I’m frequently asked why Utah leads the nation in bankruptcy. I am not sure where this notion comes from, but it may be helpful to address these bankruptcy statistics.

Firstly, Utah does not lead the nation in bankruptcies. From September, 2011 through September 2012, 16,545 bankruptcies were filed in Utah. http://www.uscourts.gov/uscourts/Statistics/BankruptcyStatistics/BankruptcyFilings/2012/0912_f2.pdf Compare that to California where over 200,000 bankruptcies were filed over that same period. So clearly Utah does not lead the nation in bankruptcy filings. 

But what about bankruptcies per capita? Again Utah is a far cry from leading the nation. Utah, California, and Colorado all had fairly close percentage of bankruptcies per capita with about .5% of the population filing for bankruptcies between September, 2011 and September, 2012. Compare that with Nevada where .7% of the population filed for bankruptcy over that same period. In fact, if you were to look at all the states, you would find that Utah is fairly average in terms of the percentage of bankruptcies filed per capita. Some states are higher, but most are right around Utah's percentage. 

Now more to the point – I get the feeling that those people who deride Utah bankruptcy numbers do so because they stigmatize those individuals who have turned to bankruptcy as a means of escape from mounting financial pressure. I get asked often : “Is it ethical do go bankrupt?” I will visit this in a separate post, but it is sufficient for me to say that bankruptcy is strong medicine and not for everyone. However, filing for bankruptcy is a necessity for some individuals and is a legal (and yes ethical) way to get on a road to financial health.    

Detroit recently filed for bankruptcy protection. Individuals normally file chapter 7 or chapter 13 bankruptcies (and in few situations chapters 11 or 12). However, cities have their own bankruptcy chapter - a chapter 9.

A chapter 9 bankruptcy allows a city to seek protection from its creditors. For most cities (and Detroit particularly) payments owing to retired workers is a major source of funds owing. It is estimated that Detroit was spending close to 6 billion dollars a year on pension plans. Ouch. Another large source of creditors for cities are municipal bonds. 

Cities file for bankruptcy to work out payments owing to its creditors. Like in other bankruptcy chapters, Detroit will enjoy the benefits of the automatic stay - meaning its creditors cannot undertake collection activities against Detroit. Collection activities is a broad term, but it definitely includes things like filing law suits, liens, and even phone calls trying to collect. Detroit will have to file a proposed plan that is agreeable to its creditors including its pensioners. This plan will include a significant reduction in payments owing to its retirees, but it will also likely include selling substantial assets held by Detroit like its airport and city parks. These funds are used to pay down debts.  

So how does a city file for bankruptcy? In much the same way an individual would. Assets of the city are used to pay down debt that is eventually wiped clean. Realistically, bankruptcy hurts cities short term, but they may be a very effective long-term solution to rising debts and lower revenue.     

One question we get a lot is what happens to my gun if I file for bankruptcy. Well, good news for Utah bankruptcy filers. As of June 2013, Utah bankruptcy filers can now exempt up to $250.00 in guns and ammo. 

Good news for bankruptcy filers in Utah. In June, 2013 the exemptions in Utah were increased substantially. For instance, the homestead exemption went from $20,000.00 per person and $40,000.00 per couple to $30,000.00 per person and $60,000.00 per couple. 

Other exemptions that increased include vehicle exemptions (2,500.00 to $3,000.00), heirlooms or other items of sentimental value ($500.00 to $1,000.00); sofa chairs and related furnishings ($500.00 to $1,000.00) as well as other exemptions. 

What this means

This means that you get to keep more of your stuff in the instance that you need bankruptcy protection. The concept behind bankruptcy is to give people a fresh start. These new exemption limits will help make that start just a little bit fresher.