Published in: Banks | Nov. 21, 2019

Why Do These 5 States Have the Fewest Bankruptcies?

By:  Dana George

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How have residents of these five states managed to file bankruptcy less often than residents of other states? 

There were 756,722 personal bankruptcies filed in the U.S. in 2018. The five states with the most filings were Alabama, Tennessee, Georgia, Mississippi, and Nevada.

But what about the five states with the lowest rates of bankruptcy? Here, we rank them and investigate the factors that may explain why residents of these states experience less bankruptcy. Turns out, there's a lot more to it than residents' income, debt, and savings.

Man in suit wading up to waste in mountain lake surrounded by little cardboard boats.

Image source: Getty Images

1. Alaska

Bankruptcy filings per capita: 0.59 per 1,000

Poverty and unemployment: At 6.2%, Alaska has the highest unemployment rate in the nation. It's also the sixth most expensive state in which to live. The average median income for Alaskans is $76,114, boosted by the Alaska Permanent Fund, an account that allots an equal amount of state oil royalties to each state resident. In 2019, that dividend is $1,606 per person. The poverty rate is 9.94% and 12% of the population depends on the Supplemental Nutrition Assistance Program (SNAP) to put food on the table.

Education: 92.4% of Alaskans have graduated from high school, and 29% hold at least a bachelor’s degree, while 11.1% of all student loans are in default.

2. Vermont

Bankruptcy filings per capita: 0.89 per 1,000

Poverty and unemployment: Vermonters enjoy the lowest unemployment rate in the country at 2.2%, but endure the 12th-highest cost of living. With a median income of $57,808, the state has a 10.91% poverty rate, slightly below the national poverty rate of 11.8%, while 12% of the population receives SNAP benefits.

Education: 92.3% of adults in Vermont have a high school degree, and 36.8% hold at least a bachelor’s degree, while 6.1% of state residents have defaulted on their student loans.

3. Maine

Bankruptcy filings per capita: 1.03 per 1,000

Poverty and unemployment: Maine’s unemployment rate comes in at 2.9%, which is below the national average of 3.5%. With an average income of $53,024, their cost of living is the 11th highest in the U.S, a fact that may contribute to its 12.55% poverty rate. 13% of the state population depends on SNAP.

Education: 92.1% of residents hold a high school education, while 30.3% have at least a bachelor’s degree. 9.8% of student loans are in default.

4. North Dakota

Bankruptcy filings per capita: 1.13 per 1,000

Poverty and unemployment: North Dakotans benefit from a low 2.5% unemployment rate. As the state with the 23rd most expensive cost of living, it's near the middle of the pack. The average income in North Dakota is $61,285 and the poverty rate is 10.65%, while 7% of residents take part in the SNAP program.

Education: High school graduates make up 92.3% of the population, while 28.9% also hold at least a bachelor’s degree. The student loan default rate is 6.2%

5. Massachusetts

Bankruptcy filings per capita: 1.15 per 1,000

Poverty and unemployment: The unemployment rate in Massachusetts is 2.9%, but with the fifth highest cost of living, 10.72% of residents live in poverty and 11% receive SNAP benefits. The average income is $74,167.

Education: 90.3% of Bay Staters have a high school education. But it’s the 42.1% holding at least a bachelor’s degree who make Massachusetts the most educated in the country. Meanwhile, 5.8% of student loans are in default.

Unemployment, poverty rate, and SNAP

Four of the five states on this list have unemployment rates below the national average, a strong indicator of financial well-being. Alaska's higher-than-average unemployment rate is the exception.

Four of the five states have a poverty rate lower than the national average, with Maine being the only exception. Four of the five states also have a lower-than-average percentage of residents who receive SNAP benefits. Maine is on par with the national average, with 13% of its residents receiving SNAP. 

Medicaid expansion

All five of the states above take part in Medicaid expansion, a program tied to the Affordable Care Act (ACA). Traditional Medicaid is generally limited to low-income women, children, aging adults, and people with disabilities who receive Supplemental Security Income (SSI). Medicaid expansion offers coverage to adults and children with incomes at or below 138% of the federal poverty level (FPL), including those living with mental illness.

Of the five states with the most bankruptcies, four don't participate in Medicaid expansion. All five states with the least bankruptcies do participate.

In addition to cutting the rate of cardiovascular disease and expanding prescriptions to mental health medications, Medicaid expansion has impacted the financial well-being of its participants.

Within two years of implementation, the Medicaid expansion provision of the ACA reduced unpaid medical bills sent to collection by $3.4 billion, prevented new delinquencies, and improved credit scores, according to an extensive study by the National Bureau of Economic Research. As credit scores began to rise, ACA participants also became eligible for better credit rates, a benefit valued at $520 million per year.

Finally, Medicaid expansion led to 50,000 fewer bankruptcies among subprime borrowers in its first two years and reduced the number of people going into medical debt by as much as 40%. For residents of states that have adopted Medicaid expansion, the ability to secure medical coverage can mean the difference between financial stability and bankruptcy. 

The bottom line

Attempting to determine why one state files for bankruptcy less than its neighbors is tricky. Each individual bankruptcy has its own story. While one family may be pushed in that direction by overwhelming medical bills, another may seek to discharge debt in order to pay student loans. Job loss, time away from work to care for an ailing relative, or running up too much debt can also lead to bankruptcy.

Perhaps the value of knowing which states have the least filings -- and which have the most -- is that we're reminded of how bankruptcy impacts individual families and the value of protecting our financial futures

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