Does Chapter 13 Prop Up Bankruptcy Filing Rates?

Yesterday, I noted the 14.1% decline in U.S. bankruptcy filings during 2012. Bankruptcy filings did not decline at the same rate everywhere, of course, although they did decline in 89 of the 90 judicial districts in the U.S. (not counting judicial districts in U.S. territories). In the Middle District of Alabama, bankruptcy filings even actually climbed (although by only 9 total filings out of almost 7,800).

The table to the right shows the twenty federal judicial districts where bankruptcy filings declined the least. One thing immediately leaps out: many of these districts are places where the percentage of chaper 13 bankruptcies is very high.

Overall, that trend holds up when one looks across the country. The graph to the right is a scatterplot of the ranking of the ninety federal judicial districts on both dimensions. Along the y-axis is the ranking in decline in total bankruptcy filings from 2011 to 2012, with the districts having the smallest declines getting higher rankings. Thus, the Middle District of Alabama was ranked 1. Along the x-axis is the rank for the percentage of bankruptcy cases that were chapter 13s in each district. On this dimension, the Middle District of Alabama was again ranked 1 with 76.1% of its overall bankruptcy filings being chapter 13s in 2012. The correlation coefficient between the two datasets is 0.55.

The data suggest that bankruptcy filings fall less where chapter 13 rates are higher. Throwing out a hypothesis, I wonder whether this effect stems from chapter 13s being "supply driven" whereas chapter 7s are more "demand driven." When what we might call the "natural demand" for bankruptcy falls, people still find their way into the offices of attorneys filing chapter 13s.

Another possibility is the classic explanation of chapter 13 as a means to avoid foreclosure, and this would tend to occur in economically distressed areas where people are still tending to file bankruptcy. The problem with this explanation is that the list of districts with the highest chapter 13 rates tend to follow historic patterns rather than mapping onto areas of current distress in the real-estate markets.

Others may have hypotheses that can be explored in the comments. 

Comments

[Ed Boltz]

To what extent are Ch. 7 bankruptcies, with their higher upfront costs, replaced with either a Ch. 13, in which both attorney's fees and court costs can be funded over time, debt settlement scams or a "Chapter Zero" (a gray market bankruptcy with no discharge)? Keep in mind that districts that are sympathetic/supportive of Ch. 13, i.e. 0% divindends, accommodating Trustees, no minimum plan length, etc., are likely to also make such replacement easier through attorney fee only plans, graduated fee structures, conversions.

[Ed Boltz]

It is also worth noting that 3 of the districts (MDAL,MDNC & EDNC) with the smallest declines are not subject to the U.S. Trustee, but are instead overseen by the more flexible and locally attuned Bankruptcy Asdministrators.

[Bob Lawless]

Interesting points. Thanks. Note that I have reposted the graphic so that it does not cut off some of the district names.

[AMC]

Looking at the three specific factors listed by Ed Boltz:

"0% divindends, accommodating Trustees, no minimum plan length"

One of those can pretty much be eliminated: "no minimum plan length".

The vast majority of Chapter 13 cases where there is no applicable commitment period (i.e., no minimum plan length) are from the Ninth Circuit. The reason being, the Ninth Circuit is the stronghold of Kagenveama/Flores - the circuit court decisions that endorsed no minimum plan length for over-the-median debtors with no projected disposable income.

There isn't a single 9th Circuit district on the list of 20 with the smallest declines.

This would appear to eliminate "no minimum plan length" as a significant factor.

[Ed Boltz]

I mentioned no minimum plan length because the EDNC, which is one of the districts in which I practice, is the origin of the Alexander case, of which Kagenveama is largely a "ditto" and is on the Top 20. I have heard that despite Kagenveama/Flores (or perhaps because of the pending en banc rehearing of Flores) that Ch. 13 Trustees and bankruptcy judges in the 9th Circuit are very hostile to early termination plans.

[David]

I am agree that rates of filing chapter 13 bankruptcy is quiet high. But on the same time it offers much more than filing chpater 7 bankruptcy.

[C.E. Petit]

One note: a negative decline is an increase. Either the negative signs should be removed from the numbers in the table (which would make MD Ala a negative number), or the table should be captioned "Percentage Change in Bankruptcy Filings."

I obviously have been around the publishing industry for too long if I'm proofreading captions of tables on academic bankruptcy-related blawgs...

[David Fuller]

You bet, but at least part of it is marketing. Filing rates are down, more lawyers are dabbling in bankruptcy, incomes are stagnant, and $0 down bankruptcies are all the rage.

A lot of lawyers - some not very serious about bankruptcy law - use the fee only chapter 13 as a way to get clients in the door. It's very hard to explain why paying $X upfront for a chapter 7 beats paying $3,500 (the local no-look) over 36 months, particularly when that taps into the same consume psychology that leads to enormous balances on the Best Buy credit card. I've had several clients who were lawyer shopping and didn't understand that filing a fee only chapter 13 would more than double the total cost of their bankruptcy.

The price competition between bankruptcy lawyers is pretty fierce right now. Once you have one or two local lawyers with loads of advertising offering $0 bankruptcy filings, it puts a lot of pressure on everyone else to offer the same "product." Interestingly, at least one district - the Western District of Kentucky - has two no-look fees that basically sort between the fee only chapter 13 cases and the chapter 13 cases that actually pay out to creditors.

[Raymond]

Bob always triggers thought on bankruptcy data and added inquiry as to trend or prediction. I will take a different approach but will use the data published by the US Bankruptcy Courts for year ending 12/2011. First by district is prior filings to total chapter 13 filing which was 28%. While the 5th Circuit showed only 11% prior filings to the total, Texas contributed 58% of the total prior filings in the 5th Circuit.The 5th circuit showed a 16% to total prior filings but TN contributed to 61% of that total.Over in the 9th Circuit CA had 71% of the total prior filings in this Circuit. Prior filings may influence the numbers but may also suffer from the unknown of when the prior filings occured.