Bankruptcy in Utah

"A Profile on Consumer Bankruptcy Petitioners"

The following is a summary of a paper authored by Dr. Jean M. Lown and Dr. Barbara R. Rowe, Utah State University. They presented it at the Annual Conference of the Association for Financial Counseling and Planning Education, November 20 - 23, 2002 at Scottsdale, Arizona.

Utah ranks first in the nation in the number of consumer bankruptcies per household. (Utah’s rate in one in 37 households, the U. S. rate is one in 77.)

This study describes 2,567 Chapter 7 and Chapter 13 cases filed in the U. S. Bankruptcy Court for Utah in 1997.

Median debt level was $ 31,981 for Chapter 7 and $ 41,626 for Chapter 13 cases. While Utah boasts a high proportion of Chapter 13 repayment plans, only 23 percent of these cases were successfully completed. Debtors tended to be young, single earners, with short job tenure.

The one factor virtually all bankruptcies share is overwhelming debt in relation to income. Americans have taken on higher levels of debt with apparently insufficient consideration on the part of either lenders or borrowers of the ability to repay.

Bankruptcy Basics

Bankruptcy law and regulations are governed by the federal Bankruptcy Code. The U. S. Administrative Office of the Courts compiles statistics on the number of filings. These data are limited to debt and contain meager demographic information.

Chapter 13 debtors promise to repay a portion of these unsecured debts over a three- to five-year period, by making monthly payments to a bankruptcy trustee who distributes the funds to priority and unsecured creditors. Chapter 7 debtors file a liquidation plan to discharge their unsecured debts.

Only unsecured debts can be discharged in bankruptcy. Secured debts, such as mortgages and car loans, must either be repaid or the lender can repossess the collateral. Priority debts such as back taxes, child support and alimony, and student loans must be repaid.

Utah Economics and Demographics

Economists speculate that large family size and low per capita income contribute to Utah’s high bankruptcy rate (Overbeck, 2001). Utah families are the largest in the nation at 3.57 persons compared to 3.14 for the U. S. as a whole (U. S. Census Bureau).

The State has the youngest population with a median age of 27.1. In 1995, per capita income in Utah was $18,054, 76.6 percent of the national average, placing it 45th of the 50 states.

Utah ranks fourth-highest in teen labor force participation, fourth in percentage of men in part-time employment and third for part-time women workers, all of which contribute to lower per capita income.

When wages are adjusted for average hours worked, the average hourly wage rate in Utah is 88.2 percent of the national average. The cost of living fluctuates around 95 percent to 105 percent of the national average. (Governor's Office of Planning and Budget, 2000).

Despite the perception that Utah women are less likely to be employed than their counterparts in the rest of the country, the female labor force participation rate (62 percent) is actually higher than the national average (59 percent) in part due to the young population. However, Utah women are more likely to be working part-time (36 percent in Utah vs. 27 percent in the U. S.) and less likely to have a college degree.

While women in the U.S. earn 75 percent of male wages, Utah women earn 62 percent, the largest gender gap in the nation (Utah Dept of Employment Security, 2001).

The cost of raising children to age 18 continues to climb to almost a quarter of a million dollars (Lino, 2001). With an average of one half more persons per household, the high cost of raising children is a significant financial factor for Utah families.

Consistent with having the largest families in the nation, Utah leads the country in home size and the number of vehicles per household (Loomis, 2001). More than one-fourth of Utah homes contain eight or more rooms ("Utah leads nation," 2001).

Utah families have low per capita incomes due to high fertility, low wages overall and specifically, low wages paid the State's women. In addition, the divorce rate (5.2) is higher than the national average (4.7) although the State has the lowest rate of single parent families due to a high remarriage rate (Buctah, 1998).

In the most comprehensive studies of consumer bankruptcy to date, Sullivan, Warren, and Westbrook (1989, 2000), concluded that the causes of bankruptcy are complex and related to fundamental changes in the national economy that have contributed to increased income volatility and employment insecurity, rising medical costs and the lack of health insurance, divorce and the growing number of single-parent families, the determination to maintain home ownership in the face of insupportable debt, and a dramatic increase in consumer debt at high interest rates.

Sullivan, Warren and Westbrook (1989) concluded that the principal cause of bankruptcy was job loss exacerbated by burdensome consumer debt and meager savings. Many of these debtors had to wait until they could find a job and save up enough money to file for bankruptcy.. Fewer than one-third of American families have an adequate emergency fund to tide them through even a short period of unemployment.

About one-fifth of consumer bankruptcies were really the result of a small business failure.

While home ownership is considered a cornerstone of middle class stability, growing numbers of Americans are assuming unsustainable mortgage debts. "They buy more than they can truly afford and they have too little margin left when disaster strikes." (SW&W, 2000, p 242.)

One notable finding was the increase in the number of Americans who had dangerous debt-to-income ratios. This increasing debt load is mostly due to credit cards. In 1981, the average family owed six weeks worth of income. In 1991, the debt load had increased to six months of income!! The total debt-to-income ratio for Chapter 7 was 194.3 percent or almost twice annual income at the time of filing. For Chapter 13, the ratio was 173.4 percent.

The ages of filers ranged from 19 to 77 with a median of 33 years.* Household size ranged from one to 12 persons, with a mean size of 2.79 for chapter 7 and 3.26 for Chapter 13 filers. Nearly 68 percent of the Chapter 13 filers were single persons. Over 53 percent of the Chapter 7 filers were single.

Most debtors were filing for bankruptcy protection for the first time. Among the sample, for Chapter 7 filers, nearly eight percent reported a previous filing. Among Chapter 13 filers, a previous filing was reported by over 20 percent of the filers.

One factor that virtually all bankruptcies share is overwhelming debt in relation to income. Americans have taken on higher levels of debt with apparently insufficient consideration on the part of either lenders or borrowers of ability to repay.

While families with more children spend less per child, the reality is that children are expensive to raise. Utahns live in the largest homes in the nation and own or lease more vehicles per household. The combination of low wages, large families, large homes and numerous vehicles puts Utahns at greater risk for financial stress.

Recommendations for financial education The results of this study highlight the importance of financial education programs. Credit education is particularly relevant for single-earner families. Such education should emphasize the need for an adequate emergency fund and monitoring debt ratios. Consumers should not assume that because creditors will grant credit that they can afford to repay.

* - incomplete data - Only 1/3 debtors provided age.