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Where People File Chapter 13

posted by Bob Lawless

State Chapter 13 RatesBetween states, there is a big disparity in the rate at which people file bankruptcy. Over the past four years, Nevada has had the highest bankruptcy filing with an a yearly average of 9.32 persons per 1,000 population file bankruptcy. At the other extreme has been Alaska with just 1.39 persons per 1,000 filing bankruptcy. As points of comparison, consider that the national filing rate over 2008 - 2011 was 3.54 per 1,000 population and that the national filing rate over the last twelve months has been 4.26 per 1,000 population.

I wondered how the filing rates would break down if we looked at just chapter 7 and chapter 13 separately. The result is the chart to the right.

For the top 10 states in each category, the chart shows annual filings per 1,000 population. To minimize the effect of temporary local conditions, the results are taken from the years 2008 - 2011 and then calculated as an average annual filing rate.

There are clearly some states that just have experienced high bankruptcy filing rates overall such as Nevada, Indiana, and Illinois. These states appear in the top 10 for both chapter 7 and chapter 13. Other states are chapter 7 states--some of which have not been historically considered to be states with high bankruptcy rates. When chapter 7 alone is considered, some states stand out. Michigan, for example, has the second highest chapter 7 rate but only ranks 21st in chapter 13 rates. Colorado has the fourth-highest chapter 7 but only the 29th-highest chapter 13 rate. Arizona ranks 6th for in chapter 7 rates but only 30th for chapter 13 rates.

At the other end of the spectrum are states where people file chapter 13 at much higher rates. Louisiana presents the most extreme case, ranking 4th in chapter 13 rates but only 46th in chapter 7 rates. It will surprise bankruptcy specialists not at all to learn that other states that tip strongly toward chapter 13 are primarily in the South. Alabama has the second-highest chapter 13 rate but only the 29th-highest chapter 7 rate. Mississippi ranks seventh for chapter 7 rates and 34th for chapter 13. Even in places that do not have particularly high overall bankruptcy rates, there can be a chapter 13 culture. For example, South Carolina ranks 24th in chapter 13 rate but dead last in chapter 7 rate. Texas has the 22nd highest chapter 13 rate but is 50th for chapter 13s.

A different comparison would be to look at the states where the chapter 13 rate per 1,000 population is higher than the chapter 7 rate. Only five states fit that description: Alabama, Louisiana, Tennessee, South Carolina, and Texas.

Why particular states or regions tip more toward chapter 7 or chapter 13 would require more space and time than I have for this blog post. In any event, I am not sure that I know the complete answer. What I have been thinking a lot about is that we need to unpack the idea that there is one bankruptcy system in the United States. Given the numerical variation it cannot possibly be the case that differences in individual circumstances explain the differences in chapter 13 rates. Are people's life circumstances that different between Tennessee and Iowa such that Tennesseans should be sixteen times more likely to file chapter 13? People are experiencing U.S. bankruptcy system in very different ways depending on where they are located.

Comments

Do you think your observations suggest anything more than a confirmation of the now well-established "local legal culture" idea? I had thought (perhaps naively) that most people who had seriously considered the question had taken for granted that the law works out quite differently in different locales simply as a function of the legal actors in those locales. An exploration of what exactly is driving any given local legal culture, and what exactly any given local legal culture is/produces (as you illustrate here), is of course interesting and useful, but I guess I would be surprised if anyone but a politician or a non-specialist would think we have one unified and uniform bankruptcy system, independent of local influence.

Congress tried to get more debtors into Chapter 13 with an "all stick, no carrot" approach.

While local legal culture has a great influence on each individual state's rates of filing, it is the approach of Congress took in seeking to force repayment that is the failure - with Chapter 13 rates back to about where they were prior to BAPCPA.

BAPCPA raised the costs and difficulty of filing all chapters, but didn't produce any lasting increase in the number of debtors filing Chapter 13, attempting to repay their creditors something over time.

I don't think too many can argue that BAPCPA was a poorly written law filled with assumptions of quantification that ended of as a fallacy. In taking a snapshot of data from final chapter 13 audited reports in periods ending 6/2004 compared to 6/2010 to see possibly who fared better, I found the following:
-Total trustee expenses increased 23%.
-Unsecured creditor distribution increased 26%.
-Attorney fees increased 64%.

While there is an influence of when cases were filed, it would seem debtor attorney fees were over double the percentage than the other two. I wonder if the increase in fees was the Congessional intent in BAPCPA and maybe why consumers did not file bankruptcy, thus in part driving up PRO SE filings.

As far as the geographic trend on chapter 13 filings, I don't see any major changes from 2004.

Another issue is the level of exemptions, some states, Tennessee as an example, have remarkably low exemption levels so they have always tilted more to Ch. 13s than 7's just on the basis that many very poor people would still have assets to be liquidated in a Ch. 7 that they can keep in a 13. I guess this is the legal embodiement of the "local culture" by the state legislature. The Code, by allowing states to mandate "state exemptions only" has exacerbated the differences in the state to state implementation of the national bankruptcy law.

I believe this will be first for me in having two responses on the subject at hand that are geared to the original blog and observations made concerning local cultures where the tendency to file chapter 13 may be greater than other disctrict cultures. I just received and reviewed an opinion out of the Northern District of Alabama, Eastern District dated March 16,2012: In re Steven Jackson Case No.11-42528-JJR-13 and In re Lerin Brown Case No. 11-42825-JJR-13. In the Order the Court stated in part "These cases contort the intent of Chapter 13 and are nothing more than chapter 7s on the installment plan and benefit no one with the exception of debtors' counsel." One case opinion should not bear a fact of frequency of occurance nationally but it is one worth reading by all sides of participants in bankruptcy. I do not believe BAPCPA intended to use the system as suggested in this decision. To my knowledge as of today, I am not aware of an appeal to this decision.

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