Chapter 13 bankruptcy is sometimes referred to as a reorganization bankruptcy. You set up a three- to five-year payment plan to reduce or pay off your debt. The court reviews your assets and income when deciding whether to approve your plan, and the plans don't leave a lot of room for luxuries.
Chapter 13 cases require a lot of motivation to carry through three to five years of voluntary austerity, but that's just one reason they fail. Learn whether Chapter 13 is worth it and why there's a low success rate with this type of bankruptcy.
Emotions, Fortitude, and Motivation
Chapter 13 is challenging. The pre-petition prep process is probably the most emotionally wrenching period of bankruptcy. Debtors (those filing for bankruptcy) may be asking themselves:
- Will this Chapter 13 save my house (or car)?
- Can I afford the payments?
- Why do I have to gather all of this information?
- Will the court approve my plan?
- Am I doing the right thing?
- What if (my boss, my neighbors, the PTA) finds out?
Chapter 13 isn't easy to carry out, and many things happen along the way that could derail a case.
Lack of Resources
Many Chapter 13s are filed to stop a foreclosure or some other unwanted event like a car repossession or trial on a lawsuit over a debt. Often, clients don't consult an attorney until the very last minute, which doesn't give the attorney much time to review the client's financials before the case must be filed. That has to wait until later when they're gathering all of the information needed for the bankruptcy schedules.
Sometimes it's not until the attorney has access to the particulars on income and expenses that they see that the client can't afford to keep the house or late model car.
Disruption in Income
Any disruption in the flow of income, like illness or job loss, will make it very difficult to keep or get back on track with a Chapter 13 repayment plan. Children are born or their needs change and marriages begin and end. It's hard to go five years without credit, major car repairs, replacement of an appliance, insurance deductibles, emergency travel, or even a vacation. While some of these items can be built into a Chapter 13 budget, but there's not much room for savings. Creditors don't like it when you hold back money that you could be paying them.
Clients also get tired and want out. Again, this is a function of time as much as anything else. Five years on a strict repayment plan is exhausting. Many clients decide that it's just not worth it, especially if they filed Chapter 13 to save an asset like a house.
Filing Without an Attorney
According to the United States Courts, about 9% of bankruptcy cases are filed by debtors pro se (meaning on their own without attorney assistance).
It's possible to get through a Chapter 7 case without an attorney, but not advisable. Self-filed Chapter 13 cases are rarely successful. Most don't get beyond the plan confirmation stage, if they get that far. Chapter 13 plans are subject to provisions like the "Best Interest of Creditors Test," the "Good Faith Test," and "Chapter 13 feasibility." Experienced bankruptcy lawyers, trustees, and judges argue over these provisions all the time, so they would be extremely challenging for a layperson to navigate.
This is borne out in a study conducted by the Bankruptcy Court for the Central District of California. The Central District has a particular interest in this issue because it has more pro se filers than any other district in the country. The 2018 study found that approximately 63.8% of pro se Chapter 7 filers obtained a discharge (compared with 94.1% of those represented by an attorney). Less than 3% of those filing Chapter 13 pro se were able to get their repayment plans confirmed (compared with 69.1% of those represented by an attorney).
Filers without attorneys are more successful with Chapter 7 cases because in many ways, they're simpler. There's no payment plan to negotiate; you either meet the means test or you don't.
There are also legitimate strategic reasons to leave Chapter 13 before the payments are completed.
Chapter 13 debtors file for any number of reasons. Many file Chapter 13 to take advantage of the automatic stay, which halts collection actions, without any intention of actually completing a case. Common reasons to file with no intention of completing the payment plan include:
- Having time to sell property
- Slowing down a lawsuit and negotiating a settlement
- Spreading out attorney fees through plan payments
- Managing student loans.
Not all of the debtors in those cases would necessarily benefit from completing a payment plan and receiving a Chapter 13 discharge. What they needed was time, and filing Chapter 13 provided it.