When it comes to why more people file for Chapter 7 bankruptcy in some states than they do in others, many factors come into play. States with high divorce rates, low median incomes and temperamental job markets can all cause bankruptcy filings to be higher, according to Michael Bovee, who has worked in debt resolution for 20 years and is the co-founder of Resolve.
A state’s laws also play a big role. Steep wage garnishment laws or laws that make it easy for creditors to seize assets can push more people toward bankruptcy to protect their assets, says Robert Haupt, a bankruptcy attorney with Lathrop Gage. Those laws also can influence the percentage of Chapter 7 or Chapter 13 bankruptcies.
With Chapter 7, for example, states that let people protect more equity in their home or car make filing for Chapter 7 more attractive. That’s because the one major disadvantage of Chapter 7 over Chapter 13 is that people can potentially lose their homes in a Chapter 7 bankruptcy.
States where people make less money may also have higher rates of Chapter 7 bankruptcies because more people can pass the “means test,” a test that looks at a filer’s income and expenses to determine if they qualify for a Chapter 7 bankruptcy. Of the 10 states with the most Chapter 7 filings, only two, Illinois and Utah, have a median household income above the national average of $61,372.
We took the total number of Chapter 7 bankruptcies filed in 2018 per state and divided those numbers by each state’s population to get a per-capita ranking.
Here are the 10 states with the highest number of Chapter 7 bankruptcy filings per capita:
1. Nevada — Although Nevada’s median household income of $58,000 and 13% poverty rate are not especially bad, in many ways the state is still recovering from the 2008 recession. In 2010, Nevada had the highest unemployment rate in the country at 14.9%. The housing market was also hit very hard and the state is currently ninth in the nation in foreclosure rate, although that’s a 78% improvement from its 2010 numbers. Nevada also has a very high bankruptcy homestead exemption of $550,000, which means most homeowners can protect the equity they have in their home if they file for Chapter 7.
2. Ohio — Ohio was one of the few states where unemployment rates didn’t improve from 2016 to 2017. And the state’s most recent 2019 unemployment numbers leave it in a three-way tie for 35th highest unemployment rate in the country. At the same time, Ohio has a fairly high homestead exemption of $145,425, which takes the sting out of Chapter 7 for many homeowners.
3. Indiana — Indiana’s median household income ($54,181) and poverty rate leave it in the middle of the pack, but it has a very low median home value of $141,100 and a low number of residents with bachelor’s degrees, which means lower income-earning potential for the state’s residents.
4. Tennessee — Tennessee likely has a higher number of Chapter 7 bankruptcies simply because it has a high number of bankruptcies period. It ranks second in the country behind Alabama. (Alabama doesn’t make this list because it has far more Chapter 13 bankruptcies than Chapter 7.) Several negative economic factors are likely behind Tennessee’s high number of bankruptcies. The state has a low median household income ($51,340), a high poverty rate (15%), and foreclosure and wage garnishment laws that favor lenders and creditors.
5. Michigan — Michigan has one of the highest unemployment rates in the county at 4.3%, a three-way tie for 42nd place. And much of the state’s workers, 18.9%, are employed in manufacturing, which means a hiccup in that industry can have a widespread effect on the economic fortunes of the state’s residents.
6. Oklahoma — Only three states have lower median home values than Oklahoma’s $137,400. At the same time, the state’s bankruptcy homestead exemption is only limited by acreage. Which means that if you live in Oklahoma, own a home and declare Chapter 7 bankruptcy, it’s likely you’ll be able to exempt all or most of your home equity. The state also has the 8th highest poverty rate at 15.8%.
7. Kentucky — The National Consumer Law Center gave Kentucky an F rating for its debtor-friendly policies, which allow creditors to seize even essential items. So if a Kentucky resident hopes to protect their assets, they are more likely to consider bankruptcy. Kentucky also has a very low median income, $48,375; the fifth highest poverty rate at 17.2%; and is in a three-way tie for 43rd highest unemployment rate at 4.3%.
8. Illinois — Why Illinois has so many bankruptcies is somewhat mysterious. The state does not have very consumer-friendly bankruptcy laws, Haupt says, including its homestead exemption, which is only $15,000 for home equity in most cases. The state’s household income is also slightly above the national average at $62,992. It could be the state’s unemployment rate that is partly responsible for the high number of bankruptcies. Illinois is tied for 40th place at 4.2%.
9. Idaho — Some of Idaho’s economic numbers don’t sound so bad. It’s in a five-way tie for seventh lowest unemployment rate at 2.9% and its 12.8% poverty rate is 25th lowest. But the state ranks 40th in median household income at $52,225, and only 3.3% of households have earnings of more than $200,000. Which means a higher percentage of people in the state may pass the Chapter 7 means test.
10. Utah — At $68,358, Utah’s median income is well above the national median, it has a low unemployment rate and its poverty rate is the sixth lowest. So why so many bankruptcies, especially Chapter 7? It could be Utah’s creditor-friendly wage garnishment laws and the fact that it has the most kids per family of any state. “The more children you have, the more you’re allowed to earn and still pass the means test,” Bovee says.
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