“Are Mormons Bankrupting Utah?”

57 comments for ““Are Mormons Bankrupting Utah?””

1. Nate, great topic. I’ve got a paper on cross-state bankruptcy (not specifically the Mormon connection) that I am hoping will come out in the Journal of Law and Economics in the next year.

   It is pretty clear that: the three things that matter for cross-state variation in bankruptcy are:

   1. General demographics such as race, age, and family status.
   2. The tendency to file chapter 13, which varies widely across states.
   3. How easy it is to garnish wages in that state.

   Even with measurement error in the variables (especially the third), we can account for about 70% of the cross-state variation. Mormonism is a non-starter (I checked– although for this I like their data better). Homestead exemptions don’t matter at all, nor does payday lending or the size of the public safety net (UI and welfare generosity). I think Warren’s hardship stuff misses the boat because everybody has hardship– bankrupt or not.

   Even accounting for all this, Utah still has a high bankruptcy rate, but my best guess is that is because our variables cannot capture all the institutional details of creditor-debtor interaction. Thus, rather than a hokey Mormonism story, the place to look is in the laws governing
   repossession/garnishment and other institutional detail.

   I can send the paper to anybody interested.

2. 2004 also seems an odd year to choose—as best as I can tell, that was the peak of Utah’s bankruptcy filings (they were 5th for per capita filings in 2004, see http://www.morganquitno.com/SR05sam1.pdf — the ABI rankings, which are by household, can only be accessed with a paid subscription). In 2004, Utah per capita filings were a little less than twice the national average. In 2006, however, Utah was 20th per capita (www.morganquitno.com/SR07sam1.pdf), at 382 per 100,000 (as opposed to a national average of 360).

   I don’t follow bankruptcy carefully, but the numbers in 2004 are so out of whack with the numbers in 2006 that (unless people took to heart some sort of Church counsel), I’m not sure what value the 2004 numbers have.

3. Sam,

   2006 is after the new law change in the end of 2005. The law drastically reduced the number of filings. Both years are interesting (and 2004 is pretty normal for the pre-law years), but definitely capturing different things. Our paper is pre-reform centering on 2000 and recovers the high Utah rate as well.

   Also, I had not looked at the 2006 Utah numbers, that is interesting that they fell so much more than the average. Which, once again, I think points towards institutional detail as being important.

4. The problem is that they’ve defined Mormon economics in Utah in terms of number of children and tithing. If that were the cause of the bankruptcy, then Mormons everywhere would be over-represented in bankruptcy filings, because they average more kids and are more likely to pay tithing

   The reason why there’s so much bankruptcy in Utah is because people buy houses that are too expensive and they buy too many toys. So what if non-Mormons do it at a slightly higher rate than Mormons, the Mormons still do it in Utah more than anyone in the US does it anywhere. The bottom line: Whether you’re a Mormon or a non-Mormon, Utah is one messed up place.

5. “The reason why there’s so much bankruptcy in Utah is because people buy houses that are too expensive and they buy too many toys. So what if non-Mormons do it at a slightly higher rate than Mormons, the Mormons still do it in Utah more than anyone in the US does it anywhere. The bottom line: Whether you’re a Mormon or a non-Mormon, Utah is one messed up place. ”

   Actually, my understandign is that it looks as though houses and expensive toys have compartively little to do wtih bankrtupcy filings in Utah. In other words, you can look at this data and the unusually high bankruptcy filings in Utah don’t correlate with unusually high levels of home mortgage or consumer debt. Do you have any actual data suggesting that home mortgage and consumer debt is higher among Utah Mormons than among “anyone in the US . . . anywhere”?

   The garnishment law story makes more sense to me. Utah law makes it easier for creditors to get at the wealth of Utah debtors. Filing for bankruptcy cuts off these state law remedies. Accordingly, those with precisely the same debt profile will file for bankruptcy more frequently in Utah than elsewhere because the benefit of doing so — i.e. the automatic stay’s protection from state collection proceedings — is greater in Utah than elsewhere. What you are seeing if the effect of the strange interaction between state and federal law in the bankruptcy code.

6. Frank,
   I thought about the new law, but in both years, the number one per capita state was about twice the national per capita average (i.e., everybody’s numbers fell). I just thought it interesting that Utah fell so relatively precipitously, even given the change in law. Which means I agree that there’s something institutional at work in these numbers. I admit, though, that I haven’t looked exhaustively (or even in any pretend amount of detail) at trends pre-2004. My research was mostly casual research preparing for an Elders Quorum lesson so that, if anyone brought up the Utahns-are-all-overconsuming-bankruptcy-filers argument, I’d have some sort of data with which to respond.

