Wednesday, July 1, 2009

Study dispels myth of high Utah bankruptcy rate

I've heard several people cite the statistic that Utah has one of the highest bankruptcy law in the nation as evidence that members of the Mormon Church are falling into the consumerist trap and "living outside their means." I've always thought that was a strange assertion; I don't live in Utah, but I've traveled there on occasion and I never saw anything that indicated that Utah residents spent more or less of their incomes than residents of other states. Apparently I wasn't the only one suspicious of this oft-quoted statistic -- two Brigham Young University professors of economics have an article in The Journal of Law & Economics that at least in part dispels that myth.

In their article entitled "Explaining the Puzzle of Cross‐State Differences in Bankruptcy Rates," Lars Lefgren and Frank McIntyre make the argument that the variation in bankruptcy rates is due primarily to differences in state laws. Specifically, they found that laws governing the garnishment of wages significantly impacted bankruptcy rates. This actually makes a lot of sense -- if your state's laws prevent your creditors from garnishing your wages, you are less likely to need the the protections afforded by filing bankruptcy. On the other hand, if your creditors can get at your paycheck, you have a strong incentive to file for bankruptcy as soon as possible. Lefgren and McIntyre also found, somewhat unsurprisingly, that rates of bankruptcy were highest in areas where the median household income was between $30,000 and $60,000.

So it appears that Utah's relatively high rate of bankruptcy (7.05 per thousand households) has more to do with its laws allowing creditors to garnish the wages of debtors than it does a particular trend among Utah residents or a Mormon subset of that population. Utah allows up to the federal limit of 25% of wages to be garnished, although it does impose a 6-month limit. In the Southeastern United States where I live, many states use the federal garnishment limit and have similarly high bankruptcy rates. Tennessee leads the pack with 8.12 bankruptcies per thousand households, with Alabama (7.42) and Georgia (7.38) not far behind.

The article is a bit dense, but it does a good job at dispelling some of the myth that Utah residents are spending like there's no tomorrow. The bankruptcy data doesn't support that assertion, and in fact, it turns out that the state-by-state data isn't very useful to map trends, due to the differences in state laws.

Lefgren and McIntyre's article is currently available for free on the J.L. & Econ website in both HTML and PDF.


Photo credit: debaird™.