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Ratio of Chapter 13s Is Declining

posted by Bob Lawless

Chapter13saspercentage A centerpiece of the 2005 bankruptcy law was to force more debtors into chapter 13. The credit industry claimed many debtors were abusing the process by filing chapter 7 when they could at least make a partial repayment to creditors in chapter 13. So far, the law has not had much effect, and the trend suggests it will not be too long before the chapter 13 rate is precisely what it was before the 2005 law passed.

Most consumers will file either a chapter 7 or chapter 13 bankruptcy. In chapter 7, the bankruptcy trustee sells all nonexempt and unencumbered assets and distributes the proceeds to creditors, and the debtor receives a fresh start. In chapter 13, the debtor devotes all of his or her disposable income to payment of creditors over a 3- or 5-year plan, and any unpaid portions of the debts are discharged. Which option is most appropriate for a debtor will depend on many factors. If I have not overgeneralized too much already, another overgeneralization is that chapter 13 can be more effective at protecting your current assets, like your home, while chapter 7 can be more effective at protecting your future income.

From 2001-2004, the Administrative Office of U.S. Courts (AO) tells us that 29.3% of nonbusiness debtors filed a chapter 13 instead of a chapter 7. Data from Automated Access to Court Electronic Records (AACER) shows that 33.4% of noncommercial debtors filed chapter 13 instead of a chapter 7 in September 2008. The graph to the right shows the trend since March 2006. If the trend continues, we will soon be very close to the same ratio of chapter 13s as we had before the 2005 law.

Note that the AO's and AACER's datasets are not perfectly overlapping. The AO counts "nonbusiness debtors," but the AO's data likely have a substantial undercount of business debtors with a concomitant overcount of nonbusiness debtors (see here). AACER, on the other hand, counts "commercial" debtors, which sweeps in a larger set of cases than the AO's definition of "business" debtors. In addition to the business cases the AO counts, AACER also counts as a commercial case debtors who file with a d/b/a (i.e., a "doing business as") or similar designation or file with an employer tax identification number. Noncommercial cases are simply all cases not designated as commercial.


Another thing that leaps out at me from that AACER data is the strong geographic component. When you total up this year's chapter 13s and the chapter 7s, for each state, there is a night and day difference between the states of the old Confederacy and the rest of the country.

In all but two states of the old Confederacy, chapter 13s still outnumber chapter 7s. Examples: Louisiana -- 68% chapter 13; Alabama, 66% chapter 13; Georgia, 60%. (The numbers I'm citing are a simple ratio of 13s to 7s, ignoring other filings. Data are through September.)

The two exceptions are Florida (36% chapter 13) and Virginia (41% chapter 13).

In most of the rest of the country, it's not even close: California, 28% chapter 13; Montana, 21%; Kansas, 33%; and so on.

I'm not an expert on the topic, just a journalist, but I'd love to hear a theory on why this would be so from those who have knowledge on the topic.

Some observations. Weekly numbers are influenced usually by Texas and Georgia where foreclosures occur only during the fist week of each month. Also, natural disasters may be influencing the number of filings as well.

I don't have theories, just a fact. CH13 was pretty much invented in Alabama. It was regularized in the Code afterward.

There are more 13s than 7s down here in my division of Texas. What I get from interviewing the clients, almost every one we file that is a "local" feels better about a 13 (pay back) than a 7 (discharge) morally speaking of course. This office advises on the criteria of what the Attorney feels is best for that particular situation. Most need some hard advice from the Attorney to be steered into a 7. Also the closer we are to the states median income, the more difficult the 7 will be to process. Other factors may be that an individual may be living with a person, the local UST anyway, takes their income into account; if they regularly cash a check for a boyfriend or friend/s, the bank accounts will show more money than what they actually take home. You won’t believe the hassle we get by the UST on that issue. Our local Bankruptcy Judge has even said from the bench, that he does not know why people are even filing 7s when there is a possibility of filing a 0% Plan repayment in a 13. As far as down here anyway, 13s are way easier to get approved than 7s are by far. It’s disproportionate down here or at least in this office, more 13s than 7s. We are only 1 of 3-5 firms locally (locally means area that is bigger than most states even bigger than some of the smaller states combined) that file consumer bankruptcies.

Given the popular characterization of Chapter 13, it is no wonder that its use is on the wane. Since the advent of BAPCPA, it has been demonized by the media and the debtors' bar, often with the unwitting support of the bench and the United States Trustee program.

"Passing" the means test rewards a consumer with permission to proceed in Chapter 7. "Failing" (or "flunking") the means test condemns him or her to the purgatory (or worse)of Chapter 13. Debtors who choose Chapter 13 for all the positive benefits it offers are viewed as dumb schlubs.

If judges, the U. S. Trustee and responsible debtors' attorneys would use less perjorative language, Chapter 13 might regain some of its respectability.

Hey Bob, couldn't find you at Ill, but I thought you might like this link. It has some stats on BK filings here in Texas on the 3rd anni of BK reform:


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