Does Chapter 13 work? How successful are these cases? What is the chance of your case being approved by the court? And how are you to decide if filing Chapter 13 is good decision if you have no sense of how often these cases get approved and completed?
I recently reviewed all the bankruptcy cases my firm filed in 2011 to measure our success rate. Why go back to 2011? Because Chapter 13 cases can last as long as 5 years, so you have to go back that far to count how many cases completed successfully and how many crashed and burned. The results were amazing, even to someone who works in these cases every day.
Nationally, only about 30% of all Chapter 13 cases receive a discharge. That’s not a great success rate in my book. The success rate varies from state to state, and the Trustee and Judge assigned to a case greatly affect the outcome. In Nebraska I have heard it said that about 60% of Chapter 13 cases result in a discharge. The Discharge is the order entered at the end of a bankruptcy case that wipes out unpaid debt when a debtor makes every required required monthly payment. Chapter 13 cases require a monthly payment over a 3 to 5 year period of time.
In reviewing the 283 Chapter 13 cases our firm filed in 2011, our clients received a Chapter 13 discharge in 198 of those cases. That is a 70% success rate! When you consider how many of those clients went through significant life changes during that time such as loss of job, divorce, medical emergencies, depression, alcohol abuse, problems with children, etc., the success rate is amazing.
The success rate of chapter 7 cases is even higher. Of the 321 Chapter 7 cases filed, 320 received chapter 7 discharges. That is a 99% success rate!
What about the 30% of chapter 13 cases that did not complete? Of the 283 chapter 13 cases we filed, 80 did not receive a chapter 13 discharge. Five clients converted their case to chapter 7 and received a discharge. Twenty clients eventually filed another bankruptcy. So, if we count the cases converted to chapter 7 and the clients who just filed another bankruptcy to get a discharge, the success rate goes up even more.
What was interesting about the 80 cases that did not complete the chapter 13 process, 55 of the clients did not convert to chapter 7 or file a new bankruptcy later. What happened to those 55 clients? There are several answers to that question. First, you would assume that the creditors would go back to suing and garnishing those clients, but in fact that was not the case. It appears that most creditors simply write off an account once a bankruptcy case is filed and they do not reopen collections when a bankruptcy is dismissed without a discharge. So, even a dismissed chapter 13 case did produce a positive affect of causing bill collectors to fade away. Other dismissed were often filed to stop a pending home foreclosure and did not involve much other debt. It must be assumed that a foreclosure was completed after the case was dismissed and there was no further need to be in bankruptcy.
SUCCESS RATE OF OTHER DEBT RELIEF ALTERNATIVES:
The importance of knowing the bankruptcy success rate is that it enables one to compare it to other forms of debt relief. It is generally estimated that Consumer Credit Counseling programs (also called Debt Management Programs) have about a 25% success rate. Only one if four debtors who enter a credit counseling payment plan complete the program. That is a poor success rate in my opinion.
Debt settlement programs generally have the worst success rate of less than 10%. The save-up-and-settle programs almost never work.
WHY DO SOME BANKRUPTCY FIRMS HAVE HIGHER SUCCESS RATES THAN OTHERS?
High chapter 13 success rate are not accidental. At some point almost every case we handle encounters a problem. Clients lose jobs or they get sick or injured or they deal with family stress and divorce matters or depression and other problems. A three to five year case is long. A skilled bankruptcy attorney, however, can do several things to keep a case going during bad times:
- Motion to Suspend Payments. Your attorney may ask the court to suspend payments for good cause.
- Amended Plans. Sometimes the original plan is no longer feasible. Perhaps a monthly payment should be lowered for 6 months while a client recovers from a car accident or illness.
- Motion to Shorten Plans. When clients become disabled or other hardships cause a permanent drop in income, in certain cases the length of a case may be shortened, even if the original plan was required to last five years.
- Home Loan Modifications. Chapter 13 cases stop foreclosure actions, and that may give a homeowner the necessary time to refinance their home through the Home Affordable Loan Modification Program (HAMP).
- Referrals to tax and other professionals. Sometimes you need a great accountant to file or amend tax returns. Sometimes you need a great real estate agent to sell a home quickly. Sometimes you need to hire a great family attorney or counselor. A good bankruptcy attorney is connected to other great professionals.
- Creative Lawyering. There are written rules and then there are the “unwritten rules.” A good bankruptcy attorney has a few tricks in the bag they can’t talk about, but that’s why you hire them. They have experience that helps them ethically navigate around barriers others crash into. Experience matters.