Many people probably don’t know how many entities declare bankruptcy each year. By the end of 2021, 401,293 Americans had filed for bankruptcy. By March 2022, more than 89,000 had applied. However, the United States is not a monolith, and regions may be subject to very different financial circumstances than their neighbors.
These factors can affect the amount of credit the average resident or business may need to accept, in addition to potentially making it difficult to keep track of their payments. By looking at bankruptcy rates by state, we can better understand where individuals and businesses are — and aren’t — struggling with debt.
Key points to remember
- The bankruptcy rate is a measure of all bankruptcy filings submitted for a selected area in a given year.
- At 214, Alaska had the lowest number of cumulative bankruptcy filings in 2021, while California, 39,505, was the highest number reported in the same year. As of March 2022, Alaska still had the fewest deposits at 28 and California still held the highest number at 7,496 deposits.
- Bankruptcy rates can help us make educated guesses about a state’s economy based on the number of filings, the rate of increase or decrease, and the type of filings in question.
Understanding Bankruptcy Rates
For people or businesses unable to repay their outstanding debts, bankruptcy offers a way both for debtors to offload their financial burden and for creditors to receive reimbursement for their investment. The request to initiate this legal procedure can be filed by either party, although it is more often made by the debtor. The debtor’s assets are measured and valued as part of the process, and then are likely used to pay off at least some of the outstanding debt.
Anyone considering declaring bankruptcy should be aware that this is not without consequences. There is always the possibility of a federal judge ruling against the debtor or simply declaring them ineligible to file. Additionally, bankruptcy filings will remain on credit reports for 10 years (with the exception of Chapter 13, which lasts seven years); this will in turn lead to a lower credit rating.
The bankruptcy rate is a measure of all bankruptcy filings submitted for a selected area in a given year. This information is published on a monthly basis by the American Bankruptcy Institute (ABI), which lists cumulative deposits for each US state, territory and the District of Columbia. The ABI further breaks down this information by amount and percentage of each of the three most common chapters of bankruptcy, in addition to including statistics on how the number of filings differs from month to month.
Keep in mind that the rate only shows the number of people and businesses that successfully filed for bankruptcy each year, not the total number that actually applied. The official US Courts website gives us a bit of a clearer picture – a monthly report detailing the number of bankruptcy cases filed, terminated, and pending. Note that US courts are currently three months ahead of the ABI.
Differences Between Bankruptcy Chapters
Several types of bankruptcy filings fall under the Bankruptcy Code. As part of the ABI’s monthly bankruptcy figures, the total number of filings for each state is broken down by which of the three largest bankruptcy chapters — Chapter 7, Chapter 11 and Chapter 13 — they are filing. Below are descriptions of these chapters, along with the total number of filings for each as of March 2022.
- Chapter 7: This chapter applies to anyone (primarily individuals, although businesses can also benefit if they have little or no assets) wishing to free themselves from unsecured debt (i.e. those that are not not guaranteed by warranties). Non-exempt assets are collected and sold to pay off as much unsecured debt as possible. As of March, 53,895 Chapter 7 bankruptcies had been filed in 2022, or 60% of the total amount.
- Chapter 11: This chapter is more commonly filed by companies and very rarely by individuals. After filing Chapter 11, businesses can continue to operate while they develop a court-supervised debt repayment plan. This gives these businesses a chance to reorganize, as well as devise new ways to increase revenue and reduce costs. As of March, 904 Chapter 11 bankruptcies had been filed in 2022, or 1.01% of the total amount.
- Chapter 13: This chapter serves as an alternative to chapter 7, in the event that an individual or business earns enough income to disqualify them from filing chapter 7. their creditors while retaining their non-exempt assets. This is accomplished through a reorganization of the debtor’s finances under the supervision and approval of the courts to create a short-term repayment plan, typically three to five years. As of March, 34,367 Chapter 13 bankruptcies had been filed in 2022, or 39% of the total amount.
