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The Decline in Bankruptcy Filings by Chapter

posted by Bob Lawless

Decline in Filing Rates.January 2012Bankruptcy filings have been on the decline, but has this decline been spread differently between chapter 7 and chapter 13? Using figures from the Bankruptcy Data Project at Harvard as supplied by Epiq Systems, the chart to the right breaks down the decline by chapter. (Clicking on the chart will bring up a larger version in a pop-up box.)

For the past year, both chapter 7 and chapter 13 bankruptcies have been declining. Some commentators have speculated that the slowdown in mortgage foreclosures has been the reason for the declining bankruptcy rate, but if that were true, one probably would see larger declines in chapter 13 rates given that it is the chapter associated with saving a home. In fact, chapter 13s have been declining at a lower rate than chapter 7s. Consumer credit markets play the most important role in determining the swings of the bankruptcy filing rate. If mortgage foreclosures do climb in the first part of 2012, I do not expect to see a huge increase in bankruptcy filings.

The chart also shows how the increase in filings during 2008 and 2009 was largely fueled by more chapter 7 bankruptcies. Being a cheaper and quicker option, chapter 7 filing rates tend to be more sensitive to changed circumstances such as legal changes, increased costs, or changing credit markets. Consequently, chapter 7 is leading the decline in bankruptcy filing rates. The differences, however, are not huge--in November, for example, the year-over-year decline in chapter 7s was 13.5% as compared to 9.5% for chapter 13s.

Because chapter 7s are declining at a somewhat greater rate than chapter 13s, the percentage of bankruptcy cases that are chapter 13s has increased. In the spring and summer of 2008, when bankruptcy filing rates were high, chapter 13 were 25-27% of all filings. For the past six months, chapter 13s have constituted 30-32% of all filings.


There are some very good points here. This seems to be the big mystery at this point. Credit card delinquencies are high and despite this the chapter 7 and 13 filings are decreasing. However, I don't think that legal changes or increased costs would lead to the decrease in filings from a period of 2008-2011. BAPCPA is the main legal change that impacted the rate of filing and it's been 6 years since that has been implemented. There are no other major changes in the legal field which would lead to a decline. I assume the costs have also been stable (for access to legal help) during this time frame. I think a decline in chapter 13 can largely be attributed to an increase in the alternative options available for either keeping or discarding your home: loan modifications and a deed in lieu. I think a decline in the chapter 7 filings will still remain a mystery. It's a long shot but it may help to compare this number to the number of DMP (debt management plans).

This blog tells of some very interesting points. I don't believe that the legal changes or increase in costs can or would result in the decrease in filings. I think we need to look at the level of Debt management plans to see the whole picture as more people may have started a plan that thought they had to go bankrupt.

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