Exploring the Demographics of Consumer Chapter Choice

Journal Issue

May 1999

Column Name

Bankruptcy by the Numbers

Journal HTML Content

This column explores the demographics of consumer chapter choice by examining some basic

bankruptcy statistics across the states. The results provide an introduction or refresher to

some of the tough issues facing us when we try to understand how and why debtors choose

between chapters 7 and 13.

<h3>The Significance of Chapter Choice</h3>

Chapter choice in consumer bankruptcy is important for both policy and administrative

reasons. On the policy side, there is an argument that some filers belong in chapter 13 rather

than chapter 7 because their likely future income relative to their pre-filing debt gives them a

good chance of making meaningful repayments over a three- to five-year period. The argument

continues that the rapid fresh start of chapter 7 should be reserved for debtors who are unable

to make meaningful repayments.

On the administrative side, the organization and burdens of managing a chapter 13 case differ

from those attached to a chapter 7 case.<a href="#2" name="2a">2</a> Any significant shift in the relative numbers of filings

in the two chapters will change the amount and nature of work for the bankruptcy courts,

private trustees, U.S. Trustees and attorneys representing debtors and creditors.

The current statutory limitations on a debtor's initial choice of chapter 7 are essentially nil

(<a href="http://www.westdoc.com/find/default.asp?rs=CLWP1.1&vr=1.0&cite=… U.S.C. §109(b)</a>). Pending legislation may change this, by placing repayment and/or income

tests at the threshold of a debtor's eligibility for chapter 7.<a href="#3" name="3a">3</a>

For these reasons, it is important to attempt to understand the current environ-ment of chapter

choice. Our systematic understanding of the causes of chapter choice is weak, even though the

opinions expressed by experts from every corner are very strong. As is frequently the case

with empirical research, we are better at saying what is false than what is true. For example,

in a highly quantified analysis of 1,529 consumer cases in Texas, Illinois and Pennsylvania (all

filed in 1981), Sullivan et al. tested chapter choice against a range of potential causes of the

choice. They concluded that many of the plausible and intentional determinants of choice (e.g.,

ability to pay, assets to protect, unsecured debt levels, state exemption levels) had little, if

any, causal effect. What mattered more, but still not a lot, were such factors as a recent move

within the state or choice of a specialist attorney.<a href="#4" name="4a">4</a>

The authors noted that the district of filing is far and away the most powerful predictor of

chapter choice, which is as true today as it was in 1981. Consider, for example, that during

1998 there were 22,840 non-business filings in the Western District of Tennessee, of which

74 percent were chapter 13 filings. During that period there were 25,011 non-business

filings in the Western District of Washington, of which 17 percent were chapter 13 filings.<a href="#5" name="5a">5</a>

Such differences persist over time, revealing the potent but amorphous factor of "local legal

culture." There are no simple ideas or models that will completely account for the large

variations in chapter choice—or at least no one has found them yet. What follows is a brief

description of a promising lead.

<h3>Chapter Choice in Relation to Filings per 1,000 Households</h3>

The percentage of chapter 13 filings in a state tends to vary directly with the numbers of filings

per 1,000 households in the state.<a href="#6" name="6a">6</a> Where the total consumer rate per household becomes very

high, it is often (but not always) due to large numbers of chapter 13 filings. The degree of

association between chapter 13 filing rate and overall consumer rate per household is large

enough to be substantively interesting. It is approximately as strong, for example, as the

positive relationship between choice of chapter 7 and a recent intrastate move, as reported by

Sullivan et al.<a href="#7" name="7a">7</a>

The relationship is shown in two forms in Tables 1 and 2. For <a href="#table1">Table 1</a>, the states (including the

District of Columbia) were first sorted by the percentage of chapter 13 filings. The highest 10

and lowest 10 states were then compared for the numbers of filings per 1,000 households. To

explore the possible relationship of these factors to the overall amount of consumer bankruptcy

activity in the groups, the total numbers of filings were also included. In <a href="#table2">Table 2</a>, the states

were first sorted on numbers of filings per 1,000 households, and the averages of the other

factors were then calculated.

The tables reveal both regularity and disparity. As has been observed repeatedly, the states with

the highest chapter 13 filing rates occupy the southern tier of the country, with the exception

of Utah. The states with the lowest rates are uniformly northern except for West Virginia. And,

most obviously, the states with the lowest rates of chapter 13 filings tend also to have small

overall filing rates both absolutely and relative to the number of households. When the data are

first sorted on the number of filings per 1,000 households, the positive association with

chapter 13 rates is again observed, but there are some striking anomalies: North and South

Carolina, which are in the top 10 states in percentage of chapter 13 filings, are in the bottom

10 states in terms of filings per 1,000 households. And the geographic regularities of Table 2

disappear.

