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Chapter 13 Rate Down Sharply in March

posted by Bob Lawless

Chapter 13 Ratio.March 2009 The 2005 changes to the U.S. bankruptcy law were supposed to move more debtors into chapter 13 with the idea that they would have to pay at least a portion of their debts. In March, however, the chapter 13 rate dipped below the old chapter 13 filing rate. Not only do these latest figures suggest the 2005 law is not working as its supporters promised but also that the latest spikes in bankruptcy filing rates are from persons in the most desperate financial conditions.

Of the noncommercial petitions filed in March 2009, only 25.5% were chapter 13 cases. These data come from Automated Access to Court Electronic Records (AACER), which defines a "commercial" case as one that involves a corporation, limited liability company, or similar entity, one with an employer identification number (EIN) (instead of or in addition to a Social Security number), or one with a designation such as "doing business as" (d/b/a). All other cases are noncommercial cases.

From 2001-2004, the Administrative Office of U.S. Courts (AO) reported that 29.3% of nonbusiness cases were chapter 13s. "Nonbusiness" is not the same as "noncommercial." AACER uses a better, more comprehensive definition to calculate "noncommercial" cases, but if we look at all bankruptcy cases together, the numbers don't change much. The AO reports 28.7% of all cases as a chapter 13 from 2001-2004, and 25.0% of all cases in the AACER data during March 2009 were chapter 13s.

Anyway it gets counted, the percentage of cases in March 2009 that were chapter 13s is now below the rate during the years before the 2005 bankruptcy law. As the graph shows, however, March always experiences a lower percentage of chapter 13s, which probably is a result of March being a traditionally high filing month for bankruptcy generally. The increase in the bankruptcy filing rate in March comes principally from increased chapter 7s, and that was true even before the 2005 changes. I don't expect the chapter 13 rate to remain below the pre-2005 rate.

At the same time, I do not expect the chapter 13 rate to rise above back above the 2005 rate. Rather, like the overall bankruptcy filing rate, the chapter 13 rate is returning to what it was before the 2005 law. The 2005 law deterred people from filing because of its increased costs, because of the rhetoric and rumors about the law, and because of the law's provisions. The effect was to depress bankruptcy filings overall and especially depress chapter 7 filings (with the effect that chapter 13 filings were a higher percentage of filings). It's been about 3 1/2 years since the law went into effect, and we're pretty much back to where we were before the law went into effect.


Some reasons for the decline:

1. In March, there was hope that the mortgage modification bill would pass, and debtors held off filing Chapter 13s, waiting for the relief it was supposed to provide to folks with underwater mortgages.

2. Saving your house used to be the be-all and end-all for people in financial trouble. Today, not so much.

3. Chapter 13 requires that debtors have regular income. With today's job situation, fewer and fewer people meet that requirement, or are able to project that they will continue to have stable regular income for a three to five year period.

4. The tax refund season increases Chapter 7 filings, not Chapter 13 filings.

5. Debtors attorneys are getting better at manipulating the means test and getting their clients through a Chapter 7.

6. From a structural standpoint, Congress whittled away the Chapter 13 "super discharge" and made it pretty much the functional equivalent of the Chapter 7 discharge.

7. The "debt relief" businesses out there are, for the most part, setting debtors up for failure. But they sure do advertize a lot. And they wouldn't do that if people in financial trouble weren't responding to their ads.

There is less reason for chapter 13 cases to be filed at the moment

a) little to no equity is available to be saved in houses, so cure and maintain plans are out of the question

b) not so many people are above median income or otherwise cannot overcome the presumption of abuse under Code section 707

c) more people are unemployed and therefore have insufficient disposable income sufficient to support a chapter 13 plan

d) debtors' attorneys are not "manipulating" the means test - however, the confusion and uncertainty under the means test is getting resolved - frequently in favor of the debtor - see, for example Ross-Tousey.

Most debtors who are eligible for chapter 7 would prefer to discharge their debts outright rather than opting for 3-5 years of indentured servitude. And why not?

