Two out of three confirmed Chapter 13 cases fail. Those are cases that met all the tests and got the judge’s OK.
And still they crater.
That’s a heap of people, deeply in debt, who don’t make it out of debt by using Chapter 13.
Arizona bankruptcy lawyer John Skiba has a theory about those failures:
- Lack of a lawyer
- Luck of the trustee draw
I wouldn’t argue against any of John’s culprits: none of the things he lists help a Chapter 13 debtor.
But I have an alternate set of reasons that those trying to reorganize their debt through Chapter 13 don’t make it to the end.
#1 Overly ambitious goals
Trying to keep a doomed house has to be the foremost reason that Chapter 13 cases crater.
The mortgage payments were too large to begin with, or circumstances conspired to put the debtor deep in default.
The amount necessary to reinstate the mortgage, while continuing to make current payments, is simply too large to pull off within the five year limit of Chapter 13.
If it isn’t the house, it’s the expensive car or the time share. In short, it’s the idea that nothing else should have to change to get out of financial trouble through Chapter 13.
#2 Inflexible calculation of required payments
The Bankruptcy Code says that a Chapter 13 debtor must devote all of his disposable income to repaying creditors for 3 or 5 years, depending on his prior annual income.
That’s right, ALL of the available money.
Worse, the drafters of BAPCPA (the bankruptcy “reform” law) thought they could develop an objective formula for calculating what is available that would fit each and every family who needed bankruptcy relief.
One doesn’t have to look beyond the families on your block to see the enormous variation in circumstances that impact family finance. Yet our law makers wanted to deprive judges of any discretion to make the rules adapt to the real world. One size shall fit all, they decreed.
And, this business of “all” continues to distress me. What responsible financial counselor would tell a client to spend every dollar they make?
Whether you save for emergencies, retirement, or big purchases, living below your means is the key to financial stability. Chapter 13 should promote reasonable saving.
Not in Chapter 13, says the current practice. The formulas applied to debtor’s budgets make no allowance for savings.
When, as John said, life happens, the debtor has no reserves.
#3 Reorganization is no longer needed
Our definition of failure may be overbroad.
Individuals often file bankruptcy as a knee jerk reaction to a lawsuit or a foreclosure. With a chance to evaluate options or get some emotional distance from difficult decisions, debtors often decide that they don’t need to reorganize.
Sometimes, the Chapter 13 was protection while they negotiated a loan modification. Or sell the house rather than have it foreclosed.
Sometime, the plan was completed but by reason of BAPCPA changes, no discharge was permitted, though the plan did everything it was expected to.
Sometimes, further reflection says they don’t want to, or can’t really, save the house.
Sometimes, Chapter 7 will provide all the relief the debtor needs.
Conversion to Chapter 7 or dismissal may not, in fact, be failure.
Chapter 13 success
Completion of a Chapter 13 plan requires discipline on the part of the debtor. It benefits from continuing involvement of experienced counsel.
A bit of luck doesn’t hurt.
It could be enhanced if Chapter 13 trustees moved away from the traditional view that Chapter 13 is a privilege.
Under BAPCPA, with the means test pushing debtors to 13 and the super discharge shrunken, Chapter 13 is no longer a treat but just travail for the financially stressed.
Nonetheless, Chapter 13 remains a marvelous tool. (And here in Northern California, the success rate is closer to 75%!)
Image of road sign courtesy of fireflythegreat.