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The Rise of Chapter 13

posted by Katie Porter

Despite credit industry claims that BAPCPA is succeeding in reducing the number of bankruptcies, the 2006 bankruptcy filings may well be a poor predictor of the future number of total consumer bankruptcies. The run-up in filings before the effective date of the law, publicity and misunderstanding about the current law, an adjustment to higher fees for bankruptcy and the exit of some attorneys from bankruptcy practice are all likely factors in the overall drop in filings in 2006. Hidden within the gross number of cases is an interesting trend in the relationship between Chapter 7 and Chapter 13 filings.

Based on year-to-date figures running through December 2nd that were provided by Bankruptcy Lookup, the proportion of Chapter 7 and Chapter 13 is wildly different in 2005 and 2006. In 2005, Chapter 7s were 81% of the 7/13 caseload and Chapter 13s were 19%. In 2006, there is a dramatic jump in the proportion of Chapter 13 cases--42% of all Chapter 7 and Chapter 13 cases are Chapter 13s. On a district by district basis, from what my poking around and talking to people has turned up, the absolute number of Chapter 13 filings are almost back to pre-BAPCPA levels in many districts.

I'd really like to hear your explanations or insights on this trend. Higher mortgage foreclosures and housing delinquencies could be pushing more homeowners to seek help from Chapter 13. Another possibility is that the dramatically higher fees for bankruptcy are pushing more people to file Chapter 13 so that they can pay their fees over time. Or maybe these numbers are the means test at work? Or more accurately, the spectre of the means test--fear of the additional scrutiny that comes with filing an above-median Chapter 7?


In my Atlanta bankruptcy practice, I saw a huge decline in Chapter 7 filings but basically no change in Chapter 13. In a big picture sense, it appears that families with household incomes just over the median ($65,000 - $90,000) are the ones hardest hit. These debtors cannot qualify for Chapter 7 because the means test budget excludes too many real life expenses (like second mortgages and 401(k) loans). In addition, the U.S. Trustee has a policy of challenging every Chapter 7 that ends up in a means test and my clients cannot afford the cost of litigation.

These debtors also cannot afford Chapter 13 because the "disposable income" that the means test shows does not exist in real life. Also, the Chapter 13 trustees here are demanding payback to the unsecureds equal to what the means test would give those unsecureds (I have a problem with that logic, but we'll leave that to another post).

So, while I think we will see more 13's I'm not so sure that the 13's will be feasible over 5 years, especially for the middle income debtors.

Finally, isn't it ironic that the credit card binge debtors are usually those with monthly income below the means test - these people are less likely to draw the attention of the U.S. Trustee who is busy making middle income debtors miserable.

Jonathan Ginsberg
Atlanta, GA

I would note two points. First, 2005 is probably the wrong baseline. Because of the increase in Chapter 7 filings shortly before enactment of BAPCPA, the share of Chapter 13 filings in 2005 (19%) was much lower than the historical share (in the range of 30%) or the share in 2004 in particular (28%). The second thing to recognize is that the unusually high 2006 share to which you refer is a higher share of a much smaller total number of filings. Thus, the total number of Chapter 13 filings through the first three quarters of this year was running considerably below the total number of Chapter 13 filings for the first three quarters of either of the preceding years. Although it is still too early to be sure, the Chapter 13 filings appear to be approaching their pre-BAPCPA levels much faster than the Chapter 7 filings, which still seem to be considerably below the pre-BAPCPA level. The most likely explanation to me is that Chapter 13 filers are more likely to be reacting to a specific financial event (such as a threatened foreclosure) and thus less susceptible to the filing-deferring impact that BAPCPA has on Chapter 7 filers.

You will also need to consider that a number of people are now finding that they cannot file a 13 and are having to file an 11 instead. This will make an apples to apples comparison hard.

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