Rehabilitation or Liquidation: Consumers' Choices in Bankruptcy

Abstract

The purpose of this analysis is to identify the legal, environmental, and economic characteristics of debtors that are predictive of their Bankruptcy Code choices. The probability that debtors file under the rehabilitation procedure provided by the Bankruptcy Code (Chapter 13) is influenced by the availability of credit counseling as an alternative to bankruptcy and by the adverse effects of a liquidation bankruptcy (Chapter 7) on future ability to qualify for consumer and mortgage credit. More generous state laws protecting debtors' assets from liquidation in Chapter 7 have a negative effect on the probability that a debtor will contract to repay some debts out of future income in Chapter 13. The results also suggest that the enactment of the Bankruptcy Amendments and Federal Judgeship Act of 1984, which restricted Chapter 13 plans providing zero repayment of unsecured debts, precipitated a decline in the probability that nonbusiness debtors would choose the rehabilitation alternative.

Consumer Debt Repayment Behavior as a Precursor to Bankruptcy

“…The net benefits of bankruptcy include protection from past-due bills and civil actions from creditors such as foreclosures, liens, repossessions, or wage garnishments (Himmelstein et al 2005;Sullivan and Worden 1990;White 1998). The likelihood of filing increases with the net benefits of bankruptcy.…”

Chapter 7 or 13: Are Client or Lawyer Interests Paramount?

“…Nelson (1999), Domowitz and Sartain (1999), Sullivan and Worden (1990), Li and Sarte (2002), and Sullivan et al (1988) all find that financial incentives play a role in the household's choice of bankruptcy chapter. Most closely related to our analysis is a set of papers that explore factors driving a household's choice of bankruptcy chapters.…”

Consumer Bankruptcy Stigma: Understanding Relationships with Familiarity and Perceived Control

“…In contrast, Chapter 13 bankruptcies are infused with a symbolic, "moral statement in favor of honoring one's commitments" (Jacoby 2001, 229) because they require debtors to undergo a 3-to 5-year payment plan. The benefits of the chapters vary depending on an individual debtor's circumstances (Sullivan and Worden 1990). In practice, African American debtors are more likely than Caucasian debtors to file for Chapter 13 bankruptcies, meaning that they are also more likely to have debt repayment plans (Braucher, Cohen, and Lawless 2012;Cohen and Lawless 2012;Lefgren, McIntyre, and Miller 2010;ProPublica 2017).…”