An important problem to be solved in interpreting the relationship between the percentage of

13 filings in a state and the rate of filings per 1,000 households is to establish the direction of

causality, if there is one. Does a local legal culture that channels filers into chapter 13 thereby

encourage more total filings than would otherwise arise? Is the population of chapter 13 filers

in high-percentage chapter 13 states composed of people who might not file at all in other

states? Alternatively, do local conditions that produce high potential for bankruptcy produce a

response in the business and legal communities that channels these filings into chapter 13? A

third possibility is that the two factors are not causally related, but are simply two

consequences of other factors, like exemption limitations or wage garnishment laws.<a href="#8" name="8a">8</a> It is

beyond doubt that strong chapter 13 environments can thrive both where bankruptcy per

1,000 households is very frequent (e.g., Alabama, Georgia and Tennessee) and infrequent (e.g.,

North Carolina and South Carolina). Nevertheless, for the nation overall, the direct

relationship between the two factors is strong. The regularity and the important exceptions

strongly imply that there is more than one set of causal factors leading to strong tendencies to

file chapter 13.

<h3>Conclusion: Why Does This Matter?</h3>

The importance of understanding the roots of very strong (or very weak) support for chapter

13 filings in a community, a district or a state goes to the heart of our conception of consumer

bankruptcy generally, and the choice between chapter 7 and chapter 13 specifically. Economists

have been attempting to use economic modeling to discern whether there has been a change in the

stigma associated with filing bankruptcy.<a href="#9" name="9a">9</a> The fact is that stigma, or shame, is a social and

emotional factor, and we are extremely ignorant of the social and emotional contexts in which

ordinary people operate at the time of filing and the months preceding it. Without an

inde-pendent basis for asserting that increased rates of filing are caused by a decreased sense of

personal responsibility, stigma or shame in the population, there is no foundation for inferring

such a relationship from economic factors alone. We need to look at the social contexts of the

bank-ruptcy environment directly.

The general prevalence of bankruptcy in a state, as measured by filings per 1,000 households,

is one example of such a measure—albeit not as precise or refined as we need. Sullivan et al.

searched for other determinants in their work. There is support at many levels for the

proposition that debtors should be at least encouraged to file chapter 13 if they can, in fact,

repay a meaningful portion of their unsecured debt over the period of the plan. If we can

understand how current high-percentage chapter 13 environments operate, and export that

which is exportable into other environments, we might find a socially satisfying way to improve

the consumer bankruptcy process.

<h3><a name="table1">Table 1</a></h3>

States with Highest and Lowest Percentages of Chapter 13

(Values are averages for the states in the group)

<th>Group</th>

<th>Percentage Chapter 13</th>

<th>Filings/1,000 Households</th>

<th>All Consumer Filings</th>

</tr>

<tr>

<td>Highest*</td>

<tr>

<td>Lowest**</td>

<tr><td colspan="4">* In decreasing order: GA, AL, NC, TN, SC, LA, TX, UT, MS, AR</td></tr>

<tr><td colspan="4">** In increasing order: ND, SD, WV, RI, NH, IA, VT, ME, AK</td></tr>

</tbody></table>

<h3><a name="table2">Table 2</a></h3>

States with Highest and Lowest Rates of Filing per 1,000 Households

(Values are averages for the states in the group)

<th>Group</th>

<th>Percentage Chapter 13</th>

<th>Filings/1,000 Households</th>

<th>All Consumer Filings</th>

</tr>

<tr>

<td>Highest*</td>

<tr>

<td>Lowest**</td>

<tr>

<td colspan="4">* In decreasing order: NV, TN, GA, UT, AL, CA, MS, MD, ID, AR</td>

</tr>

<tr>

<td colspan="4">** In increasing order: AK, SD, SC, IA, VT, ND, ME, MA, NC, NE</td>

</tr>

</tbody></table>

</center>

<hr>

<h3>Footnotes</h3>

<a name="1">1</a> All views expressed in this article are those of the author and do not necessarily represent the views of the Executive Office for U.S. Trustees. <a href="#1a">Return to article</a>

<a name="2">2</a> For the courts, see Bermant, Gordon, Lombard, Patricia A., and Wiggins, Elizabeth C., A Day in the Life: The Federal Judicial Center's 1988-1989 Bankruptcy Court Time

Study. 63 Amer. Bnkry. L. J. 491 (1991). <a href="#2a">Return to article</a>

<a name="3">3</a> See, e.g., H.R. 833, The Bankruptcy Reform Act of 1999, and S.625, the Bankruptcy Reform Act of 1999, introduced in February and March, 1999, respectively. <a href="#3a">Return to article</a>

<a name="4">4</a> Sullivan, Teresa A., Warren, Elizabeth, and Westbrook, Jay Lawrence, As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America (1989). Pages 230-270. <a href="#4a">Return to article</a>

<a name="5">5</a> Data compiled by the Administrative Office of the U.S. Courts. <a href="#5a">Return to article</a>

<a name="6">6</a> The product-moment correlation coefficient for this relationship is +.41, which is statistically significant. <a href="#6a">Return to article</a>

<a name="7">7</a> Sullivan et al., supra note 5, at 246. <a href="#7a">Return to article</a>

<a name="8">8</a> Sullivan et al. reported that exemption limitations did not influence chapter choice across the states they studied (Texas, Illinois, Pennsylvania), but there has been no study

using information from all states. Nothing has been published about the effectiveness of wage garnishment laws. <a href="#8a">Return to article</a>

<a name="9">9</a> See White, Michelle J., "Why Don't More Households File for Bankruptcy?" 14 Journal of Economics & Organization 205 (1998). <a href="#9a">Return to article</a>

Journal Authors

Gordon Bermant

Journal Date

Saturday, May 1, 1999 - 12:00