There have been many articles and studies of the Bankruptcy Code since Congress changed the bankruptcy laws in October of 2005. One of the most thorough recent studies concerns the use of Chapter 13 bankruptcy across the country and the likelihood that a Chapter 13 bankruptcy will be successful. In this study the author looked at all Chapter 13 bankruptcies filed in the United States from 2007 to 2013.
During this time period there were just over 2.2 million Chapter 13 cases filed. A Chapter 13 case is filed when a debtor either does not qualify under the Means Test for a Chapter 7 case which requires no repayment plan, or there is some advantageous reason for filing a Chapter 13. Reasons to file a Chapter 13 may include catching up on mortgage arrears through a repayment plan or stripping a second mortgage from real estate owned by the debtor, when the second mortgage is wholly unsecured, meaning there is no equity to cover any portion of the second mortgage or home equity line of credit.
The most surprising finding of this study was that of the 2.2 million Chapter 13 cases filed, more than 52% of the cases were dismissed before the repayment plan was confirmed. In order for the case to be completed the plan for repayment which is put together by the debtor must be confirmed by the Bankruptcy Judge assigned to the case. Also somewhat surprising was that of the cases that were able to have the have their plans approved by the Judge, another 27% of those cases resulted in dismissal before the plan was completed. The study found that just over 35% of Chapter 13 cases filed were successful and resulted in the repayment plan being completed.
It is also important to note that of the approximately 800,000 plans that were completed, unsecured creditors generally did not receive much money compared to what they were owed. An unsecured creditor is one that does not have collateral that may be foreclosed or repossessed should a person who owes money not pay. One of the most common types of unsecured debt is credit card debt. In about 26% of the cases the unsecured creditors received 70% or more of what they were owed before the debtor filed Chapter 13. In about 11% of the cases they received between 40-70% of what they were owed. In 55% of the cases the creditors received 1-39% and in 8% of the chapter 13 cases the unsecured creditors received nothing.
The study also found that there is great variation relative to successful completion of plans, the amount of money paid under the plans and the amounts paid to unsecured creditors. Massachusetts cases which were included within the study, on average, paid total disbursem*nts to all creditors in the amount of $20,602.00 per confirmed Chapter 13 plan. Of that amount in confirmed cases the unsecured creditors received about half of that amount $10,291. The study also found that Massachusetts was one of five states including California, Connecticut, Arizona and Rhode Island with the lowest percentage of confirmed plans at less than 50% confirmed.
The study confirms what is already known by Massachusetts bankruptcy lawyers who regularly represent debtors in bankruptcy cases. It is more difficult to be discharged in a Chapter 13 case, as the repayment plan takes between 36 and 60 months. During that time there are a lot of opportunities for debtors to fall behind on payments for a number of reasons including job loss, health problems diminishing earning ability or other unexpected expenses which affects the debtor’s ability to complete the plan. Counsel in Massachusetts should continue to try to qualify debtors under the Means Test for Chapter 7 cases where there is no repayment plan whenever possible, and file Chapter 13 cases only when necessary, or advantageous to their clients.
FAQs
In 55% of the cases the creditors received 1-39% and in 8% of the chapter 13 cases the unsecured creditors received nothing. The study also found that there is great variation relative to successful completion of plans, the amount of money paid under the plans and the amounts paid to unsecured creditors.
What percentage of Chapter 13 bankruptcies are successful? ›
Chapter 13 should never be filed without a lawyer. Chapter 13 cases filed with an attorney already have only a 33% success rate; that number drops to a 2.3 % success rate without a lawyer. In fact, many bankruptcy trustees will tell you they have never seen a successful Chapter 13 case where a debtor was unrepresented.
How much does Chapter 13 lower your credit score? ›
Filing for Chapter 13 bankruptcy will make your credit score go down. This will stay on your credit report for seven years. How much your credit score drops depends on how good your credit was before you filed for bankruptcy. If you had good credit before bankruptcy, your credit score will drop a lot more.
