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Does the Chapter 13 Filing Rate Tell Us Anything About Mortgage Foreclosures?

posted by Bob Lawless

A few days ago, I had the bright idea of looking at the chapter 13 filing rate in the different states and seeing if that told us anything about what might be happening with home mortgage foreclosures. Generally speaking, homeowners often will find it easier to save a home in chapter 13, and thus changes in the chapter 13 rate could give us some understanding of the financial distress being caused by the home mortgage crisis. It's a nice theory, but in practice the data are unilluminating on that point. There is great variation from state-to-state in the chapter 13 rate, making it difficult to draw meaningful conclusions from the data.

Chapter_13_ratio_by_statenov_2007Nationally, 38.8% of all November 2007 bankruptcy filings were chapter 13s, but the table shows the national figures masks considerable state variation. (The data are courtesy of AACER.) Bankruptcy experts will not find the state variation very surprising. In an 1993 article, Professor (and upcoming Credit Slips guest blogger) Jean Braucher documented how consumer bankruptcy attorneys can influence chapter choice. (See Braucher, 1993. "Lawyers and Consumer Bankruptcy: One Code, Many Cultures," American Bankruptcy Law Journal, 67:501-83.) On the heels of that article, Professors Teresa Sullivan, (Credit Slips blogger) Elizabeth Warren, and Jay Westbrook described important variations in bankruptcy practice that could not be explained by difference in formal rules but rather were likely the byproduct of differing cultures by local professionals. (See Sullivan, Warren & Westbrook, 1994. "The Persistence of Local Legal Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts," Harvard Journal of Law & Public Policy, 17:801-865.) From these studies and others, we know that local legal culture plays a significant role in bankruptcy chapter choice.

The persistence of local legal culture makes it difficult to use a snapshot of differences in state bankruptcy filings rates or the percentage of chapter 13 cases as a proxy for the financial distress of homeowners. To make such a measure meaningful, one would have to follow the filing rate of particular states across time. In statistics-speak, we need longitudinal (over time) not cross-sectional (across observations) data. Bankruptcy filing data by state are difficult to get and assemble, especially going back in time--why that should be probably should be the subject of another post--making the task beyond what I have time to devote to a blog post. Thus, I'm going to say that we can't say a whole lot about the mortgage foreclosure crisis from the chapter 13 data.


Bob: Great idea, and great initiative for pulling the data. Would it be worth figuring out if the Chapter 13 filing rate per thousand correlates with the mortgage foreclosure rate per thousand? For the question you posed (with the assumption that Chapter 13 is where most save-the-home folks will go), one could argue that a high or low number of Chapter 7 filers is irrelevant. Do you really want to know how many people are headed into Chapter 13 for help?

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.