A Tale of Two Chapters

<p>Consumer debtors have two primary options in bankruptcy—to pay some or all of their
debts out of future earnings under chapter 13, or to liquidate non-exempt property,
if any, to satisfy creditors while protecting future earnings under chapter 7. To
date, the majority of consumer debtors have opted for chapter 7. A series of
legislative proposals have been made since 1997 in an attempt to encourage more
debtors to file under chapter 13 rather than under chapter 7. This is the first
in a series of articles in which we compare chapter 7 and chapter 13 cases and
debtors.

</p><h3>Filings</h3>

<p>Chapter 7 and chapter 13 filings have followed relatively similar patterns since
1985. Between 1985 and 2001, chapter 7 filings nationwide increased by
275 percent, while chapter 13 filings increased by 294 percent. During that
period, filings in both chapters increased during 12 years and decreased during four
years. Throughout that period, there have been about 2.5 chapter 7 filings for
each chapter 13 filing nationwide.

</p><p></p><center><img src="/AM/images/journal/7-802bbtnfig1.gif" alt="" align="middle" height="347" hspace="5" vspace="5" width="548"></center>

<h3>Geographic Filing Patterns</h3>

<p>Chapter 7 filing rates relative to the population are somewhat comparable around
the country. For example, in 2001 the filing rates in 29 states and the
District of Columbia were within 25 percent of the national average (3.65 per
1,000 population). Chapter 13 filing rates show much greater variation, with
only 12 states and the District of Columbia within 25 percent of the national
average of 1.47 per 1,000 population. In general, chapter 13 filings are
extremely heavy in most of the Southeast, and very light in New England and the
upper Midwest. This is illustrated in Figures 2 and 3, in which white
indicates a filing rate of less than one-half the national average, a checkered
pattern indicates a filing rate of between 50 and 150 percent of the national
average, and black indicates filings at more than 150 percent of the national
average. Chapter 7 filing rates fall outside of the middle range in few states,
while about one-half of the states have chapter 13 filing rates that are either in
the high or low ranges.

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<p></p><center><img src="/AM/images/journal/7-802bbtnfig3.gif" alt="" align="middle" height="279" hspace="5" vspace="5" width="548"></center>

<h3>Disbursements</h3>

<p>Several factors create difficulties for making case-based comparisons between chapter
7 and chapter 13 disbursements. Disbursements in chapter 7 cases are made when
the case is closed and are reported at that time. The average life-span of chapter
7 cases filed by consumers in which assets are liquidated and disbursed is about three
years. Chapter 7 trustees report the disbursements individually for each case.
Chapter 13 payments, by contrast, are made monthly during the life of the case,
typically three to five years. At the end of each fiscal year, standing chapter 13
trustees report, in the aggregate, the disbursements they made to various classes of
creditors. Disbursements from a single case may be spread over five annual reports.
Although the total disbursements from each case become part of the case file in the
court, there is no national database of case-by-case distributions comparable to the
one for chapter 7. Therefore, direct comparisons are not possible. Additionally,
some chapter 13 payments include non-delinquent post-petition mortgage payments and
installment payments to debtors' attorneys.

</p><p>Despite these difficulties, we can be confident that the amount of money collected
by trustees and disbursed to creditors in chapter 13 cases is much higher than the
amount collected in chapter 7 cases. For example, total payments to secured,
priority and unsecured creditors in chapter 13 cases during FY 2001 was $3.13
billion, more than triple the $902 million in chapter 7 cases.<small>^{<a href="#2" name="2a">2</a>}</small> Moreover, the
bulk of the money in chapter 7 cases came from a relatively few large cases, most
of which involved commercial debtors. (We will explore this in more detail in a later
article.) Chart 1 compares disbursements by chapter in FY 2001.

</p><p></p><center><img src="/AM/images/journal/7-802bbtnchart1.gif" alt="" align="middle" height="175" hspace="5" vspace="5" width="547"></center>

<h3>Debtor Demographics</h3>

<p>Although chapter 7 debtors have been fairly well studied in recent years, less
information is available on chapter 13 debtors. We will present what is available in
a later article, but here we give a brief summary. In some ways, the debtor groups
are quite similar. For example, the percentage jointly filed by married couples is nearly
identical, as are their educational backgrounds. Chapter 13 debtors have more dependents
and are more likely to be homeowners than are chapter 7 debtors, and a higher percentage
of chapter 13 debtors report having a prior bankruptcy. While income levels appear to
be slightly higher for chapter 13 debtors, these debtors also report larger family
sizes. There appear to be wide differences in the debt structures of the debtors.
Chapter 7 debtors have much higher general unsecured debt, particularly credit card debt,
while chapter 13 debtors tend to have higher secured debt and priority debt levels.<small>^{<a href="#3" name="3a">3</a>}</small>

</p><h3>Conclusion</h3>

<p>It is well known that very few chapter 7 cases make disbursements to creditors.
A large percentage of those cases are consumer cases. These cases create an
interesting comparison with chapter 13 cases that are confirmed and go on to create
disbursements for creditors. In this article, we have made some early comparisons of
these two groups of consumer cases in bankruptcy. In future articles, we intend to
focus more closely on particular aspects of these comparisons.

</p><hr>
<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} All views expressed in this article are those of the authors and do not necessarily represent the views of the Executive Office
for U.S. Trustees or the Department of Justice. <a href="#1a">Return to article</a>

</p><p>^{<small><a name="2">2</a></small>} Distributions data does not include cases in the six judicial districts in Alabama and North Carolina. These districts are not
part of the U.S. Trustee Program, and are served by bankruptcy administrators. <a href="#2a">Return to article</a>

</p><p>^{<small><a name="3">3</a></small>} There is no disagreement about the presence of these differences, but there is no consensus that these differences influence the
debtors' choice of chapter. <a href="#3a">Return to article</a>

</p>