7. (Oh, and Frank, we cross-posted on #s 1 and 2. I mistyped when I said I didn’t know what value 2004 had; rather, I think it’s interesting to look at in light of the change. But I also didn’t know 2004 was typical for pre-bankruptcy-reform.)

8. I wonder if you could tease out some of the effects of creditor-debtor interaction by looking at the details of the changes in the law. IOW, you could look at shifts in filing rates across states before and after the law and then try to attribute changes in rank to particular provisions, e.g. credit counselling had a big effect in N.C. but not in Alaska, etc. etc.

9. Sam, I agree that Utah’s relative fall is interesting (and not forecastable). Maybe I can write a paper about it…

10. Another point worth making is taht bankruptcy filing rates are not the same thing as rates of finacial distress. One could have comparatively little financial distress and high filing rates or high filing rates and comparatively little financial distress depending on debt collection laws and practices, demographics, etc. Bankruptcy is a particular bundle of legal procedures. Sometimes it makes sense to use them and sometimes it does not, and the decision to do so is often complicated.

    For example, if I am judgment proof and simply do nothing in most states I will get the equivalent of a discharge of indebtedness in about five years, when the statute of limitations on my previous debts will have run. If I am not facing any collection efforts, why bother with the expense of bankruptcy filing?

11. “If I am not facing any collection efforts, why bother with the expense of bankruptcy filing?”

    This effectively explains North and South Carolina, Alaska, and several other states.

12. FYI:

    I just created this KML file of the top 500 foreclosure zipcodes as of yesterday:

    http://bbs.keyhole.com/ubb/showthreaded.php/Cat/0/Number/926345/an/0/page/0#926345

    None in Utah at the moment (in the top 500)

13. Testing… 1.2.3…

14. I tried to post the link to a KML file I made of the top 500 foreclosure zipcodes as of yesterday but I guess it didn’t take. So just click my name to see that none of Utah’s zipcodes are currently in the top 500. Food for thought…

15. Foreclosure is a whole ‘nother ball of wax, and in the recent market, low foreclosure does not mean low financial distress. Utah housing values have dramatically increased in the last few years. Thus a person in distress who could not make payments a few years ago would now be able to sell the home quickly, and at some profit, or refinance and tap out the equity.

16. You make a good point. Foreclosure (and better yet ‘pre-foreclosure’ sales) can actually be a good way to stave off bankruptcy. I wonder if some of the bankruptcies could reflect an attempt to avoid foreclosure at all costs.

17. How is the local housing market faring in Utah?

    The collapse of the subprime market has been predicted to eventually hit all sectors of the housing market, depressing home values. Yet, it can be expected that there will be isolated pockets and hold-outs of localized appreciating housing values. Perhaps Utah is one of those?

    Here in Colorado, the housing market is in bad shape. People have For Sale signs sitting in their yards for years, with no buyers. I’ve had a couple clients who’ve had to file simply because they couldn’t find a buyer.

    It’s widely felt that the 2005 law did not have much impact on bankruptcy filings. And the steadily increasing national rate of filing seems to bear this out. There is still a residual misconception among Americans that 2005 made bankruptcy “no longer an option” (a mis perception encouraged by unscrupulous collection agents). But the statistics seem to show that somewhere over 90% of those who could get a Chapter 7 under the old law, can still get one under the new law. The Credit Counseling requirement is an absolute joke and just busywork for the debtor, but it only costs about $50 and you can do it online in about 45 minutes, so I don’t consider it a big deal. Increased filing fees are also not so huge as to make a big difference. The Means Test has been catching a few debtors and forcing them into Chapter 13, but it’s really not that many.

    The biggest impact the law had was that it effectively doubled attorney’s fees. In Colorado, you used to be able to get a Chapter 7 for about $750. That’s now doubled to $1,500 on average. The law simply created so much extra attorney liability and busywork that doubled fees were the result.

    This effect of the 2005 law actually does impact the debtors. It makes legal representation unaffordable for many. But I doubt even this really impacts the filing rate too drastically. But it does mean that more debtors are trying to file pro se (on their own) or, even worse, going to those guys who advertise on talk radio.

    As far as Utah’s exemptions go, I skimmed over them. They’re a bit on the stingy side for some key items (like housing, vehicles, and tools of the trade). They don’t appear to be as generous as Colorado’s. But they are quite a bit more generous than some states, like North Carolina. So perhaps they are middle of the pack? Can’t say much as to garnishment laws, but I can’t imagine that a predominantly Republican western state with an aggressively growing business sector has any consumer protections worth spit in the sagebrush. But I wouldn’t know.

