Debtor Discharge and Creditor Repayment in Chapter 13

• Publication year: 2022

39 Creighton L. Rev. 473. DEBTOR DISCHARGE AND CREDITOR REPAYMENT IN CHAPTER 13

Creighton Law Review

Vol. 39

SCOTT F. NORBERG(fn*) AND ANDREW J. VELKEY(fn**)

I. INTRODUCTION

There were nearly 1.6 million consumer bankruptcy filings in the United States in 2004. That is more than twice the number just ten years earlier(fn1) and more than one filing for every seventy households in the country.(fn2) Almost 29% of these filings - over 467,000 - were under Chapter 13 of the Bankruptcy Code.(fn3) With the dramatic increases in consumer filings, even in prosperous economic times, there has been much debate about the causes of the "bankruptcy epidemic."(fn4) The debate culminated last year in the enactment of extensive reform of United States consumer bankruptcy laws. The core of the legal reforms is a "means test" that is designed to limit consumer debtor access to Chapter 7, requiring some debtors to file for relief under Chapter 13 or not at all. Yet, little is known about what debtors and creditors accomplish in Chapter 13 cases or how well the Chapter 13 system serves its intended purposes. The government collects minimal information about consumer bankruptcy filings, and academic research has been limited.

The first national study of its kind, the Chapter 13 Project provides a detailed portrait of the Chapter 13 system and the extent to which Chapter 13 has fulfilled its principal purposes - debtor fresh start, on the one hand, and creditor repayment, on the other. In addition, the study explores an array of debtor characteristics, Chapter 13 plan features, and district and trustee practices for their relationship to debtor discharge and debt repayment in Chapter 13. Like several other studies before it, the Project also describes the debtors who have used Chapter 13.

II. SUMMARY AND HIGHLIGHTS OF PROJECT FINDINGS

A. DEBTOR DISCHARGE

The overall discharge rate for the debtors in the seven districts covered by the Project was 33%; 67% of cases were dismissed or converted, 23% before confirmation and 44% after confirmation. As a percentage of cases with a confirmed plan (excluding cases dismissed before confirmation), the discharge rate was nearly 43%.

Discharge rates varied considerably across the seven districts in the sample, from a low of 27% (or 20% including cases dismissed before confirmation) in the Western District of Tennessee to a high of 54% (or 47% including cases dismissed before confirmation) in the Middle District of North Carolina. We expected, but did not find, that higher plan completion rates correlate with higher pre-confirmation dismissal rates. This and several other findings support the conclusion that some courts do not carefully screen cases for feasibility at confirmation. On the other hand, the data also reveal that apparent lack of feasibility is not significantly related to case outcome.

One of the more striking findings of the study is that at least 50% of the debtors filed one or more other bankruptcy cases, either before or after the sample case. Thirty percent (30%) filed at least one other case, 10% filed at least two other cases, and 10% filed at least three or more other cases. There was a statistically significant relation between judicial district and incidence of other filings; about 20% of the debtors in the Middle District of North Carolina filed a later petition, while no less than 56% of the debtors in the Western District of Tennessee have filed more than one case, compared to the overall subsequent refiling rate of 33%. The great majority of the other filings were also under Chapter 13, and most were made within a year of the filing in the sample case. Debtors who filed bankruptcy for the first time in the sample case were significantly more likely to complete their plans than debtors who had filed one or more previous cases. Thirty-eight percent (38%) of first-time filers completed their plans compared to 22.5% who had filed one previous case. The discharge rate plummeted to 14% for debtors who had filed two or more cases before the sample case.

Nearly one in seven (15%) debtors who received a discharge went on to file another case.

Debtors in nearly 45% of the cases in which a proposed distribution was reported proposed to pay no more than 25% of unsecured claims. In 31% of cases the debtors proposed to pay 100%. Relatively few debtors - less than 10%-proposed to pay between 26% and 99%. There was no significant difference in the proposed percentage to be paid on unsecured debt by debtors in completed cases and debtors in cases that were dismissed or converted.

