People have long considered how a state's bankruptcy rate reflects the demographics of its residents, but a new study by two BYU economists found state law and state bankruptcy court norms also contribute to a state's bankruptcy rate.

BYU professors Lars Lefgren and Frank McIntyre wrote in the study, published in the University of Chicago's Journal of Law and Economics, that about 70 percent of bankruptcy differences between the states can be explained by wage garnishment laws, the percentage of bankruptcies filed under Chapter 13 and demographics.

The authors looked at 28,000 bankruptcies in all 50 states from 1999 to 2001. During that time, Utah's bankruptcy rate was second-highest in the nation, after Tennessee, Lefgren said.

In 2005, Congress changed bankruptcy law to make it more difficult to file for bankruptcy, but Lefgren said that the conclusions of the study don't necessarily change because the authors looked at state laws and bankruptcy court norms.

Federal law allows creditors to garnishee up to 25 percent of a person's wages, if their income meets certain requirements. Some people declare bankruptcy because they are not taking home enough income after garnishments, Lefgren said.

But about half the states have garnishment laws that favor debtors. For instance, in North Carolina, creditors can garnishee 75 percent of a person's disposable income. "But their disposable income is a calculation after living expenses," Lefgren said, and people who make $100,000 a year can argue that 100 percent of their income goes to living expenses. The result is that in North Carolina, creditors don't bother garnisheeing wages, and as a result, North Carolina has one of the lowest bankruptcy rates in the United States.

In Utah, creditors can garnishee wages for six months. Then they have to get permission from a judge to renew garnishment.

"Utah falls on the relatively severe end in terms of debtors and what can be garnisheed," Lefgren said.

Chapter 13 bankruptcy is different than Chapter 7 bankruptcy because with Chapter 13, debtors are required to repay a portion of their debts to creditors in monthly installments. Chapter 7 bankruptcies result in the debtor selling assets and distributing proceeds among debtors. All unsecured debt vanishes, and most households don't have assets worth liquidating, Lefgren said.

But with Chapter 13 bankruptcies, the monthly installments can become too much and the debtors default. That can result in another bankruptcy filing.

Some states have more Chapter 13s than others. The highest number are in the Southeast. For instance, in Georgia, 62 percent of the household bankruptcies are filed under Chapter 13. In Utah, it's 38 percent. In Alaska, which has one of the lowest bankruptcy rates in the nation, it's 10 percent.

"In the Southeast, it's sort of where you see the strongest pressure for Chapter 13 bankruptcy," Lefgren said. "Once you get out of the Southeast states, Utah is pretty much at the top of the rest of the states."

Research in the 1990s found that bankruptcy courts "develop practices and norms of which types of households file which type of bankruptcy," Lefgren said.

For instance, in some courts, "people file under Chapter 13 because it's important that people repay their debts. That's not coming from the clients, but from the bankruptcy judges and the bankruptcy trustees," which are the lawyers that represent the creditors.

Also, it has been documented that when lawyers representing debtors attempt to file a Chapter 7 in a court friendly to Chapter 13s, "the bankruptcy judge can make life a little bit difficult for the lawyers," Lefgren said.

Generally, households that are in bankruptcy rely on their lawyers to steer them through the court system, and are unaware of legal procedures to help themselves.

"We saw this one unfortunate situation," Lefgren said of a Utah case. "This single mother with children, she filed for bankruptcy six times."

The woman originally filed for Chapter 7 bankruptcy, but accumulated new debt and filed for Chapter 13. The debt was $12,000. "She was a single mom with two or three kids, only making seven bucks an hour," Lefgren said. On a low income, the woman couldn't make the repayments arranged in her Chapter 13 bankruptcy and kept refiling and refiling.

"I don't know the circumstances under which she borrowed the money," he said. "But she can't crawl out of this relatively small whole."

Demographics also contribute to bankruptcy filings. "Filing is highest when you have a lot of people in ages of 25 to 29." Lefgren said.

Utah has a large young adult population, many with families.

"These newly formed families are some of the households at the highest risk. Utah probably has a few more of those than other places."

Middle- to low-income households — those earning $30,000 to $60,000 — also have a higher bankruptcy rate.

"If you look at who files for bankruptcy, it tends to be lower-income households and households that have lost their jobs. So there's financial strain. They're more likely to experience medical shock."

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As a result of their research, the BYU authors warn policymakers about programs in which debtors are forced to repay their creditors in unreasonable circumstances.

"When you have a policy that says, 'OK, we're really going to be tough on debtors,' you can try to make people pay, but if they lack the capacity to do it, it's very hard to make them do so," he said. "If you garnishee people's wages, you're going to force them into bankruptcy."

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