Bankruptcy rates vary alot across states. With a fairly simple statistical model, Lars Lefgren and I explain about 70% of these differences in a paper just published in the Journal of Law and Economics. For cross sectional work using survey data, where you are looking across states at a point in time, explaining 70% is pretty darn impressive.
The leading indicators (and likely causes) are:
1. Wage garnishment laws. Allowing creditors to garnish wages is a very strong predictor of your bankruptcy rate, because once the garnishing starts, the debtor heads to the bankruptcy lawyer. If your state makes garnishing hard or effectively impossible, then the debtor still doesn’t pay his debts, but he need not file a bankruptcy. If you wanted to know the one thing to best predict a state’s bankruptcy rate, it would be their wage garnishment laws.
2. Chapter choice. One can file a chapter 7 bankruptcy and be done with it, or one can file a chapter 13 bankruptcy that lets you keep your assets but requires you to pay back some of your debts over the next several years. People filing bankruptcy, though, tend to have trouble completing these plans, and so 70% of chapter 13’s are not completed. This can send the filer back to court for a _new_ bankruptcy filing — meaning that the same debt creates multiple bankruptcy filings. This then drives up the reported number of “bankruptcies”. Some states’ lawyers and courts funnel debtors into 13’s. Some encourage 7’s. This creates variation in the number of bankruptcy filings.
3. Demographics. Bankruptcy filers tend to be low to middle income and in their late twenties. This is enough time to get some consumer debt and get in trouble, but before you have substantial assets that you would want to protect from a bankruptcy. Student loans, as I recall, are not generally dismissable as part of bankruptcy. Also, family structure matters– like being a single mom or divorced with kids.
The abstract is here , the paper is freely available from the JLE here , or you can read the press release. All in all, the takeaway message is that bankruptcy rate differences across states are more policy noise than a revelation about credit abuse among different state populations. Low bankruptcy rates do not necessarily imply that people are paying back their debts any more than those in high bankruptcy states. In fact, the wage garnishment evidence would suggest the opposite.
More broadly, differences across states in some social outcome may not be telling you what you think they are.