering 2 million cases nationally -- which reflected a rush to file before the new law took effect -- to 600,000 in 2006. But now bankruptcies are booming again. Why are bankruptcies in Utah -- in particular Chapter 7 filings, which typically involve a liquidation of property and assets -- rising again despite the recent federal law changes that supposedly make it harder for someone to qualify?
Right before the law changed in 2005, people who would have waited to file for bankruptcy filed for protection immediately. Under the new law, the costs of filing bankruptcy have risen and have become a bigger hassle to do now. What makes it harder to file is the increased documentary burden on the people who file for bankruptcy, and in turn the lawyer who has to process the documents and make sure those are legal. Because of the increased paperwork, lawyers responded by raising their fees by $1,000 on average. Attorneys' fees for Chapter 7 filings went from $800 to $1,800, and fees for Chapter 13 filings went from $2,000 to $2,800 in Utah. Still, if a person's financial situation deteriorates -- and the recession has made the financial situation worse for a lot of people -- it's not surprising filings are again rising.
• Utah no longer ranks among the top 10 in the nation for bankruptcy filings, especially after the bankruptcy reform bill of 2005. Currently, the state ranks 21st in the number of bankruptcy filings per 1,000 residents. Why has our ranking improved?
The recession is relatively mild in Utah compared with states like Michigan, Las Vegas, California, Florida or Phoenix. Once things normalize nationwide, Utah's filings will probably jump higher again. But it's not because we're flakier than other people, but more because of our wage garnishment laws, demographics and a high incidence of repeat bankruptcy filings.
• Are there unique factors in Utah, apart from the recession, layoffs, unexpected medical bills, divorce, foreclosures, a lack of consumer financial education and savings, that are causing bankruptcy filings to rise?
Utah's wage garnishment laws make it fairly easy for creditors to garnish a debtor's wages, so it makes sense that it would be related to our higher bankruptcy rate. States with larger concentrations of younger, middle-class people tend to have higher bankruptcy rates. Young families with children have a high risk of filing for bankruptcy because they're earning less, or are less experienced with financial matters and undertaking large financial commitments over their heads. Statistically, there's a strong correlation between states that have high Chapter 13 filings -- which is basically a bankruptcy repayment plan -- and the overall bankruptcy rate, because 70 percent of those cases get dismissed when the payment plan fails and the same household refiles again under Chapter 13 or Chapter 7. So we're getting people counted in the bankruptcy statistics multiple times for the same debts.
• How do Utah's wage garnishment laws work? Under what circumstances can a debtor's wages be garnished?
As long as you earn 30 times the hourly federal minimum wage, or more than $180 a week, a creditor can go to court and file a motion to garnish wages. Based on the court order, employers can take a fraction of wages out of the debtor's paycheck to pay the creditor. In Utah, the garnishment order can last up to six months, and after that point, if the creditor is still owed money, they can go for another garnishment order.
• If bankruptcy filing rates are high in Utah because people who end up filing for bankruptcy multiple times are repeatedly counted in bankruptcy statistics for the same debts, should the U.S. Bankruptcy Court change the way it counts these people?
The federal bankruptcy court keeps records for a variety of reasons. I'm not sure if it's their job to fix the way statistics are recorded. Perhaps, policy makers shouldn't look at the bankruptcy rate as a measure of financial stress, and should look at other indicators, such as unemployment, mortgage delinquencies, or what fraction of credit card balances are delinquent. And even if we didn't have people being counted in bankruptcy statistics multiple times for the same debts, there's still the issue of Utah's wage garnishment laws.
• About 58 percent of Utahns filed for bankruptcy under Chapter 7 compared with 41 percent that filed under Chapter 13 in 2008, according to data from the U.S. Bankruptcy Court in Utah. And in previous years, the percentage of Utahns filing Chapter 7 bankruptcy has typically been higher than that of Chapter 13. Why are more Utahns filing under Chapter 7 compared with Chapter 13?
Chapter 7 is a more attractive financial option because it wipes out all unsecured debt, i.e. credit card debt, personal and payday loan debt. Typically people that file Chapter 7 have little or no assets to liquidate and distribute assets to creditors. All you do is pay a $1,500 filing fee and your debts are wiped out. But it's getting harder to qualify because the 2005 bankruptcy reform act places limits on who can file under Chapter 7.
The highest incidence of Chapter 13 filings is in the southeast states like Georgia and Tennessee, and then followed by Utah. Utah ranked ninth among states in the number of Chapter 13 filings for the year ended March 31. Bankruptcy filers that can afford to pay at least 25 percent of what they owe, or a minimum of $6,000, over a five-year period, must file for a Chapter 13 reorganization and make payments rather than get immediate relief under a Chapter 7 liquidation of their assets.
Under Chapter 13, people are basically agreeing to a payment plan for three to five years, the court distributes the payments to creditors and the remainder of the debt is forgiven. The problem with Chapter 13 is you have to make payments to the plan, and if you stop, then the bankruptcy is dismissed and your debts come back. Oftentimes, a household will file under Chapter 13, won't be able to keep up with the payment plan, and the case gets dismissed and they file again under Chapter 7 or 13.
Different bankruptcy courts in regional areas develop different institutional cultures and norms, and in some places, you'll have pressure from judges and trustees to have households file under Chapter 13 to repay debts to creditors as much as they can. It could also be financial incentives in the legal profession, where trustees can allow bankruptcy lawyers to charge higher fees for Chapter 13 bankruptcy, which makes it more profitable for them to suggest their clients to do that.