Bankruptcy

Chapter 13 Rate Down Sharply in March

By Bob Lawless

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.

Full post as published by Credit Slips on April 21, 2009 (boomark / email).