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Front Page » December 30, 2004 » Local News » Foundation analysts explore factors influencing Utah's ba...
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Foundation analysts explore factors influencing Utah's bankruptcy rates

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A wave of accelerating bankruptcy rates continues to sweep across the nation, creating economic, political and social hardships.

At the local level, Utah has emerged as the number one state in terms of bankruptcies compared to the number of households.

Bankruptcy provides individuals falling on hard times with an opportunity to obtain a fresh start, free of existing debt. In order for the outcome to occur, people filing for bankruptcy are granted a complete discharge or release from specific debts or they are required to follow a repayment plan that grants protection from creditors.

While a discharge absolves an individual from repaying qualified debts, valid liens against property from a secured creditor are not discharged, pointed out the latest research report compiled byUtah Foundation's independent analysts.

Also, individuals are not generally able to discharge debts incurred based on dishonest or improper behavior, tax claims, debts owed for spousal and child support or debts owed for government funded or guaranteed student loans.

Bankruptcy is divided up into several different chapters, with the most prominent being chapter seven and chapter 13, explained the foundation analysts.

Approximately 70 percent of all debtors file a chapter seven bankruptcy, which allows for the complete discharge of all debts except those exempted from bankruptcy.

Of all chapter seven filers, 99 percent are granted a discharge of debts. Individuals cannot file for a second chapter seven bankruptcy within six years of a previous discharge of debts.

Chapter 13 bankruptcies are used primarily by individuals to reorganize finances by utilizing a partial debt repayment plan supervised by a trustee.

Chapter 13 repayment plans typically last three to five years and, at the end of the designated time period, remaining unsecured debts are discharged.

People with mortgages often choose to file a Chapter 13 because they are able to keep homes through the type of bankruptcy.

Utah has consistently ranked in the top quarter of states for bankruptcies since 1960, noted the association analysts.

In the 1980s, Utah broke into the top 10 among states, and then bankruptcies soared in Utah during the late 1980s.

After falling briefly, the state's bankruptcy rate accelerated in the late 1990s.

Utah achieved the highest bankruptcy rate in the nation in 2002 and 2003.

There is little variation from year to year with regard to which states round out the top positions in term of high bankruptcy filing rates, indicated the foundation researchers. A handful of states consistently report high household filing rates. Utah, Alabama, Georgia, Idaho, Indiana, Nevada, Missouri, Oklahoma, Ohio and Tennessee not only post high filing rates, but have appeared in the top quarter of states since 1960. In other words, it appears that a state struggles with high filing rates during a long period rather than suddenly developing a problem with bankruptcy.

Many theories exist to explain the rise in bankruptcies nationally. The most popular response seems to be to blame irresponsible consumers who spend too much on luxuries and do not save money for emergencies. Affluenza, a PBS documentary and book by John De Graaf, David Wann and Thomas Naylor argues that Americans are caught up in a "painful, contagious, socially transmitted condition of overload, debt, anxiety and waste resulting from the dogged pursuit of more."

Americans do have greater debt than in past years and many financial analysts blame the situation on credit cards.

Credit card use is widespread throughout all demographic categories, though it is considerably higher among low income and younger households.

The United States Federal Reserve estimates that 76.2 percent of all American families have some form of credit card. But during the long-term, credit cards appear to have merely replaced other kinds of debt, such as installment loans.

American debt levels, in proportion to the economy, are larger than ever, but the increase is caused by increased mortgages and home equity loans. Mortgage debt has been steadily rising since the mid-1980s and has accelerated in recent years as interest rates hit historic lows.

By the end of the second quarter 2004, mortgage debt in the U.S. exceeded $7 trillion, representing a 33 percent increase since 2001. Coupled with increased debt, the U.S. savings rate has fallen dramatically in the past 30 years and accelerated in the last decade.

In 1990, the personal savings rate as a percentage of disposable personal income registered at 7 percent. By 2003, the personal savings rate had fallen to 1.4 percent.

