The Case of Bankruptcy

"Using Family Economics Data to Explain Complex Relationships:
The Case of Bankruptcy"

The following is a summary of a paper written by Dr. Jean M Lown and Jessica Tubbs Family, Consumer and Human Development Utah State University, Logan, Utah

Abstract

Not every research question can be answered with data, either because the data do not exist or because a wide combination of factors, some of which are difficult to measure, may influence the outcome. Intervening factors, including the state’s religious and legal cultures, may be influencing the bankruptcy rate.

Americans have faced an onslaught of economic and social changes during the last 20 years. Many families have not been prepared to meet the challenges and hardships. They have found themselves in a variety of precarious financial situations. People have dealt with the difficult times in a plethora of ways. Millions have turned to high-interest credit cards to make ends meet from month to month. However, just because people have been given credit cards, doesn’t mean they have the income to repay their debt. Some have turned to home equity loans as a source of income, only to have their largest asset repossessed. Finally, an increasingly large number of Americans are turning to bankruptcy to heal their financial woes. For many years in American history, declaring bankruptcy was as damaging as donning a bright scarlet “A.” However, times have changed. A record-breaking total of 1,539,111 consumer bankruptcies were filed in 2002 (American Bankruptcy Institute, 2002). Utah ended 2002 with a record-breaking 21,527 consumer filings.

The high bankruptcy rate is surprising because of the fiscally conservative reputation of the State. About 70 percent of the population belongs to the Church of Jesus Christ of Latter-day Saints. For years, the Church has taught members to live a life of thrift, industry and frugality. It has encouraged members to live within their means, avoid unnecessary debt, and to repay debt quickly and in full (Brown, 1997; Nash, 1997).

Purpose

This paper will explore the possible reasons the people of Utah file for bankruptcy, and what influence their religion has on that decision.

Who Files and Why?
The current bankruptcy petition does not ask debtors to identify a reason as to why they are filing. There is also very limited demographic data collected in the court files.

Only about one-third of the forms indicate the age of the debtor(s). No data are available on education, marital history, employment history other than income, and gender for single filers. In some interviews conducted in other states at the Section 341 hearing, the only time the debtor must appear in court, debtors cited these reasons: job loss or pay cut, family breakup, uninsured medical expenses, creditor problems and housing expenses.

Background on family economics
Why does Utah have the highest filing rate per household when such a large portion of the population belong to a religion that shuns living in debt? What are the possible reasons? Some include these: supporting larger families on smaller incomes, having the lowest median age in the nation, low per capita income, and burdensome housing costs.

Income
Utah had a median family income of $51,022. The U. S. median family income was $50,046. However, Utah has a per capita income of $18,185, which is lower than the national average of $21,587.

At the median, Utah workers earn 88 percent of the national wage. The median income for men is $28,168 and for women is $14,140. Utah ranks 49th in the country for women’s earnings. While Utah women are more likely it to be employed than their counterparts in the rest of the nation, they are more apt to work part-time in low-wage, no-benefit jobs.

Family Size
Utah had the highest number of persons per family: 3.57 compared to the average U. S family size of 3.14. So Utah families, on the average, support an additional half person per household. Although Utah income is higher than the national average, it is important to remember more people are being supported with it.

For a child born in 2002, a middle-income married couple with two children would spend about $231,680 to raise the younger child to age 18 (Lino, 2003)

Age
Utah also has the lowest median age, 27.1 yrs. The average median age for the rest of the nation is 35.3. While other states with high elderly populations have high dependency ratios, the dependents in Utah do not come with Social Security checks and pensions.

Utah has the highest marriage rate of any state with 58 .8 percent of adults being married, compared the national average of 54.4 percent. They are also younger than the national average at the time of their marriage and start having children at a very young age.

Education
Utah has a higher percentage of the population with a high school diploma or equivalent (87.7 percent) compared to the national rate of 80.4 percent. The percentage of people with bachelor’s degrees or higher is also larger in Utah with 26.1percent, compared to the national rate of 24.4 percent. Surprisingly, higher education levels correlate with a higher propensity to overspend. (Bac, Hanna & Lindamood, 1993). Higher education does not mean Utahns are financially literate.

States that lack a mandate for personal finance course in high school have higher bankruptcy rates.

Housing
The median number of rooms in a Utah home is six, while the national median is 5.3 (Loomis, 2001). Almost one-fifth of Utah houses have nine or more rooms, compared to only 7.7 percent of the nation. Also, about 76 percent of the Utah population has a mortgage. Utahns may be living in homes they may not be able to afford. Utah has the second-highest foreclosure rate for mortgages insured by FHA. The home ownership rate is 72 percent, compared to the U. S. rate of 68 percent. Many debtors were unrealistic in wanting to maintain unaffordable homes.

Transportation
Utahns own more vehicles per household (Loomis, 2001) and these vehicles tend to be larger and more expensive four-wheel drive models. More than 19,000 households have five or more vehicles; 124,000 own three vehicles and 51,000 own four.

Religious Contributions
The Salt Lake City area ranked first in the nation, far exceeding the second place city. Those who itemized on their income tax returns donated nearly 15 percent of their discretionary income to religious and charitable organizations. Residents of Utah County donated 23.6 percent of their income. Many members contribute to sending missionaries around the world. Lenders don’t calculate these expenses when determining a borrower’s ability to repay a loan.

Legal Culture
Utahns file for Chapter 13 bankruptcy more than the national average (41 percent compared to 30). However, only 23 percent of the Chapter 13 cases filed in 1997 completed their repayment plans.

Conclusions (Unedited)
It is impossible to fully explain why bankruptcy filings have reached epidemic levels in our country. Many debtors have been affected by a job loss, divorce or other financial hardship. Continuing economic and employment volatility mean trouble for consumers living on the financial edge. The answers to the questions on the growth of the bankruptcy rate and with regard to why a state ranks first in filings will not be found in the court records. This comparison of family economic status in Utah compared to the U. S. used family economic statistics to explain why Utah families are likely to be financially stressed, and therefore more vulnerable to bankruptcy when unexpected events such as illness, injury or job loss occur.

It takes two hands to clap. A reduction in the bankruptcy rate is not likely when lenders are so lax in extending credit. Many consumers believe that if they are granted credit, then they must be able to afford it. Increased education could help people avoid bankruptcy. Education regarding wise use of credit, learning to use prudent financial management skills, and the building of a sufficient emergency fund are essential tools to use credit wisely.

And what about the people of Utah? - they live closer to the financial edge due to large families, low incomes and high religious contributions.