Do Chapter 13 payment plans really work? How many customers actually finish the plan and become debt free? How does it stack up to other options like consumer credit repayment plans? If you don’t know how likely a plan of action will succeed, how do you know what to do?
Historically, only one in three chapter 13 cases are completed nationwide. That is a pretty bad success rate in my opinion. Law professor Katherine Porter (@bankruptprof) wrote a provoking article about chapter 13 success rates in 2011 that basically called for an elimination of chapter 13 cases. Her study confirmed the dismal success rate of these cases.
Chapter 13 is a pretend solution. I use this term to mean a social program that does not work as intended but is not critiqued or reformed because its flaws are hidden.
That study always struck me as wrong. It seemed wrong because we were achieving a much higher success rate in Nebraska and in our firm’s cases. It seemed wrong because chapter 13 has so many advantages over chapter 7 that allow debtors to stop foreclosures, retain work vehicles and basically even the playing field against big bill collectors.
So I began to review success rates of bankruptcy cases and other debt solutions. In reviewing the 283 Chapter 13 cases our firm filed in 2011, our clients obtained chapter 13 discharges in 198 of those cases. That is a 70% success rate! Chapter 7 success rates are even higher. Of the 321 chapter 7 cases our firm filed in 2011, clients received discharges in 320 cases. That is a 99% success rate.
Bankruptcy Judge Brian D. Lynch reports a similar success rate for cases filed in the bankruptcy court for the the Western District of Washington. (See Measuring Success in Chapter 13) Another study by Ed Flynn of the American Bankruptcy Institute (Chapter 13 Revisited) revealed a nationwide chapter 13 completion rate of 50% for confirmed cases.
HOW DOES CHAPTER 13 STACK UP TO OTHER DEBT SOLUTIONS?
It is important to know the average success rate before starting a debt program. Here is what our studies indicate:
- Chapter 7. Nationally, about 95% of chapter 7 cases complete successfully.
- Chapter 13. It varies a lot from state to state and from law firm to law firm. Success rates vary from 40% to 70%.
- Credit Counseling Payment Programs. This is a hard figure to track since the credit counseling industry does not publicly report their success rate. But industry insiders report success rates of 20% to 25%. (See this article: Does Credit Counseling Work?)
- Debt Settlement. The “save-up-and-settle” programs are basically a scam with success rates well under 10%.
- Dave Ramsey Debt Snowball Plan. There is absolutely no reliable information about the success rate of these programs. I would estimate that only about 1 in 3 of those folks who begin this program become debt free.
WHY DO SOME BANKRUPTCY FIRMS HAVE HIGHER SUCCESS RATES?
Success is no accident. Some attorneys just work harder at it and have a higher commitment rate to clients. In every chapter 13 case there comes a time when a client needs help. Clients get injured and they lose jobs or go through divorce and they face many other problems that can cause a payment plan to fail. Successful chapter 13 attorneys have many tools to help clients through temporary problems:
- Motion to Suspend Payment. From time to time a debtor may ask the court to stop or reduce the bankruptcy payment if good cause exists.
- Amended Plans. When income decreases due to lower paying jobs or expenses increase due to medical problems, the original plan may be amended to make the payment affordable. Skilled attorneys know how to adjust payments when circumstances change.
- Home Loan Modifications. Chapter 13 can stop a home foreclosure and give a homeowner extra time to modify their home loan. When home loans are modified the monthly bankruptcy payment can be lowered typically.
- Referrals to Tax and other professionals. A good chapter 13 attorney can refer clients to other skilled professionals. Perhaps a client needs great accountant to prepare tax returns. Perhaps a good real estate agent is needed. Getting clients to the right professional help is key.
- Understanding the Real Cause of Financial Problems. Money problems are often secondary. Listening to your client and helping guide them through difficult times can make a real difference.
Does chapter 13 work? The evidence is overwhelming. In the hands of a skilled attorney, chapter 13 is a very real debt solution.