Many people are likely unaware of how many entities declare bankruptcy each year. By the end of 2020, 523,917 Americans had filed for bankruptcy. However, the United States isn't a monolith, and regions can be subject to vastly different financial circumstances than their neighbors.
These factors can impact how much credit the average resident or business may need to take on, in addition to potentially making it difficult for them to keep up with their payments. Through looking at bankruptcy rates by state, we can get a better sense of where individuals and companies are—and are not—struggling with debt.
- The bankruptcy rate is a measure of all bankruptcy filings submitted for a select area during a given year.
- At 107, Alaska had the smallest number of cumulative bankruptcy filings in 2021, whereas California's 18,817 was the highest number reported thus far for this period.
- Bankruptcy rates can help us make educated hypotheses 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 unload their financial burden and for creditors to receive some reimbursement for their investment. The petition to initiate this legal proceeding can be filed by either party, though it is more commonly done by the debtor. The debtor's assets are measured and evaluated as part of the process, and then likely are used to repay at least a portion of the outstanding debt.
Anyone considering filing for bankruptcy should be aware that it isn't without consequences. There is always the possibility that a federal judge will rule against the debtor or simply declare them ineligible to file. Additionally, bankruptcy filings will remain on credit reports for 10 years (excluding Chapter 13, which lasts seven years); this will in turn result in a lower credit score.
The bankruptcy rate is a measure of all bankruptcy filings submitted for a select area during a given year. This information is released on a monthly basis by the American Bankruptcy Institute (ABI), which lists the cumulative filings for each U.S. state, territory, and the District of Columbia going back to 2008. The ABI further breaks down this information by the amount and percentage of each of the three most common bankruptcy chapters, in addition to including statistics about how the number of filings differs month-over-month.
Keep in mind that the rate only lists how many people and businesses were able to successfully file for bankruptcy each year, not the total number that actually applied. The official website of the U.S. Courts gives us a slightly clearer picture—a monthly report detailing the number of filed, terminated, and pending bankruptcy cases. Note that the ABI is currently two months ahead of the U.S. Courts.
Differences Among Bankruptcy Chapters
Several different kinds of bankruptcy filings fall under the Bankruptcy Code. As part of the ABI's monthly bankruptcy numbers, the total filings for each state are broken down by which of the three biggest bankruptcy chapters—Chapter 7, Chapter 11, and Chapter 13—they are filed under. Below are descriptions of these chapters, as well as the total number of filings for each one as of May 2021.
- Chapter 7: This chapter applies to anyone (primarily individuals, though businesses can also take advantage of it if they have few to no assets) wishing to be free of unsecured debts (i.e., those not backed by collateral). Nonexempt assets are gathered and sold to repay as much of the unsecured debt as possible. As of May, there were 133,909 Chapter 7 bankruptcies filed in 2021, or 73% of the total amount.
- Chapter 11: This chapter is more commonly filed by businesses and very rarely by individuals. After filing for Chapter 11, companies are able to continue operating while they develop a debt repayment plan under the court's supervision. This gives these businesses a chance to reorganize, as well as to devise new ways to raise revenue and cut costs. As of May, there were 2,108 Chapter 11 bankruptcies filed in 2021, or 1.15% of the total amount.
- Chapter 13: This chapter serves as an alternative to Chapter 7, in the event that an individual or business earns an income high enough to disqualify them from filing for the Chapter 7. Alternatively referred to as a wage earner's plan, Chapter 13 gives debtors more time to repay their creditors while also retaining their nonexempt assets. This is accomplished via 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 long. As of May, there were 46,375 Chapter 13 bankruptcies filed in 2021, or 25% of the total amount.
Additionally, a 2017 report by ProPublica found that Black filers were more likely to choose Chapter 13—steered that way by attorneys who charged $1,000 to file Chapter 7 but lower or no upfront fees to file Chapter 13. As Chapter 13 lacks the same garnishment and debt collector protections as Chapter 7—and sets up repayment plans instead of removing debt—it is ultimately more expensive. Black Chapter 13 filers were also less likely than their White peers to complete their repayment plans.