18. Seth, even if the housing sales have weakened, the paper value on homes is much more than it was when I was there, 3 years ago, so you can go to a bank and borrow more to finance your first mortgage. Which will lead to problems down the line, but in the short term…

    I would be curious as to the impact of geographic stability, or ties that people feel to a place. I know many of my acquantainces have sacrificed financially in order to stay in Utah (either to be close to family or to be “in zion”). While we would expect to see that in other places (manhattan, LA, small towns etc), I wonder if the extent is greater in Utah. Also a tie to a large area like So Cal, NYC etc means increased expenses but also increased opportunities. Not necessarily so for Utah. Anyway, I will have to develop it further, but I wondered if anyone had thoughts along these lines.

19. Giasen wrote:

    “I wonder if some of the bankruptcies could reflect an attempt to avoid foreclosure at all costs.”

    Yes, that is what often drives debtors to file. But realistically, I think it’s of limited effectiveness. If you’re behind on your payments (almost a given with an impending foreclosure), a Chapter 7 bankruptcy probably will not save your house. It will delay the foreclosure, and it’s possible to game the system to reset the redemption periods and make the bank start all over with the foreclosure process and drag out the amount of time you can stay in the house (although that better not be the only reason you filed, or you could face fraud charges). But it generally only prolongs the inevitable.

    Chapter 13 can work if you actually have enough income to continue making house payments once the other unsecured debts are either eliminated or greatly reduced in the payment plan. But the failure rate of Chapter 13 bankruptcies is very high (I’ve heard a figure of as high as 80%, but maybe Frank can confirm or deny that).

    And if you don’t have any remaining equity in the house, what’s the point of stopping the foreclosure anyway?

20. Seth R.: I went to a faculty workshop a couple of weeks ago on bankruptcy filing rates, and as I recall there was a pretty big drop off in filings dur to the 2005 law. Now part of that was the fact that there was a big spike in filings right before the law was passed, presumeably because lawyers told potential clients horror stories of the benefits they would lose if they didn’t file immediately. Still, I recall that it was pretty obvious that there was a big effect due to the reform act.

    Also, I think that some homeowners will file for Chapter 7s and hang on to their houses by reaffirming the debts to the bank post-discharge. Still, I think that you are right that bankruptcy is not a good way of hanging onto a house. If you are insolvent, you probably simply need to get cheaper housing….

21. Frank, my understanding was that the lull in bankruptcies during 2006 was largely due to the October 2005 “run on the courts” and not due to any particular virtue of the law. Rates have been steadily recovering, indicating that any impact of the law was largely temporary.

    I also suspect that the law was widely perceived to have more bite than it actually did. Lots of people THINK bankruptcy literally “went away.” This is absolutely not the case, but even Consumer Reports in late 2005 was all gloom and doom. Consumer bankruptcy attorneys didn’t help matters by aggressively advertising “file now before the law changes!”

    I would imagine that with Utah’s highly organized community structure, via the LDS Church, such rumors could spread more quickly?

22. Seth: “But the failure rate of Chapter 13 bankruptcies is very high (I’ve heard a figure of as high as 80%, but maybe Frank can confirm or deny that).”

    80% might be a little high, but not crazy. It varies by state.

23. I think if the bank is demanding a reaffirmation on the house, you’re better off going into a Chapter 13 – assuming again that there’s any equity to protect.

    You might be right about the law having an impact. But I still think it’s due to temporary factors, rather than any virtue of the law itself (which, despite the US Trustee’s best efforts, is mostly window-dressing).

24. Frank,

    I’d like a copy of your paper.

25. If anybody has any bankruptcy data (preferably sortable by a location such as zipcode, county, or state) that I can play with, let me know. Might even be able to toss in a religious dimension to it based on some type of census style data…

    the link in the post didn’t work for me.

26. Nate, your statement confuses me. The purpose of declaring bankruptcy is to obtain debt relief. If it’s not home mortgages and consumer debt loads, then what is it? Unusually high utility bills that they can’t pay?

    You say that Utah law does a better job of forcing those in debt to pay for what they’ve bought, which means that there’s a higher incentive to obtain federal debt relief. So while people everywhere are stiffing their creditors at the same rate, those in Utah are simply doing it by declaring bankruptcy. This has a surface-level plausibility that breaks apart once you look more closely. Specifically, it makes Utah seem fairly normal, when (as everybody knows) Utah is one messed up place.

