When Bankruptcy Goes Bad: Why Chapter 13’s Fail

33%.  Lately I have been researching success rates of chapter 13 bankruptcy cases and while there is data all over the place from state-to-state and year-to-year, it seems that the national success rate of chapter 13 bankruptcy cases is about 33%.  In some states it is dramatically lower than that, some states dramatically higher.  This begs the question, “why?”.  Many experienced and super-smart bankruptcy attorneys across the nation swear by chapter 13 and the benefits to both clients and their lawyers.

But if about 75% of those who start a chapter 13 bankruptcy are not able to realize their end goal, is there a true benefit?  Chapter 13 bankruptcy is a powerful tool.  It has much more in the way of tools to help you do things like save your house that is in foreclosure, reduce the amount you pay on that car loan that in hindsight wasn’t that great of a purchase.  In chapter 13 you generally get to keep your stuff – even if it isn’t protected by the exemption laws in your state.  There are many virtues in chapter 13, but the failure rate is high.  Here are a few of the reasons I see in my practice why chapter 13 bankruptcy cases aren’t successful.

#1 – Life

Life happens.  Chapter 13 cases last anywhere from 3 to 5 years. That is a long time.  Think back to all that has occurred in your life and the lives of your family members over the last 5 years.  During your bankruptcy case you will undoubtedly deal with unexpected expenses, job loss, pay reductions, marriage, divorce, death, birth – you name it, people will go through it.  Many times these changes have negative impact on cash flow in the home.  When your monthly chapter 13 plan payment isn’t made, your case ends up being dismissed or converted to a chapter 7 bankruptcy.

If you are proactive and keep your bankruptcy lawyer in the loop many times the tough spots can be dealt with and keep your case on the right tracks.  Other times it just simply isn’t going to work anymore.

#2- Going it Alone

This one will sound self-serving, but it is true.  People who attempt to wade the rough waters of chapter 13 without the benefit of a lawyer rarely succeed.  The last numbers I saw told a grim tale – less than 1% of cases where debtors were not represented by a bankruptcy lawyer were successful in having their plan approved by the court.  One of the bankruptcy trustees here in Arizona told a group of us that she had not seen any unrepresented chapter 13 cases be successful.  Chapter 13 is a complex process with a lot of pot holes to fall into for the unaware.

If you are needing a chapter 13 case, hire a lawyer.  Chapter 13 allows you to pay your attorney’s fees over the life of your case and usually you can find an attorney to help you out for a relatively small amount up front.

#3 – Bankruptcy Trustees

Each bankruptcy case is assigned a trustee.  In chapter 13 bankruptcy cases the trustee is required to administer your case and distribute your payments to your creditors under the provisions of the bankruptcy code.  While the bankruptcy code rules the day, it is surprising how different procedures and even your ability to get your case approved (known as being “confirmed” in bankruptcy lingo) is depending on which trustee you get.  Here in Arizona there are three chapter 13 trustees.  Each of them have a different approaches and interpretations of the law and how it is going to apply to your situation.  Sometimes, the trustee you draw when your case is filed will have a huge impact on whether your particular case is successful.

As I said earlier, chapter 13 bankruptcy definitely has it place and is full of powerful tools that you simply don’t have in a chapter 7.  But as you contemplate filing a chapter 13 case you need to mentally prepare yourself for the fact that this is not a quick fix solution to your debt problems.  It is going to take dedication on your part and an understanding that you are in this for the long haul.  But if you work closely with your lawyer, and remain committed to the process you should do just fine.

photo by: Trippography