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Did the 2005 Law Make for More Chapter 13s?

posted by Bob Lawless

Chapter_13_ratio_3 In my last post, I discussed whether the chapter 13 rate in different states told us much about the mortgage crisis. Short answer: not really. The problem is the assembling the time it would take to assemble the statewide chapter 13 rates going back historically. The national trend in the chapter 13 filing rate is not as difficult to assemble, and it reveals an interesting pattern. The proponents of the 2005 U.S. bankruptcy law said it would force more people into repayment plans in chapter 13 rather than taking the "easy way out" in chapter 7.

The graph shows the monthly changes in the chapter 13 filing rate since January 2004 through November 2007. The data are from the Administrative Office of U.S. Courts except for October and November 2007, which are from AACER. The month the 2005 bankruptcy law went into effect should not be hard to spot. The percentage of cases that were chapter 13 filings spiked immediately after the law went into effect, but the spike was aberrant. Immediately before the 2005 law went into effect, people rushed to file to beat the law's harsh provisions. It made more sense to beat the law's effective date if one intended to file chapter 7 rather than chapter 13. Thus, the big spike after the 2005 law's effective date represents the absence of chapter 7s rather than a rush toward chapter 13. As bankruptcy filings have continued their steady climb (discussed in previous posts gathered here) and looking again to be over 1,000,000 in 2008 (see here), the chapter 13 ratio has been trending back toward the same levels as before the 2005 bankruptcy law.

Still, even a casual inspection of the graph will tell us that the levels are not the same. Where a little over 30% of all bankruptcy filings were chapter 13s before the 2005 law, a little under 40% of all filings are now chapter 13s. The precise figure for November 2007 was 38.8% as compared to 32.2% in January 2004. Two years after the 2005 bankruptcy law went into effect, there seems to have been a slight shift toward more chapter 13s. In my previous post, I said that one really needed longitudinal data to get a handle on how the home mortgage crisis is interacting with bankruptcy filing rates. One wonders whether the persistence of the slightly increased chapter 13 rate might be partly attributable to homeowners filing chapter 13 to save their homes during the mortgage foreclosure crisis.


Chapter 13 rates have always varied widely for many reasons, not all of which are readily understandable; "local legal culture" plays a surprisingly large role. Professor Bill Whitford for one did some excellent work in this in years past. More generally, our uniform national law looks very different district to district, only modestly less so in the age of the U.S. Trustee. I can testify from 30 years experience as a bankruptcy lawyer that the decision between Chapter 7 and Chapter 13 can be complex and idiosyncratic. All in all, if anyone could tease out a reliable cause-effect connection, such as discussed, to sound academic standards, it would be an impressive accomplishment indeed.

I know Ken and agree with him. I would suggest two reasons (based on the clients we see) for the slightly higher percentage: there are some clients that don't qualify for a 7 and need to file a 13, however, the higher rate of foreclosures is probably the biggest factor. Chapter 13 clients are usually trying to save their home. As evidence of this, an early report on the credit counseling requirement outcome had 97% of people not able to fund a repayment plan, but over 40% filing a chapter 13. The only reason for a 13 in that situation is to save something a chapter 7 would not.

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