    In my opinion, bankruptcy laws should be _much_ more strict than they currently are. Until some fraction of the population begins to fear a possible conflict between the legal requirements to repay debt and the 13th amendment, then we don’t have very good bankruptcy law.

27. Frank and Nate,

    One thing a comprehensive study of bankruptcy filing rates should take into account is localized bankruptcy practices among attorneys who do bankruptcy work. These practices can vary from state to state, and I’d imagine that each bankruptcy bar has it’s own quirks and personality. The bankruptcy bar tends to be very small in most states, and the stance of even a few key practitioners can have a big impact on the process in their state.

    I will say, that lawyers are a highly risk-averse and conservative bunch, and the 2005 law change pretty-much scared the tar out of them. There was a bit of a stampede of lawyers trying to get out of bankruptcy practice. This undoubtedly made it harder to find legal representation and probably contributed to popular notions that bankruptcy is no longer available. The dedicated bankruptcy practitioners stuck it out in most cases, but the dabblers are a much rarer sight now. It used to be that bankruptcy was a good third leg of a generalist legal practice (right after wills and divorces). Not anymore.

    I think it was an overreaction and the panic wasn’t all that warranted. But then, I’m one of those crazy entrepreneurs who saw the exodus from bankruptcy practice as a good opportunity to get my own practice established. Jury is still out on whether I was right or not.

28. Giasen,

    ICPSR has county level data, but zip code is not publicly available (you have to buy it).

    Seth, I’ll send a copy.

    DKL,

    “So while people everywhere are stiffing their creditors at the same rate, those in Utah are simply doing it by declaring bankruptcy.”

    This is almost right. The rates are still not identical. Just much closer than you think. In fact, it is not clear offhand where the rates of default are higher– Utah or places banning wage garnishment.

    “Specifically, it makes Utah seem fairly normal, when (as everybody knows) Utah is one messed up place.”

    Proof by “as everybody knows”.

29. “This has a surface-level plausibility that breaks apart once you look more closely. Specifically, it makes Utah seem fairly normal, when (as everybody knows) Utah is one messed up place.”

    I bow to your indomitable powers of reason DKL.

30. Seth,

    I heard that the largest bankruptcy firm in Utah exited after the law changed.

31. Actually that makes sense Frank.

    You said it was a “large” firm. Larger firms also tend to have very large overhead expenses. As a result, they pretty-much have to do high volume of filings to generate sufficient revenue. This means they are operating on very tight profit margins. A law change doubling the amount of work you have to do per bankruptcy, might well have been too much for them.

32. “Larger firms also tend to have very large overhead expenses.”

    Along these lines, apparently, exiting the industry allowed them to exit their advertising contracts, which were no doubt substantial.

33. “Nate, your statement confuses me. The purpose of declaring bankruptcy is to obtain debt relief. If it’s not home mortgages and consumer debt loads, then what is it? Unusually high utility bills that they can’t pay?”

    Two points. First, often times the purpose of declaring bankruptcy is less to obtain debt relief than to stop debt collection. There are lots and lots and lots of people in massive amounts of debt that no one is trying to collect against. These people don’t file for bankruptcy, even though it would discharge their indebtedness. Furthermore, because debt is a legal claim to repayment in the form of a lawsuit it does not last forever. If a creditor sits of their legal rights for a number of years they lose them under the statute of limitations. In other words, if everyone (creditor and debtor) simply does nothing, then debt goes away. Put more simply, “getting rid of debt” can’t explain why some insolvent people file for bankruptcy and some do not. Lots of insolvent people (most of them in all probability) never file for bankruptcy.

    Second, often times people in bankruptcy discharge consumer and home mortgage debt, but there is a good deal of research suggesting that they generally file because there is a large and unexpected debt that results in collection proceedings. One very common culprit is medical expenses.

    As for tougher bankruptcy laws, I am less certain than you are. Most lenders are extremely sophisticated and are very good at forecasting the risk of potential debtors and then pricing their loan accordingly. In other words, the lenders insure against bankruptcy loss via interest rates. Of course the insurance premium that debtors must pay for the risk created by their bankruptcy rights is more or less inalienable, since we don’t let people contract out of bankruptcy. Hence, I wouldn’t necessarily object to keeping a generous bankruptcy system but allowing debtor’s and creditor’s to opt out of it. There is a sense in which we allow this in large, corporate transactions through certain kinds of asset securitization, but it is an imperfect opt out and its complexity places it beyond the reach of ordinary consumers. Of course, if we did allow consumers to opt out of bankruptcy, I am not sure that it would make much difference on their interests rates, as I suspect that bankruptcy doesn’t necessarily have a huge influence on default rates. Put in other terms, I suspect that debts written off by lenders in bankruptcy would be written off anyway because outside of bankruptcy the cost of recovery against largely assetless debtors is simply too high. Even if we think creditors should be able to squeeze the last drop of blood out of debtors, if there is no blood there squeezing harder doesn’t make a heck of a lot of difference.