While the authors of Affluenza paint the picture that Americans are spending more and more money in vain attempts to buy happiness, Elizabeth Warren and Amelia Warren Tyagi in The Two-Income Trap paint a decidedly different picture. Warren and Tyagi argue that, while Americans are spending a fair portion of money on dining out, clothing and appliances, the percentage of income spent on those items is actually considerably less than American families spent 50 years ago.

American families - especially middle class households - are in financial trouble and the single biggest factor, according to Warren and Tyagi, is the cost of housing. More specifically, rising home prices are a problem for families much more than for childless individuals.

Warren and Tyagi's research demonstrates that, between 1983 and 1998, home prices for families with children increased three times faster than for households without children.

Other factors that seem correlated with rising bankruptcies are increasing divorce rates and the number of single mothers raising children.

In addition, medical emergencies create large debt loads for some families. A report by Teresa Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook indicates that more than one in five debtors listed medical problems as the primary reason to file for bankruptcy protection.

Utah's high bankruptcy rate is troubling, especially if it signals weakness in the state that could hamper the growth of the economy or the well being of residents. Some economic weaknesses are apparent, but an interesting legal phenomenon maybe equally responsible for Utah's high bankruptcy rate.

In Utah, approximately 32 percent of all consumer cases filed are currently in chapter 13 repayment plans. But a few years ago, the number was 40 percent.

Nationwide, approximately 29 percent of all consumer bankruptcy cases are filed in chapter 13. Chapter 13 bankruptcies locally and nationally have been on the rise since the 1970s, when the rate registered at 16 percent of filings.

The percentage of chapter 13 cases in Utah escalated through 2000 before falling to 32 percent in 2003.

One theory explaining Utah's high bankruptcy rate is that many chapter 13 filings fail to result in a discharge of debts. Failed bankruptcy cases have the potential to drive up the filing rates in Utah. Even though a bankruptcy case fails, a family or individual may still be in financial distress and the only viable option is to re-file.

Of the total chapter 13 filings in Utah in 1997, only 23.8 percent of the cases were completed and resulted in a discharge of remaining unsecured debt. The remaining cases were dismissed or converted to a chapter seven bankruptcy.

Nationally, one-third of chapter 13 filings reach a successful discharge.

Research indicates it is possible that the number of refilings due to failed Chapter 13 cases is inflating Utah's bankruptcy rate. Economic factors also have an influence on the state's high bankruptcy rate. Utah has the largest family size in the nation at 3.57 persons per household as compared to 3.14 nationally. About 46 percent of all Utah families have a child younger than 18 years of age living at home, compared to 36 percent nationally. Larger families frequently have higher debt levels due to increased need for larger homes, bigger cars to accommodate all members and additional expenses for clothing, food, medical expenses and other items

The state has larger than average home sizes and Utahns also have a higher than average number of vehicles per household. In addition, the average cost of raising a child to age 18 can cost a middle class family as much as $165,630 according to the U.S. Department of Agriculture. Utahns also struggle with low rates of pay. The U.S. Bureau of Labor Statistics reports that average annual pay in Utah sits at 82 percent of the national average and has been declining relative to the nation for 20 years.

Furthermore, Utah has one of the largest gender wage gaps in the nation with women earning 70.3 percent of male counterparts as opposed to 76.2 percent nationally. In 2000, median female earnings in Utah were $24,872 as compared to $36,935 for men for full-time, year-round workers.

In addition to legal and economic factors, several social phenomena may influence bankruptcies. The Catalogue for Philanthropy ranks Utah eighth in the nation in charitable generosity. It is interesting to note that seven of the top 10 most generous states are also states that have historically high bankruptcy rates.

There are no simple answers to the bankruptcy question in Utah. The foundation, Utah State University and several organizations plan to continue exploring the bankruptcy phenomenon to provide needed data and analysis . Hopefully, the research will help to not only understand why Utahns file bankruptcy at high rates, but have the potential to offer insights on policies that may curb future high filing rates.

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