When nonpayment results in their cases being dismissed—resulting in their protection from creditors being removed—many individuals can become stuck in a cycle of continuously filing for bankruptcy just to keep the lights on. This means losing money due to partially paying back their debts and then having to start over again. Although the study's data was specific to Memphis, the pattern also shows for Black debtors and Chapter 13 filings in the rest of the South, according to ProPublica.
Total bankruptcy filing fees for Chapter 7 and Chapter 13 are $338 and $310, respectively. The average attorney fees for the same chapters are $1,450 and $3,000, respectively. Chapter 7 fees are typically paid upfront, whereas a portion of the Chapter 13 fees will be folded into the repayment plan. This can ultimately make Chapter 13 the only affordable option for some, even if it actually costs more in the long run.
As of May, the total cumulative filings for all U.S. states, territories, and the District of Columbia in 2021 was 182,655. This represents a 15% decrease from the prior month and a 29% decrease year to date (YTD). At 107, Alaska had the fewest cumulative bankruptcy filings in 2021, whereas California's 18,817 was the highest number reported thus far for this same period.
The ABI ranked New Hampshire as having the greatest month-over-month decrease in bankruptcy filings at 35%. Conversely, D.C. had the highest month-over-month increase in bankruptcy filings at 13%. Although Guam had the actual greatest month-over-month increase at 150%, the U.S. territories weren't included in the ABI's ranking.
This percentage is also less impressive when you consider that it means there were fewer than 13 bankruptcy filings in the month prior, based on the 31 cumulative total reported for Guam in May. By comparison, D.C. has 155 filings thus far, and a 13% increase would mean there were fewer than 138 in the previous month. Guam certainly experienced a bigger bump in filings proportionally, but it reported almost the exact same numerical increase as D.C.
On a YTD basis, at 41%, Mississippi has thus far experienced the greatest decrease in bankruptcy filings for all of 2021. Nevada had the highest increase in filings during this same period, though it was just 1% YTD.
A Closer Look at Bankruptcy Rates by State
Bankruptcy rates provide insight into how individuals and businesses in different areas of the U.S. are handling their debt burdens. Of course, we can't directly infer much information with just bankruptcy filings, but they can help us make educated hypotheses based on the number of filings, the rate of increase or decrease, and the type of filings in question.
For example, 92% of New Mexico's bankruptcy filings were Chapter 7, compared to just 0.14% for Chapter 11. Conversely, Delaware's Chapter 7 and Chapter 11 filings were 42% and 39.84%, respectively. From this—given that Chapter 7 filings are typically submitted by individuals whereas businesses generally file under Chapter 11—we can reasonably hypothesize that New Mexico's economic circumstances are more favorable toward companies than toward the general population. Meanwhile, Delaware's percentages seemingly indicate that individuals and companies are facing relatively equal challenges with their debt.
Of course, any conclusions drawn from the ABI data are purely speculative and would require additional research to support them. For instance, 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 are simply not that many businesses operating in the state. However, considering that there were 63,630 filings reported for New Mexico in 2020, the above hypothesis seems far less probable.
Here's one last example of how bankruptcy rates can be used. The number of bankruptcy filings has been declining ever since 2012. The trends almost leveled out in 2016 before dropping dramatically after 2016. In light of the economic impact of the COVID-19 pandemic, it might come as a surprise that total 2021 filings aren't especially high compared to 2020, considering that the data encompasses nearly the entire first half of the year. From this, we can make a few reasonable hypotheses. Potentially the most plausible one is that stimulus payments and other economic measures have kept people and companies afloat enough that they haven't needed to seek bankruptcy protection yet.
The Bottom Line
The excellent performance of all states YTD—as well as the general trend of state bankruptcy filings decreasing month over month, with just North Dakota and D.C. reporting increases—would seem to indicate that the ongoing economic recovery from the COVID-19 pandemic is helping individuals and businesses manage their debts. Of course, bankruptcies were already declining and 2021 isn't over yet. It's entirely possible that we may still see a massive increase in bankruptcy filings by the end of the year as government stimulus and other pandemic assistance initiatives come to an end.