Notably, a very large percentage of the debtors proposed plans longer than the minimum thirty-six months required by the Code; the median and modal lengths of the sample debtors' plans were sixty months, or twenty-four months longer than the standard set out in the Bankruptcy Code. Indeed, the length of plans at the 25th percentile was forty-seven months, or nearly a year longer than the standard envisioned by the Bankruptcy Code. However, debtors who proposed shorter plans were more likely to complete their plans.

Joint petitioners were significantly more likely to complete a plan than individual filers. The higher completion rate for joint filers could not be tied to the presence of a second income, however. Individual petitioners reporting spousal income did not complete their plans at a statistically significantly greater rate than individual filers who did not report a second income.

Debtors who completed their plans on average owed more total pre-bankruptcy debt and had higher debt-income ratios than debtors whose cases were dismissed or converted. Perhaps debtors who were more reluctant to file were more committed to doing what was necessary to complete a plan.

B. CREDITOR REPAYMENT

The primary creditor beneficiaries by far of the Chapter 13 system are secured creditors. Nationally, the percentage of trustee disbursements to secured creditors ranged between 60% and 69% of total disbursements between 1994 and 2003. Yet, these percentages substantially understate the proportion of all payments by Chapter 13 debtors to secured creditors, because they do not include payments made directly by debtors to secured creditors, in particular mortgage creditors.

Less than a third of trustee disbursements were to general unsecured creditors.

Chapter 13 costs, which include debtor attorney's fees, clerk's noticing fees charged to the case, and any § 507(b) awards, were a sizable portion of total trustee distributions to creditors and equaled a very large percentage of disbursements to general unsecured creditors. The ratio of Chapter 13 costs to total trustee disbursements was quite stable over the years 1994 to 2003, ranging from 15% to 18%. The ratio of Chapter 13 costs to total trustee disbursements to general unsecured creditors ranged between 59% and 75%; in other words, Chapter 13 costs equaled as much as 75% of disbursements to unsecured creditors.

Not surprisingly, creditor collections were greater in cases with a confirmed plan, and greater still in cases that proceeded to discharge of the debtor. Even so, debtors paid no more unsecured debt in cases dismissed before confirmation than in cases dismissed after confirmation.

C. PROFILE OF THE DEBTORS

The debtors in the Chapter 13 Project are very similar in terms of gender, debt-income ratio, and homeownership rates to debtors in previous studies. Most of the debtors in the Chapter 13 Project were far less affluent than the population as a whole. In 1994 dollars, only 25% earned more than $26,000 per year. Half earned less than $18,000 in annual gross income, and 25% earned less than $13,000. The mean debtor household annual income was less than half the mean for all households; and the median was less than 60% of the median for all households in the country.

D. THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005

The Chapter 13 Project establishes a detailed picture of Chapter 13 outcomes that will serve as a baseline for measuring the much-criticized changes in the law wrought by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The BAPCPA reforms are complex, and their effects on Chapter 13 outcomes for debtors and creditors are subject to considerable speculation. For example, the new provision limiting strip-down of certain purchase money security interests in Chapter 13(fn5) might be expected to further increase the share of Chapter 13 disbursements paid to secured creditors and to correspondingly reduce payments to unsecured creditors. At the same time, this anti-lien stripping provision may lead some debtors who would otherwise file in Chapter 13 to file under Chapter 7 because they can not afford to pay 100% of the claim,(fn6) also reducing collections by unsecured creditors. For debtors who are or would be means-tested out of Chapter 7, the means test will determine the amount of their "disposable income" that must be devoted to a Chapter 13 plan.(fn7) Whether this test requires more or less in debtor plan payments than the current disposable income test remains to be seen. The new limitations on repeat filings may boost overall discharge rates and thus increase average creditor collections per case. The credit counseling and debtor education requirements also may have far-reaching consequences.

III. DESIGN AND...