Is Filing Chapter 13 Bankruptcy Worth It?
People considering filing Chapter 13 bankruptcy alongside other debt resolution options often ask: “What is the success rate of Chapter 13 bankruptcy?” Unfortunately, companies (many of whom are financed by credit card companies and banks) seeking to push non-bankruptcy alternatives will manipulate and cherry pick the statistics that they use in their marketing materials, leading to misleading information being disseminated. This misleading information is not helpful in determining the best option for you. Reported statistics varied wildly from by state, federal district, time frame and, of course, the reporting source.
In an effort to provide as much objectively accurate and verifiable information as possible, we researched source documents such as the annual reports published by BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act), interviewed a Chapter 13 Bankruptcy Trustee, conferred with a retired bankruptcy Judge and extensively researched other articles, blogs and documents on the internet from varying points of view.
As a preliminary note, oftentimes “success rate” is used interchangeably with or as a replacement for “discharge rate.” In the bankruptcy context, a “discharge” is the final order entered at the end of a successful case and is the court order that effectively resolves the debt. However, it is critical to note that obtaining a Chapter 13 discharge is not the only way to define “success” in Chapter 13. There are countless scenarios based on an individual’s circumstances that a Chapter 13 may not end with a Chapter 13 discharge but the result could still be fairly characterized as “successful.” Examples include a client choosing to voluntarily dismiss the Chapter 13 when their primary objectives have been accomplished or converting their case to Chapter 7. While the client would consider this “success,” these matters would be included in statistics as part of the “failure rate.”
What is the Success Rate of Chapter 13 Filings?
For those just looking for a quick data snippet, we want to be transparent and upfront. For those looking for more in-depth information, we highly recommend you read this whole article. What we found? The success rates for Chapter 13 bankruptcy vary and can depend on several factors including experience and commitment of the attorney you hire:
- National Percentage of Cases Filed in 2018 vs. Dismissed Cases, from varying years (source: BAPCPA report 2018, uscourts.gov): 48%
- State of Michigan Percentage of Cases Filed in 2018 vs. Dismissed Cases, from varying years (source: BAPCPA report 2018, uscourts.gov): 55%
- Acclaim Legal Services, firm specific success statistics based on a all firm cases assigned to a specific Chapter 13 Trustee in the Eastern District of Michigan (source: Chapter 13 Standing Trustee):
- Average rate of Chapter 13 Plan confirmation (2012 – 2018) is 88% (District average is 80%). Plan confirmation means the Court approved our client’s proposed plan of reorganization.
- Acclaim Legal Services discharge rate exceeds the National and State average. For our cases filed in 2012 (note, to evaluate discharge rates you must use several years prior based on the length of Chapter 13 Plans) that were confirmed by the Court, 69% of those clients obtained a bankruptcy discharge.
Why do the Chapter 13 results vary?
- Competency of Law Firm – Chapter 13 is considered a specialty area of the law. Finding a qualified attorney who understands and has successfully administered a large quantity of cases is critical to your success.
“Choosing the right attorney or law firm could be one of the most important decisions a consumer makes in the Chapter 13 process. An experienced attorney will not only ensure a client properly qualifies from the outset but will also set up a Chapter 13 plan that is optimized for success. A skilled Chapter 13 bankruptcy attorney will help their clients find success throughout the confirmation process and most importantly, they will closely monitor the case for any actionable steps necessary to bring the case to proper completion. ~ David Ruskin Esq, Chapter 13 Standing Trustee for Eastern District of Michigan
- Economics of geographic area – a good job environment allowing people to fund a plan
- Communication – with your attorney, Trustee, etc.
- What is considered “completion” in terms of calculating a “success rate”. Examples of an early termination of a Chapter 13 case that may be beneficial for the client but are reported negatively in terms of completion percentages:
- Conversion to a Chapter 7 (e.g., client filed a Chapter 13 to bring a mortgage current, accomplished that, and then converted the case to eliminate the balance of unsecured debt; client’s income changed so they now qualify to file a Chapter 7 bankruptcy when they previously did not).
- Strategic or Voluntary dismissal (e.g., client filed Chapter 13 to stop a foreclosure and the lender subsequently approved a loan modification that resolved the mortgage delinquency and the client then dismisses the case with the primary objective achieved).
What Causes a Chapter 13 Plan to Succeed or Fail?
#1 Plan payments – from the BAPCPA data we reviewed, 1/3 of the dismissals were directly correlated to “Failure to Make Payments Under Plan.” This is the most critical factor for success.
