Study: Bankruptcy rates largely depend on State’s policies, not people

Why does bankruptcy take place? Is it due to people’s fault in terms of their perspective towards debt, wrong decisions in context of managing money, their penchant for default or it happens due to the not-so-prudent policies of the State? To find answers to this ever so important question economists from the Brigham Young University conducted a research study. These economists were Lars Lefgren and Frank McIntyre.

In the study they found out interesting facts on bankruptcy rates and also how it is different in context of different states. The journal of Law and Economics has published the study in which these two economists were helped also by five of their students.

These two wanted to concentrate on the ‘variance’ in terms of the number of bankruptcy filings across the different states of USA. One intriguing fact which came out in course of this study is that the state of Utah was found to be present in the top-five always as far as number of bankruptcy filing was concerned. Some are of opinion that this is due to that states higher number of kids per household. However it was found that the prevailing difference in the number of filings and their variance from state o state depends quite heavily on the receptive state’s policies. The study also points out that, “Demographics, wage garnishment restrictions and the fraction of bankruptcies filed under Chapter 13 explain 70% of the variation in filing rates across states.” On the other hand under Chapter 7, bankruptcy filing has a different connotation attached to it as unlike under chapter 13, in this case, “…the bankruptcy court has the option to sell the debtor’s personal belongings to raise money to pay his or her creditors”.

Thus referring to two different states Nevada and Utah, Lefgren mentioned that, “Utah is more likely to file under Chapter 13 than nevada.” So it shows that the different laws present across different states are responsible for the variance in filing rates and therefore these two economists recommend that the bankruptcy laws across the states should be “harmonized”.