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Sunday, June 27, 2010

Today's Consumers Prefer Chapter 7 Bankruptcy 3 to 1

Today's Consumers Prefer Chapter 7 Bankruptcy 3 to 1

While the media focuses on the total number of filings, a drill down into those data can also tell us something about the pain that families are suffering. In the last two years, since the foreclosure crisis, the fraction of all consumer filings that are chapter 13 cases has plummeted. In the language of taste tests of soda pop, today's consumers prefer chapter 7 three-to-one over the competition (aka chapter 13). Check out these data from the UST Program. In 06-07, chapter 13s averaged about 38% of all filings. In 08, there was a steep drop to 31%; and in 09, a further drop to 26.5%. These are really big changes in such a large system.
Chapter13Filings
The obvious explanation for this fall in chapter 13 is a decline in people trying to save their homes, which we think is a major reason that people chose chapter 13 instead of chapter 7.
Homeowners in 2008 and 2009 seem to have realized three things: 1) home prices are not going up anytime soon; the "crisis" is  a long-term change in the housing and mortgage markets; 2) they are not going to get a loan modification; the Administration's projected numbers of those who would be helped by HAMP and HARP were fanciful (dare I say "misleading"?); and 3) they simply cannot make their mortgage payments in a world where overtime is being eliminated, unemployment is a fear or reality, increased tax burdens loom as states and localities can't make ends meet, and many other costs remain high (gas, health care, etc.) Many people had these realizations in 2008, and many more had them in 2009. Each year, the share of chapter 13 filings plummeted. And all this, despite BAPCPA's purported intent of driving up chapter 13 filings and making people pay more of their debts.
Homeowners' pessism may not be a bad thing. In a research paper that I authored with John Eggum and Tara Twomey, we found that chapter 13 filers in April 2006 (before the foreclosure crisis) had very high homeownership costs, with more than 70% of homeowners trying to save homes that subsumed more than 30% of their incomes (the long-standing standard for affordable housing). The lower fraction of chapter 13 filings may ultimately translate to a higher rate of plan completion for chapter 13; if consumers are reticient to try to save homes with high costs, maybe more than 1 in 3 chapter 13 plans will make it to completion and a higher fraction of chapter 13 debtors will earn a discharge. Time--a long time, given the five year repayment plans that dominate chapter 13--will tell if the lower proportion of chapter 13 cases as a share of total bankruptcies will correlate with a higher discharge rate for chapter 13.

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