#2 Compliance with court and plan requirements
#3 Communication with the court regarding changes to circumstances
While the Chapter 13 plan has inherent structures and guidelines dictating the process, it is also a highly customizable plan that can be modified for each person. This is because it is based on the individual debt scenario and specific income to each persons’ case. Also, because it spans 36 -60 months, a lot can change during that timeframe of the plan: job/income change, additional family members, divorce, etc. The Chapter 13 plan allows us to modify our proposed repayment plan to adjust to these life events and changes in circumstances.
How do Debt Management Plans (DMPs) and Other Debt Resolution Options Compare in Success Rates?
The available information and reported data for Debt Management Programs (DMPs) and their completion success rates varies greatly. We saw reports as low as 20% up to 55 – 60%. It is hard to get a verified number because tracking is not required by the government as it is under BAPCPA laws. Also, various agencies have varying definitions of success and success rates depending on their competency and creditor relationship.
What is the key factor or differences between filing Chapter 13 bankruptcy and Debt Management Programs?
Both Chapter 13 bankruptcy and DMPs share the common variable of participants payment into the program. For both options, this aspect is the largest factor for success or failure. The main differences occur is in how the payments or budget is set up. DMP’s are not necessarily calculated on what the consumer can afford, but rather on what the creditor demands or will accept in payments. Most Debt Management Programs are not legally binding and are based on Debtor’s making a voluntary repayment.
The problem is that DMPs, as currently constituted, are only useful for some consumers. Creditors call the shots when it comes to concessions offered through DMPs. They rarely reduce the amount of principal that consumers owe them, never as part of a DMP. Agencies really have only three concessions to offer that creditors will allow. First, creditors can “re-age” a credit card account of a consumer who enters a DMP. Most creditors will re-age an account once a year or twice in five years, the maximum allowed by federal financial service regulators. ~ National Consumer Law Center report (consumerlaw.org)
The second major difference between a DMP and Chapter 13 Plans are tools to bring creditors into compliance. DMPs rely on their relationships with major creditors (Some creditors such as Visa and Mastercard fund non-profit debt relief agencies to help collect on debts owed them) and their good will to set up a balanced and reasonable budget. One stubborn creditor could derail a plan. Some creditors may choose to side-step the DMP and pursue legal remedies such as a judgment and then garnishment.
The Chapter 13 plan requires that ALL creditors participate; it is not an elective process. The Chapter 13 plan offers some unique and powerful tools to help consumers:
- Hierarchy in payments to creditors (Household and living expenses -1st, Secured creditors such as home and vehicles -2nd, IRS and other priority creditors-3rd, general unsecured creditors last). This helps prioritize your debt and ensure funds are available to take care of the things that are most important.
- Ability to reduce and eliminate a portion of debt.
- Ability to reduce interest rates (0% interest to unsecured creditors, potential to reduce interest rates or even the principal amount owed on a vehicle loan, etc.).
- Legal protection from creditors and creditor actions such as home foreclosure, vehicle repossession, judgments and wage garnishments, etc.
Bankruptcy is also a legal solution which forces creditors to play by a set of defined rules. It also terminates collection calls and collection activity and stops pending lawsuits. Neither credit counseling or debt settlement solutions can make this claim. (Source: Steve Rhode, Getoutofdebt.org)
With a successful plan comes benefits:
- Improved credit (improved debt-to-income ratio and no more late reports to the credit bureaus);
- Creditor protection;
- Save money on interest rates and late penalties;
- Balanced budget!
Bankruptcy clearly came out as the quickest and most effective solution to resolving problem debt. I’ve lived through it. I know it is painful. But with the power of law behind it and the total number of discharges to filings behind it, bankruptcy would seem to be the most cost effective way for debtors to deal with their debt in the shortest amount of time and receive the most comprehensive outcome. (Source: Steve Rhode, Getoutofdebt.org)
The Bottom Line:
There is no statistic that is going to tell YOU how successful you are going to be in a Chapter 13 plan, that’s depends mainly on you and the choices you make:
- Success is mainly motivated by the interest in the client taking steps to make the plan work.
- Choosing the right law firm with the proper understanding of the process and experience to administer the case through discharge is critical. It is almost impossible to succeed without legal representation and then it is imperative that an attorney or law firm comprehensively understand the Chapter 13 process. The attorney should:
- Ensure that you accurately qualify;
- Set up an optimal repayment plan;
- Provide timely and continual communication about deadlines and steps necessary for successful plan completion;
- Properly monitor the case over the life of the plan (i.e. case reviews) to ensure that everything is on-track for a timely court discharge.
Why Acclaim Legal Services?
With over 120 years of combined legal experience, we are leaders in our district. Our practice specializes in administering Chapter 13 cases and the results speak for themselves.
We offer a free consultation to guide you in the decision-making process. Call us today at 866-261-8282 for a free consultation with a licensed Michigan bankruptcy attorney or click here to schedule online.