Ratio of Chapter 13s Is Declining

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.