34. Bankruptcy is also of limited use in dealing with utility bills.

    Sure, you get the debt discharged. But they also cut off your heat.

35. Seth R.: I know that my old firm — Sidley Austin LLP — instituted a per se firm policy against personal bankruptcy work after the 2005 Act, although I don’t think that they did much personal bankruptcy work before the Act. The corporate bankruptcy practice, of course, remained although we did mainly creditor side work.

36. Nate, problem is, even with the new law, the creditors haven’t dropped their interest rates.

    It’s the same old story every time we have an industry arguing for more favorable legislation on grounds of economic impact to consumers or the economy –

    The legislation passes, and the rates don’t change. It happened with tort reform, it happened with malpractice caps, and now it’s happening with bankruptcy law.

    Amazing.

    Guess it never occurred to anyone that the industry didn’t really have any real incentive to drop prices once the law passed.

37. Seth R.: They have an incentive if there is competition between lenders. I suspect that the real answer is that it may turn out that the bankruptcy filing rate is not a particularlly good proxy for default, and that pushing people out of bankruptcy doesn’t mean that they pay their debts. It simply means that debtors and creditors hang out in limbo until the debts are wiped out by the statute of limitations. The horror of this system, however, is that fewer people are hiring bankruptcy attorneys!

38. Ahh, one of the black-hats eh?

    I think one of the major problems with the new law was the advertising requirements it imposed on law firms. Technically, if even one of Sidley’s lawyers so much as counseled a debtor regarding bankruptcy, the ENTIRE FIRM would be required to include a paragraph of statutorily mandated disclosures on ALL of its advertising.

    Of course, the statutory requirement has been ruled unconstitutional by at least 3 state supreme courts, but none of us knew that a year ago. Just one of the highlights of the new law.

    As for the pro se problem, it’s driving the trustees and the judges absolutely bonkers. For a judge, having to deal with a pro se debtor is kind of like a low-grade version of hell. Not to mention, it’s just a poor way to handle the court system.

    P.S. Actually, I’m kidding about the “black-hats.” I’ve found bankruptcy to be an extremely collegial professional community on both debtor and creditor side. We largely get along very well.

    Now, the US Trustee office on the other hand….

39. Nate: As for tougher bankruptcy laws, I am less certain than you are. Most lenders are extremely sophisticated and are very good at forecasting the risk of potential debtors and then pricing their loan accordingly. In other words, the lenders insure against bankruptcy loss via interest rates.

    Lenders aren’t the only people who get screwed when people declare bankruptcy. Regarding health care, you get what you pay for. If it saved someone’s life, why shouldn’t they pay a pretty penny for it. If the alternative is being dead, I think working the rest of one’s life to pay it off is decent compensation.

    It’s worth noting that when Harry Truman’s haberdashery went out of business, rather than declare personal bankruptcy, he took on personally about $30,000 (in 1920s dollars) of early debt personally in order to make sure that everybody got paid. Nowadays, it’s OK just to kick creditors in the teeth, because folks like you talk about insuring against bad debt with interest rates.

40. Thanks for the link Seth. It led me over to the US Bankruptcy courtes site. According to this “2006 Calendar Year by Chapter (xls) ” at the uscourts dot gov Utah is in the 10th Circuit along with Colorado, Kansas, and a few other states with lower totals & per capitas for bankruptcy.

    Using estimated populations from the US Census bureau I get 1 bankruptcy for every 476 people in Colorado, 1 for every 435 people in Kansas, and 1 in every 475 for Utah last calendar year.

    What would Ezekiel Johnson & James Wright say about Kansas, not to mention the rest of the US bankruptcy court circuits? I understand Kansas is predominantly Methodist.

