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February/March 2010 – Web Exclusive

Staying Afloat

Texas ranked 49th among states in its rate of 2009 personal bankruptcies.

Constitution, economy keep Texas bankruptcy rates low

by Mark Wangrin

John Penn
Bankruptcy Lawyer
Haynes and Boone LLP

With the country in the midst of the worst recession in generations, Americans are heading to the bankruptcy courts in droves. Not in Texas, though, where a resilient economy, constitutional protections and long-standing feelings about debt collectors have combined to give the state the nation’s second-lowest rate for personal bankruptcies.

The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, according to the National Bankruptcy Research Center. December 2009 filings exceeded 110,000 nationally for the tenth straight month, raising the year’s total to 1.4 million.

Texas, on the other hand, had the lowest rate among states in Chapter 7 filings (1.08 per 1,000 people) and ranked 24th in Chapter 13 filings (1.02 per 1,000). These are the two legal mechanisms available for personal bankruptcy; Chapter 7 liquidates assets to pay debts, while the less commonly used Chapter 13 allows debtors to reorganize their finances and use income to pay off debts over time. In all, Texas ranked 49th among states in its rate of 2009 personal bankruptcies.

Avoiding Bankruptcy

Bankruptcy experts offer several alternatives to filing for personal bankruptcy, though some come with their own risks.

Trim recurring bills. Debtors are advised to cut non-essential costs. These savings, however, often are not enough if the debt is too large.

Negotiate with creditors. Debtors can try to negotiate payment plans with their creditors, or offer them a lump-sum payment, in return for the removal of negative information from credit reports.

Secure a home equity loan. Such loans allow people to borrow using the equity in their home as collateral. In Texas, however, this exposes the home to a bank claim on the property, which is otherwise protected by the state’s homestead exemption.

Use a debt counseling service. Such businesses can help negotiate reduced interest rates and payment schedules, but even these debts may prove too much.

Debt Protection

“The lower rates stem largely from the fact that the Texas economy is faring better than others,” says John Penn, a bankruptcy lawyer with Haynes and Boone LLP in Fort Worth. “But there are also characteristics unique to Texas that help with that, not the least of which is our very generous and comprehensive homestead exemption. Our history and culture provides us with more protection.”

Before Texas became a state, many U.S. citizens hounded by debt collectors packed their belongings and fled southwest, but not before scribbling on their front door “G.T.T.” — Gone to Texas.

Texas’ history as a sanctuary for debtors wasn’t forgotten in the state’s first constitution in 1876. Included was a homestead exemption that prevents most creditors, except for taxing authorities and mortgage or home-improvement loan holders, from forcing the sale of a debtor’s residence to settle outstanding bills.

Texas’ homestead exemption also provides taxpayers with a $15,000 reduction in their evaluation for property taxes — and lower property taxes also depress bankruptcy rates, Penn says.

Your Money: Keep More of It

Other factors contributing to Texas’ low bankruptcy rates include a lower tax burden and lower cost of living.

“And another factor that weighs in our favor is that we do not have wage garnishment for debts,” Penn says. “In other states, if you’re behind on credit cards or other debts and they sue you and get a judgment, they can start taking all or some of your paycheck. We don’t have that here. Those kinds of protections for Texans give us more of a cushion in harder times.

“All of that makes Texas more livable and means that our population is not as close to the edge as others,” he says. “The slightest economic downturn in some places sends people over the edge.” FN

Above Water

In fiscal 2009, Texas had the second-lowest personal bankruptcy rate among states.

Personal Bankruptcy Filings Per Capita By State Total, Chapters 7 & 13

Fiscal 2009 (Filings per 1,000 population)

Rate Lowest StatesFilings
1. Alaska1.36
2. Texas2.15
3. South Carolina2.15
4. South Dakota2.21
5. Hawaii2.28
6. Wyoming2.31
7. Vermont2.46
8. North Dakota2.47
9. Montana2.66
10. Connecticut2.77
Rate Highest StatesFilings
1. Nevada10.49
2. Tennessee8.67
3. Georgia7.52
4. Alabama7.41
5. Indiana7.33
6. Michigan6.73
7. Ohio6.06
8. Kentucky5.76
9. Arkansas5.65
10. Illinois5.39

Source: Administrative Office of the U.S. Courts

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