Comsumer Bankruptcy\u27s New Clothes: an Empirical Study of Discharge and Debt Collection in Chapter 13

Consumer bankruptcy filings hit another record high in 1998, with nearly 1.4 million consumers filing for bankruptcy relief. This trend sparked a debate in Congress about means-testing chapter 7 bankruptcy filings. Proponents of reform argued that it would curtail fraud and abuse. Opponents believed that consumer debt was swamping income growth, and that the deregulation of the consumer credit market had led to overgenerous lending and hence to more bankruptcies. This is an empirical study of whether filers for chapter 13 bankruptcy cases are abusing the system, or whether debtors are truly being swamped by debt in excess of their incomes. It finds that a large percentage of chapter 13 filers had previously filed for bankruptcy, indicating the potential for abuse of the system\u27s provision of an automatic stay of collections. It also finds, however, that the vast majority of debtors were in desperate need of debt relief, and that most had most incomes or lived in poverty. This study also challenges the basic premises of the Bankruptcy Code by concluding that unsecured creditors are collecting a small percentage of their claims in chapter 13, so that chapter 13 may not be an effective procedure for the collection of unsecured debt as contemplated by the Code. Most debtors are using chapter 13 to deal with secured creditors, who collected 90% of all chapter 13 payments in the study. Perhaps the most striking finding is that successful debtors owed more secured debt than failed debtors

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Debtor Discharge and Creditor Repayment in Chapter 13

The consumer bankruptcy system plays an enormous albeit largely under appreciated role in the United States economy. There were nearly 1.6 million consumer bankruptcy filings in the United States in 2004 - more than twice the number just ten years earlier, and more than one filing for every 70 households in the country. Nearly a third of these filings were under Chapter 13 of the Bankruptcy Code. (Chapter 13 provides for individual debt readjustment pursuant to a repayment plan, whereas Chapter 7 provides for liquidation of assets to pay creditor claims.) Yet, little is known about what debtors and creditors accomplish in Chapter 13 cases or how well the Chapter 13 system serves its intended purposes. This article reports on the findings of the Chapter 13 Project, a national empirical study of 795 Chapter 13 bankruptcy filings in seven federal judicial districts. Funded by the National Conference of Bankruptcy Judges and the American Bankruptcy Institute, it is the first and only national study of its kind. It provides a detailed portrait of the Chapter 13 system and the extent to which Chapter 13 has fulfilled its principal purposes -- debtor fresh start, on the one hand, and creditor repayment, on the other. The article first reports on who is using Chapter 13 - the gender, income, indebtedness and other bankruptcy filings of the debtors in the sample. It then reports on the extent to which the debtors in the seven districts completed their plans and obtained a discharge. Next, we consider various debtor characteristics - gender, income, amount and type of debt, debt-income ratio, other filings - and certain plan features - length, proposed distribution to unsecured creditors, income reserved for payment of living expenses - for their relation to case outcome. Regarding creditor repayment, the study reports in detail on the amounts and types of debt that are collected by creditors in Chapter 13 cases. The Project has produced a wealth of new information and insights into the Chapter 13 system. Some of the highlights include: Most of the debtors in the sample were far less affluent than the population as a whole. At least 50% of the debtors had filed one or more other petitions. Discharge rates varied significantly by district, but overall only one-third of the debtors completed a plan. We found statistically significant correlations between case outcome and debtor income, amount and type of debt, and other filings. Equally revealing, the study found no significant relationship between case outcome and plan feasibility, proposed plan length or proposed distribution to unsecured creditors. Regarding creditor repayment, the study reports that the primary creditor beneficiaries by far of the Chapter 13 system are secured creditors; and that less than a third of trustee disbursements were to general unsecured creditors. The median amount paid to unsecured creditors in all cases was $0