Were still growing into the law. And wasn't there a moratorium on foreclosures? I mean I didn't see much of that so much but I guess thats the point..? Now I don't know about Attorneys manipulating the "mean" test but maybe its just that they finally have a grasp for what the UST looks for. I remember the UST growing..still growing... into it as well. Trying to get over the fact that you have to do a "mean" test calc. in 13 but not you are not able to use all of the deductions in the I and J as well was a real bummer!

There is just no way to keep up with those jok...people on advertising but I am seeing more and more with failed consolidations. Wonder if that can be turned over as property of the estate??? (thinking out loud.. sorry) Business is steady anyway.

On the subject of AMCs #6, I agree. Also Attorneys have to work harder and wait longer for their money for the same work if not harder work(stinking means test in 13s!). If a 13 debtor has cars paid through his/her/their 13 you can wait a long time for that 2-3k you have in that plan, thats if the debtors don't get laid off at the beginning, in the middle.....you know? the "risk part".... The new law with "adequate protection" payments have made Attorneys fees, an Administrative priority debt, subordinate to a vehicle creditors APPs(re DeSardi, 340 B.R. 790 (Bankr. S.D. Tex. 2006)(great blog on it here http://www.stayviolation.com/the_code/). You have to get those suckers confirmed to get paid. Locally we get only up to 1k before confirmation (still subordinate to those freggin APPs). The rest after. I mean, what do you do? Someone has to have two vehicles for work (two income family) and they can only afford a tiny percentage plan and they can afford it. Do you tell them to let one go because you won't get your fees as fast? Theres probably a lot of that out there... attorneys taking the "hit". You confirm a small percentage plan and those APPs will eat your lunch and leave you holding the bill.

this is a better link... www.stayviolation.com/the_code/

This explains what I am going through; my wife and I are well above the state median income, and so are out for a 7, but our income is still recovering after job and we do not have enough for even a 0% repay plan on unsecured debt. Now if the mortgage could be modified...but that isn't in place yet (and selling the underwater house would likely destroy our multipley distressed marriage, and how would that play out in court...).

Great article and great comments. I think there is a lot of hesitation that built up in the system- banks holding off (moratoria or no) and borrowers holding their breath to see if Congress would pass a chapter 13 mod bill, and if the various loan mod bills were for real (they're not) and everyone waiting to see what will happen with the ecomony. These issues will work themeselves out in the near future (and it looks like Congress is not going to take up chapter 13 mod soon).

And the other factor is that chapter 13 as constituted just does not work for people w/ ARMS or other bad mortgages. Many of them are best advised to walk away and many of them are doing just that.

As the person who started this discussion, I'm going to issue a dissent. All of these comments about reasons people are not filing chapter 13 are all really good points. But, for two reasons, I don't think they explain the one-month drop in the percentage of debtors choosing chapter 13.

First, go with the simplest answer, and the simplest answer is that the March drop fits the historical pattern. Second, many of these explanations were operative before March so can't explain the March data alone. Note my dissent is limited only to the data point about the big one-month drop.

Ya! Why March? In March we had 19 consumer bks of which 13 were....:) 13s. April... so far.. we have filed 21 with 12 being 13s. We are expecting 5-7 more in the next week. Don't know yet how many will be 13s. I have been seeing a bunch of May 5th foreclosure notices though. So we saw a drop of about 6 13s compared with our Feb. numbers.

Ya I kind of went on that weird rabbit trail on my las reply....;)

The numbers of people who would otherwise benefit from a Chapter 13 plan, who have large nondischargeable student loan obligations, may also be a factor. There is no satisfactory (to the debtor) way of handling a large private student loan obligation in a Chapter 13 case, and making these nondischargeable was another effect of BAPCPA.

I totally agree Martha! You hit the nail on the head. If we could just pay them in Chapter 13 and get a discharge would be huge. I know we have had that debate before on this site. These higher income debtors that only have unsecured debts they are paying in 13s would benefit from being able to pay them over unsecured debts. How could there not be a benefit if could take all of those debts "off the market"? It really defeats the whole purpose of "fresh start". When you have large student loan debts is like you are getting a semi-fresh start.

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