Additionally, a 2017 report by ProPublica found that black filers were more likely to choose Chapter 13, led that way by attorneys who charged $1,000 to file Chapter 7 but lower or no upfront fees to file. Chapter 13. Since Chapter 13 doesn’t have the same garnishment and debt collector protections as Chapter 7 – and sets up repayment plans instead of removing the debt – it’s ultimately more expensive . Black Chapter 13 filers were also less likely than their white peers to complete their repayment plans.
When non-payment results in their case being dismissed, which results in the removal of their protection from creditors, many people can find themselves stuck in a cycle of continuous filing for bankruptcy just to keep the lights on. This means losing money due to partial repayment of their debts and then having to start over. While the study’s data is specific to Memphis, the pattern also appears for black debtors and Chapter 13 filings in the rest of the South.
The total bankruptcy filing fees for Chapter 7 and Chapter 13 are $338 and $310, respectively. Average attorney fees for the same chapters are $1,450 and $3,000, respectively. Chapter 7 fees are usually paid upfront, while a portion of Chapter 13 fees will be rolled into the repayment plan. This may ultimately make Chapter 13 the only affordable option for some, even if it actually costs more in the long run.
Other notable bankruptcy chapters include Chapter 9, Chapter 12, and Chapter 15. The ABI dataset, however, does not include any information on the total number of filings under these chapters.
Breakdown State by State
In March, the total number of cumulative filings for all states, territories and the District of Columbia in 2022 was 89,224. This represents an increase of 34% from the previous month and a decrease of 17% since the beginning of the year (YTD). At 28, Alaska had the fewest cumulative bankruptcy filings in 2022, while California, 7,496, was the highest number reported so far for the same period.
The ABI ranked Alaska as having the largest month-over-month decrease in 0% bankruptcy filings. Conversely, Maine saw the largest month-over-month increase in 100% bankruptcy filings.
On a YTD basis, at minus 58%, Delaware has seen the largest decrease in bankruptcy filings for all of 2022 so far. even if it was only 9% since the beginning of the year. Although Guam recorded the largest real year-to-date decline of minus 67%, US territories were not included in the ABI’s ranking.
A closer look at bankruptcy rates by state
Bankruptcy rates provide insight into how individuals and businesses in different parts of the United States are managing their debt burdens. Of course, we can’t directly infer a lot of information with bankruptcy filings alone, but they can help us make educated guesses based on the number of filings, the rate of increase or decrease, and the type of filings. in question.
For example, 83% of New Mexico’s bankruptcy filings were Chapter 7, compared to only 0.7% for Chapter 11. Conversely, Delaware’s Chapter 7 and Chapter 11 filings were 53% and 13%, respectively. From this, since Chapter 7 filings are typically submitted by individuals whereas corporations typically file under Chapter 11, we can reasonably assume that New Mexico’s economic situation is more business-friendly than it is. to the general population. Meanwhile, Delaware’s percentages apparently indicate both are facing issues with their debt; however, businesses appear to be in less trouble than individuals.
Of course, any conclusions drawn from the ABI data are purely speculative and would require further research to substantiate them. For example, another possible conclusion one might draw from New Mexico’s bankruptcy rates is that the percentage of Chapter 11 filings is so low because there simply aren’t many businesses. operating in the state. However, given that there were 66,505 reported deposits for New Mexico in 2021, the above hypothesis seems much less likely.
Here is a final example of how bankruptcy rates can be used. The number of bankruptcy filings has been declining since 2013. The trends almost leveled off in 2016 before falling dramatically after 2016. Given the economic impact of the COVID-19 pandemic, it might come as a surprise that the total 2021 filings are not particularly high compared to 2020, given that the data covers almost all of the first half of the year. From this, we can make some reasonable assumptions. The most plausible is potentially that stimulus payments and other economic measures have kept people and businesses afloat enough that they haven’t yet needed to file for bankruptcy protection.
The strong year-to-date performance of all states – with only Louisiana, Tennessee and Mississippi reporting increases – would seem to indicate that the economic recovery from the COVID-19 pandemic has helped individuals and businesses manage their debts. Of course, bankruptcies were already down and 2022 isn’t over yet. It is entirely possible that we will still see a massive increase in bankruptcy filings by the end of the year, as government stimulus measures and other pandemic relief initiatives come to an end.