Will my credit score go up after filing Chapter 13? ›
As noted, your credit score will likely go up immediately following your bankruptcy—then will tank within a month or so. Depending on your specific situation, in some instances, you could well end up with a better credit score within a few years than you had prior to the bankruptcy.
How many Chapter 13 plans fail? ›
Nationally, about 95% of chapter 7 cases complete successfully. Chapter 13. It varies a lot from state to state and from law firm to law firm. Success rates vary from 40% to 70%.
Why do most Chapter 13 bankruptcies fail? ›
In most cases, failure is due to one of several reasons: Life circ*mstances. Not having the guidance of an experienced bankruptcy attorney. Over-ambition.
What percentage of debt do you have to pay back in Chapter 13? ›
However, the actual percentage individuals are required to pay back will vary depending on their specific financial circ*mstances. While some individuals may be required to repay 100% of their debts, many filers only repay a portion of what they owe, often significantly less than the total amount.
How to get a 700 credit score during Chapter 13? ›
Tips for Boosting Credit Scores While in Chapter 13
- Make all secured payments on time. A Chapter 13 plan typically includes the arrearage (back payments) owed to secured creditors. ...
- Obtain a new line of credit and make timely payments. ...
- Check your credit report for inaccuracies. ...
- Apply for a secured credit card.
The most surprising finding of this study was that of the 2.2 million Chapter 13 cases filed, more than 52% of the cases were dismissed before the repayment plan was confirmed.
Can I negotiate my Chapter 13 payment? ›
Reduce Your Chapter 13 Plan Payments
If you've suffered a permanent income reduction—perhaps you lost your job or received a salary decrease—you could file a motion asking the bankruptcy court to lower or modify your payments.
The completed Chapter 13 bankruptcy, along with the accounts that were included in the program, should disappear from your credit reports about seven years after the filing date. Before the filing of this bankruptcy, the ineligible accounts would also be removed from the report at a sooner interval.
What is the negative impact of filing Chapter 13? ›
Cons of Filing Chapter 13 Bankruptcy
Job loss, medical issues, and added expenses all strain the plan. 2. Certain Debts Remain: Common protected debts like most student loans, alimony, and child support can't be discharged in Chapter 13. (These debts are also not discharged in a Chapter 7 case).
Are Chapter 13 bankruptcies worth it? ›
In many cases, Chapter 13 bankruptcy offers the most flexibility. Chapter 13 bankruptcy can offer several substantial benefits compared to the other types of bankruptcy options available in the US. However, navigating the filing process can be incredibly difficult, and Chapter 13 bankruptcy is not for everyone.
What would disqualify me from Chapter 13? ›
An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy ...
What can I not do during Chapter 13? ›
Also do not not incur debt, use credit, credit cards, or enter into leases while in Chapter 13 without Bankruptcy Court approval, except in the case of an emergency for the protection and preservation of life, health or property. Contact your attorney if you need to sell property or incur debt.
How much cash can you keep when filing Chapter 13? ›
Keeping cash when filing for bankruptcy does change somewhat between Chapter 7 and Chapter 13 bankruptcies. Under Chapter 13, you also have the $550 cash exemption along with a wildcard exemption up to $1,475, allowing you to keep $2,025 in cash under Chapter 13.
What is the average Chapter 13 payment? ›
A Chapter 13 petition for bankruptcy will likely necessitate a $500 to $600 monthly payment, especially for debtors paying at least one automobile through the payment plan. However, since the bankruptcy court will consider a large number of factors, this estimate could vary greatly.
What is the downside to filing Chapter 13? ›
Cons of Filing Chapter 13 Bankruptcy
Job loss, medical issues, and added expenses all strain the plan. 2. Certain Debts Remain: Common protected debts like most student loans, alimony, and child support can't be discharged in Chapter 13.
Why is my Chapter 13 payment so high? ›
Many times, for instance, chapter 13 bankruptcy is filed to stop a foreclosure and save a house. Under the plan, the debtor must propose to repay the arrears over the life of the plan. This can often mean thousands and thousands of dollars spread out over 60 months, which results in a high chapter 13 plan payment.