41. Actually DKL, the creditors don’t take any financial hit at all when you don’t pay. They’re actually heavily insured against defaulting debtors. The insurance plans are sold on the stock market. You could buy into one right now, if you’re hoping to diversify your portfolio…

    The bad thing about this is that it gives the major lenders little incentive to lend responsibly. In fact, major lenders actively solicit bad credit risks at a higher rate than they solicit those with good credit. The reason is that bad credit risks tend to miss payments. At that point you can nail them with various fees and 33% interest rates. Most of the credit card lenders’ profit margin actually comes from fees and penalties. So the bad credit risks are actually the ones who pay the bills for Visa and Mastercard.

    Of course, this simply passes the financial hit from the creditors to the stock market, but let’s not waste any sympathy on major lenders shall we? The days when Joe grocer down the street didn’t eat if you didn’t pay are long gone, along with Harry Truman, much as we may wish both were still with us (especially Truman).

42. Regarding health care, you get what you pay for. If it saved someone’s life, why shouldn’t they pay a pretty penny for it. If the alternative is being dead, I think working the rest of one’s life to pay it off is decent compensation.

    Good point, unless they saved your life but you still can’t work. Nobody pays you just to breathe, so if you’re totally disabled, you still can’t pay the medical bills. Disabled people also continue to rack up medical bills that they can’t pay for, because they can’t work. Their family members can’t put in extra hours at work, because they have to care for a disabled person. And no insurance company in the world will take you on or increase existing coverage.

    Did any of those articles talk about how many bankruptcies are attributable to health care costs? Of the four people I know personally (here in Utah) who have filed bankruptcy, two were due to medical bills. One person was completely disabled and never worked again. The other one returned to full health but still never earned a penny because she was a SAHM.

    A couple years ago, there were several newspaper articles about how Utah’s biggest local health care provider (IHC) was driving people into bankruptcy by their aggressive collection practices. I don’t know how that issue played out.

43. And moreover… the great state of Tennessee weighs in at a hefty 1 bankruptcy for every 189 people. Utah ranks 20th among the states (including DC). Lowest bankruptcies per capita can be found in the tropical island paradise of Hawaii at 1 for every 1,332 people. It appears to me that Tennessee is mainly Southern Baptist and Hawaii United Church of Christ. For whatever any of that is worth…

44. “Lenders and Finance companies are the scourge on this great nation.” ?

    I imagine quite a few of us work for ‘the scourge’. I borrowed for my car and my education and paid them both off promptly. The only debt I have now is a mortgage, much like what I imagine most of the posters here have. I bet most of the people here also invest. even it if is only a savings account, the bank loans your money to somebody else and pays (very) modest interest. I think most people pay AND earn interest. Perhaps you meant something else.

45. Seth R, my point is that Bankruptcy is dishonorable, a fact still recognized in Truman’s time. Furthermore, nothing you says addresses the fact that it’s not just lenders who don’t get paid in bankruptcy.

46. Didn’t claim otherwise DKL.

    Incidentally, isn’t there a prohibition on usury in the Old Testament? I think modern lending practices would probably qualify…

    Still doesn’t defend borrowing, but I’m just saying we’d best not waste tears on lenders generally.

47. Seth R, the way that the Old Testament uses the term usury, it means any interest at all. The economics of loans and the time-value of money weren’t understood as recently as the Renaissance, and Aquinas spills quite a lot of ink arguing that nobody should ever charge interest. Nowadays, we’ve redefined usury to mean undo interest, but the truth is that the prohibition on usury is altogether repudiated, because it’s based on the economic understanding of primitive tribes.

48. In the Summer 1987 issue of “Dialogue” I wrote a review essay titled “Move Over Fortune ‘500’” that dealt with Heinerman and Shupe’s conspiracy-oriented 1986 book, “The Mormon Corporate Empire.” In the course of that essay I mentioned two quite different studies dealing with financial behavior in Utah — principally commercial fraud — not mentioned in the book that may possibly have some bearing on the propensity of Utahns to file for personal bankruptcy in this day and age:
    (1) An article in the June 20, 1983 issue of “Forbes” (p. 33) that noted that in recent years at least ten separate swindles had been uncovered in Utah invvolving more than 9,000 people (then 1% of Utah’s adults) and losses estimated at more than $200 million. In asking the “why” question, the “Forbes” reporter described Utah as “fertile soil for swindles” because of excessive trust among LDS Church members: “Most of those bilked are Mormons, and the bilkers, too, profess to be upstanding members of the church and use church connections.”
    (2) The December 1984 report of the Securities Fraud Task Force commissioned by Gov. Scott M. Matheson that noted with alarm that “the appeal of Utah to legitinate new business has been seriously undermined because of its unfavorable reputation for securities fraud.” The task force then went on to note that “Utah’s citizens also appear more susceptible to fraudulent schemes than people in most other states…[They] rely…on personal and religious relationships. Several investment schemes have relied directly or indirectly upon religious affiliations…members of the Church of Jesus Christ of Latter-day Saints are particularly susceptible to various schemes because faith in one another spawns promoters [who] take advantage of ‘the Mormon Connection.’ ”
    These two reports — one by a leading national business magazine and the other from a Utah gubernatorial task force — are now more than twenty years old. Is the commercial fraud profiile of Utah any different today? In light of this admittedly outdated material and discussion here re a recent disproportionate propensity of Utahns to file for personal bankruptcy, is there something going on in Utah’s financial culture worth thinking about? Or is this a “no problem” situation?

