Law Review: Eraslan, Hulya et al.- The Anatomy of U.S. Personal Bankruptcy Under Chapter 13

Abstract:

By compiling a novel data set from bankruptcy court dockets recorded in Delaware between 2001 and 2002, the authors build and estimate a structural model of Chapter 13 bankruptcy. This allows them to quantify how key debtor characteristics, including whether they are experiencing bankruptcy for the first time, their past-due secured debt at the time of filing, and income in excess of that required for basic maintenance, affect the distribution of creditor recovery rates. The analysis further reveals that changes in debtors’ conditions during bankruptcy play a nontrivial role in governing Chapter 13 outcomes, including their ability to obtain a financial fresh start. The authors’ model then predicts that the more stringent provisions of Chapter 13 recently adopted, in particular those that force subsets of debtors to file for long-term plans, do not materially raise creditor recovery rates but make discharge less likely for that subset of debtors. This finding also arises in the context of alternative policy experiments that require bankruptcy plans to meet stricter standards in order to be confirmed by the court.

Commentary:

The conclusion that Trustees and courts that are more stringent with Chapter 13 debtors decrease the likelihood of discharge is not surprising. That such stringency does not significantly increase dividends to unsecured creditors, however, is telling. For example, the paper finds that increasing plan length to 60 months decreased discharge rates from 44% to 37%, but only increased returns to creditors (and the paper is not terribly clear on whether this is returns to all creditors, including priority and secured, or just unsecured creditors) from 28% to 29% . Similarly, having minimum dividends for confirmation, decrease the likelihood of discharge without substantial improvement in return for creditors.

This conclusion points to ways that Chapter 13 practice can be improved to increase discharges without significant harm to creditors. Among those would be to allow and encourage Chapter 13 cases, even for above median debtors, to conclude in shorter periods of time. While the Applicable Commitment Period for confirmation of a plan is a fixed time period, either 36 or 60 months depending on whether the debtor is above or below the state median income, Chapter 13 cases can be converted to Chapter 7, debtors can be granted hardship discharges under 11 U.S.C. § 1328 and plans can be modified to be shorter than 36 or 60 months, since the requirements for modification under § 1329 does not incorporate either the Means Test or the Applicable Commitment Period.

Courts and Trustees can, in addition to actions taken by debtors and their attorneys, rather than simply seeking dismissal of struggling cases, seek conversion as the default, as §1307(c) provides that either is equally valid depending on the best interests of the creditors and estate. Similarly, Trustees can also move pursuant to § 1329(a) to modify plans to shorten them. Since this papers shows that lengthening a plan does not provide a statistically significant increase in returns to creditors, neither should be problematic.

For a copy of the paper, please see:

The Anatomy of U.S. Personal Bankruptcy Under Chapter 13

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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