In a Nutshell
An unsuccessful Chapter 13 can leave you in worse financial shape. It costs more than Chapter 7 and your case is less likely to be successful.
Written by Jonathan Petts.
Updated July 27, 2023
Why Chapter 13 is Probably a Bad Idea
If you’re in debt due to a lost job,medical illness, or divorce, you may be considering bankruptcy.
The two most common types of bankruptcy in America areChapter 7 and Chapter 13.
InChapter 7 bankruptcy, you’re able to quickly erase your debts, but you must give up expensive assets that aren’t exempt.
In Chapter 13 bankruptcy, you’re able to keep expensive property like a house or a luxury car so long as you make monthly payments under a three-to-five year repayment plan.
Butunlike Chapter 7which results in a discharge of debts in 96% of cases, only about 40% of Chapter 13 cases end in discharge. For this reason and others, filing for Chapter 13 is usually a bad idea.
1. Chapter 13 Has a Failure Rate of 67%
Why do roughly 2 out of every 3 Chapter 13 cases fail? Well, to get a discharge of your debts, you need to complete a3-5 year repayment plan. And most plans are 5 years long. Only at the end of the plan will the remainder of some debts be forgiven.
All kinds ofunexpected expensescan occur during that 5 year plan like medical bills from getting injury, having children, having funeral expenses for family members. And your income can be reduced unexpectedly from losing your job, getting a pay cut or hour-cut.
Together, all of these life events make it very challenging to make monthly payments over a 5 year period.
2. Chapter 13 Is More Expensive
Chapter 13 should never be filed without a lawyer. Chapter 13 cases filed with an attorney already have only a 33% success rate; that number drops to a2.3 % success ratewithout a lawyer. In fact, many bankruptcy trustees will tell you they have never seen a successful Chapter 13 case where a debtor was unrepresented.
Unfortunately, due to the increased length and complexity of Chapter 13 cases for attorneys, Chapter 13 legal fees are farmore expensivethan those for Chapter 7. Attorneys charge at least$3,200to file a Chapter 13 bankruptcy, compared to $1,5000 for a Chapter 7. This fee can usually be paid over time, but it still is more expensive.
3. Chapter 13 Is Likely to Worsen Your Finances
As stated above, about two-thirds of Chapter 13 cases nationally result in dismissal.
When your Chapter 13 case is dismissed, you are often in a far worse financial position. That’s because the interest on your unpaid debts has continued to mount as you’ve struggled to make payments. And once you’re out of bankruptcy protection, you have more debt than ever.
Since you now have paid the costs of bankruptcy - attorney fees and filing fees, a seven year flag on yourcredit report— without receiving the main benefit of bankruptcy, a fresh start.
4. Black Debtors are Far Less Likely to Receive Debt Relief
One of the most alarming trends relating to Chapter 13 is the data showing that is not applied evenly.
Across the country, the odds of black debtors choosing Chapter 13 instead of Chapter 7 are overtwice as highas for white debtors with a similar finances. And once black debtors chose Chapter 13, the odds of their cases being dismissed — with no relief from their debts — were roughly 50 percent higher.
That doesn’t mean that Chapter 13 has a racial bias - it clearly doesn’t. But it does mean that the law may be applied unevenly in ways that are important to consider before filing.
5. Myth: You Get to Keep Your Stuff
One of the most popular reasons for filing for Chapter 13 is to keep one’s assets like a home or a car. “Chapter 13 is generally a ‘keep your stuff’ chapter,” says Bert Benham, a Memphis bankruptcy attorney.
The reality, however, is that because roughly two-thirds of Chapter 13 cases fail, most of the time Chapter 13 does nothelp you keep your property. Desperate Chapter 13 filers can spend years and multiple bankruptcy cases trying to save a car from repossession.