49. I don’t know, but the entrepreneurial impulse seems fairly robust in Utah.

    Considering the high failure rate for startup businesses (I’m pretty sure it’s at least over half), this could contribute to the insolvency rate.

    I’ve always personally felt that the bankruptcy system was one of the prices we pay for a viable entrepreneurial system.

50. “Regarding health care, you get what you pay for. If it saved someone’s life, why shouldn’t they pay a pretty penny for it.”

    That may be true in certain countries, but I doubt the inefficient US health care system is really capable of matching costs with benefits.

    But there is a third way that makes excellent health care available to everyone (though admittedly super-duper, platinum-coated health care is reserved for the rich no matter where one lives) without bankrupting any of them. 9% of my (and every other employed person’s) gross salary is deducted, matched by my employer (required by law) and transferred to the good folks at the local social insurance group. When my life needs saving, it costs nothing in additional pennies, pretty or not. If I’m not sick, I continue to pay (the familiar insurance principle). If I were unemployed, I would continue to be covered. But since I like consumer goods and no one gives them to me when I am out of work, I stay employed, healthy (all that food on the table and sporting equipment), and solvent.

    The system does run a deficit, which could be covered in its entirety if all employers met their legal obligations to provide accurate and timely transfers. In other words, it’s not broke, but does suffer from dishonorable and illegal business practices.

51. I am not so sure that bankruptcy is dishonorable. One advantage of generous bankruptcy laws is that they tend to make people less risk adverse. It may will be that this lower risk adversion increases overall social wealth (afterall society diversifies away the risk). If you look at continental Europe, for example, they have very harsh bankruptcy laws compared to the U.S. One result is that entrepreneurs and businesspeople tend to be more risk adverse and there are far fewer start up companies. For my money, I think that high corporate mortality rates and the ability of people to start over relatively easily is good for the economy. With Seth R. I don’t shed many tears for sophisticated lenders (involuntary creditors like tort victims are another matter), but I also don’t view them as the scum of the earth. On the whole, I think that the democratization of credit is a good thing, particularlly in a world where the most valuable asset most people have is their labor.

52. Re Nate’s #52 (“…in a world where the most valuable asset most people have is their labor”) I think we’re overlooking the even more paramount importance of reputation, either as a corporation or an individual. Like Nate, I wouldn’t subscribe to the ethic of an older generation that bankruptcy is “dishonorable” (I think often it’s just an inescapable, calamitous necessity) but in my view it certainly shouldn’t be viewed as just a ho-hum part of the economic/legal/reputational landscape. It’s a serious step and, if taken casually/cavalierly rather than as a step of last resort, I worry about the erosion of personal and reputational standards of behavior. Just because those left holding the bag are usually corporations and financial institutions shouldn’t justify a casual approach to bankruptcy.(Are we hearing on this subject more from attorneys comfortable with the bankruptcy process and therefore more apt to view such an event in a fashion more relaxed than non-lawyers?) How should we feel about the creditors’ position when an individual files for bankruptcy, emerges from the proceeding, and goes on to make a pile? Last night I read about Harry Truman’s 1920s brush with business failure re his famous Kansas City haberdashery. I don’t know whether he and his partner filed for bankruptcy or wound up the business in some other way, but Truman took on $30,000 (in 1920s dollars) of debt to pay his creditors over time. “He who steals my purse steals trash, but….”

53. [Reference to previously deleted advertising comment removed]

    As far as the debt management industry is concerned, tread lightly. There is a ton of fraud going on in this industry. For many debtors, the companies add no extra value, you sign up for their services, pay them your money, and all they do is make phone calls you could have made yourself.

    These people, by law, are not allowed to give “legal advice” (although many violate the law and do it anyway). And when they do give advice, it’s often bad advice (such as using home equity you could have saved completely in bankruptcy to pay off credit card bills).

    Furthermore, a great many of these agencies are receiving financial kickbacks from major lenders like MBNA. The “non-profit” label is largely a mere IRS formality. The financial kickbacks often provide these organizations with a direct incentive to steer people into inappropriate debt repayment plans and discourage bankruptcy.

    They also claim to have particular sway with creditors. I think this is largely bogus and they don’t have any more influence with your creditors than you do. And many major lenders won’t even negotiate with you anyway.

    To top it off, be aware that when one of your creditors agrees to “write-off” or “forgive” a portion of your debt, the IRS considers that “taxable income.” Debts discharged in bankruptcy are not considered “taxable income.”

    If you have a manageable amount of unsecured debt that you are able to pay off in about 5 years and don’t know where to start, a reputable debt management organization can be a useful option (and there are some good ones out there). But if your unsecured debt load is bigger than that, you should probably be talking to an attorney, not a debt counselor.

    Yes, there are good debt management organizations out there. But the industry is highly unregulated and rife with abuse and fly-by-night operations that take your money and then skip town. As I said – tread lightly.

54. Bill, you’re right. I am more likely to be less concerned with the process simply due to familiarity. I also won’t pretend that I’m concerned. I do see a disconnect between the younger generation and the older. The older generation typically seems to be a bit more upset about their situation than the younger. But that’s a broad generalization on my part based on anecdotal evidence (and who am I to say what my clients are really thinking anyway?).

    My experience is that sophisticated lenders really don’t care whether you file or not. They’ve averaged things out. In fact I’ve even heard of some major lenders flatly refusing to negotiate with some debtors and telling them bluntly to go file bankruptcy. As for collection agencies, they may try to lay guilt trips on their targets. But debt collection is a pretty rough business and I guarantee you that they aren’t too busted up over a non-payment either. There’s very rarely anything personal about this business. I suppose that’s a loss for our society.

    Like Nate though, I agree that involuntary creditors are a different story – such as tort victims, child support recipients, and such. As for small, unsophisticated, voluntary lenders – they’re a pretty rare breed nowadays.

55. Bill: Even on the issue of reputation, I am conflicted. On one hand, I think that a reputation for commercial honesty is extremely important for both ethical and practical reasons. On the other hand, especially in the corporate context, I think that a strong reputational sanction for bankruptcy may be counterproductive. For example, there is good evidence that one of the great advantages that Silcon Valley in general and successful tech companies like Apple have is that they don’t strongly stigmitize failure. If you do a start up and the start up goes bust in Silcon Valley, you are not regarded as a commercial leper. Rather, the assumption in many quarters is that the failure was probably a good learning experience and added to your value as a potential employee, business partner, investment, etc. The advantage of these norms is that they foster a climate of risk taking and entrepreneurship. You don’t see the same thing, for example, in France where business bankruptcy is extremely difficult, carries a very strong stigma, and can even result in criminal sanctions.

56. Seth and Nate (#54 and #55), thanks for your observations, which help me to understand better the lawyer’s point of view and what I would have to guess is partly a shift in attitudes/perceptions that’s generational (with me trying to cope with my status as part of the [almost] over-the-hill crowd). In the course of my various experiences, I’ve spent a lot of time with cops, physicians/nurses, and military types, all of whom have had to build defense mechanicisms to cope with their constant proximity to violence and death and all of whom have also somehow sorted out how to retain a sense of compassion and honor without becoming either hopelessly callous or disfunctional on the job. I would hope that familiarity and even comfort with the world of bankruptcy procedures and the court system doesn’t completely lower the barriers that sometimes should reasonably inhibit people through a sense of personal honor either in the context of a corporate officer or family finances.
    Nate, your observations about the importance of a climate that tolerates failure in order to stimulate success squares not only with my personal experience but that of everything I’ve ever read about the qualities and experiences that have gone into making successful entrepreneurs specifically and accomplished people generally. (Last night’s reading also included an account of General John J. (“Black Jack”) Pershing’s conduct of World War I. When responding to his very talented chief of staff’s plea for a combat assignment in France, Pershing gave this officer command of a marine brigade, told him that he’d undoubtedly make mistakes in getting this new unit “bloodied,” but that he didn’t want to see too many mistakes made.) I’d just make the point that the value of failure for people that ultimately become successes comes from the lessons learned, and that some of the lessons sometimes come from the pain of the accountability involved. If there’s no accountability — such is in no-fuss bankruptcy proceedings — there may not be a lesson learned.

57. Oops. #54 should have read “I won’t pretend I’m NOT concerned.”

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