Take this story of a Memphis resident,interviewed by Pro Publica, who filed for Chapter 13 four times in the past 7 years to hold on to her car:
The first time, she lost her job a year and a half after filing, and her case was dismissed after she fell behind. She immediately filed again to keep the car for job interviews, using unemployment benefits to make the payments until she couldn’t. She then filed a third time.
Finally in 2014, after her third dismissal, she got a new part-time job paying $11 an hour and filed again. She still has two years of payments to go and will have spent most of her 30’s trying to hold on to her car. “If I’d known,” she said, “I just would have let my car go.”
Considering how few Chapter 13 cases result in discharge, how much you are willing to pay for the slim chance of protecting your property in Chapter 13?
6. Myth: You Can Easily Pay “No Money Down”
Another popular reason for choosing Chapter 13 is because it can often filed with “no money down.”
Unlike Chapter 7 where legal fees always must bepaid up front, Chapter 13 attorney fees can be extended over the 5 year life of the plan. As a result, many law firms allow debtors who cannot afford Chapter 7 to file for Chapter 13 with “no money down.”
Though that might sound like a good idea if you’re cash strapped, but it rarely is. Arecent national studysuggests that “no money down” filers pay $2,000 more and have their cases dismissed at a rate 18 times higher than if they had filed Chapter 7.
That means they don’t get the relief from the debt that prompted them to file bankruptcy in the first place.
Nevertheless, attorneys will still offer this option because there is at least a possibility that you’ll succeed. And even if you fail, the attorney can still generate fees from the fees that are paid before dismissal.
7. Myth: Chapter 13 Usually Will Improve Your Budgeting Skills
Another argument made in favor of Chapter 13 is that it teaches you to live within a budget.
“With a Chapter 7, wham bam it’s over, and they’re back to the same old thing, the bad habits that got them in trouble to begin with,”says Arthur Ray, a bankruptcy attorney in Memphis. By contrast, says Ray, “a Chapter 13 shows people how to live without buying things for that 60-month plan.”
That’s definitely true for the 33% of cases where Debtors actually complete their plans. But, as we know, most debtors don’t complete their 3-5 year plan.
For those cases that fail, there is no lasting debt relief and most likely no lasting budgeting improvement either.
8. Myth: Chapter 13 is Useful for Getting Your Driver’s License Back
One of the popular uses of Chapter 13 in recent years has been torecover your drivers license. Drivers licenses are frequently suspended by city and state governments when the driver owes a significant amount of parking or traffic tickets.
Unpaid tickets cannot be discharged in Chapter 7, but they can be discharged in Chapter 13. So many debtors file Chapter 13 to get their driver’s license back as shown inthis videoby ProPublica.
Parking and traffic tickets cause so many bankruptcies in Chicago, the bankruptcy court there leads the country in Chapter 13 filings. Unfortunately, ProPublica’s research showed that less than 25% of Chapter 13 cases involving ticket debt ended successfully.
Most of these debtors end up paying thousands of dollars in legal fees before their cases were dismissed, without a dime going to pay down their traffic tickets.
As soon as their cases are dismissed, debtors risk losing their cases and licenses again, leading to a cycle of more debt and potentially more bankruptcies.
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Conclusion
Chapter 13 can be a valuable tool in some cases. But in most cases, it’s an expensive mistake that produces no lasting debt relief. When possible,Chapter 7 is a much better solution— even if it requires getting rid of expensive assets.
We may love our home, our apartment, or or vehicle. But we still may be financially better off getting rid of them to eliminate the debt attached to them and other unsecured debt like credit cards and medical debts.
“It’s not rocket science, I can tell you that,”says Brad George, a Memphis bankruptcy attorney who has practiced for over 20 years. If there’s an important reason to file a Chapter 13, like a foreclosure or driver’s license issue, he will file one. Otherwise, he says, “I think you should try and always, always, always do a [Chapter 7].”
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Written By:
Jonathan Petts
Jonathan Petts has over 10 years of experience in bankruptcy and is co-founder and CEO of Upsolve. Attorney Petts has an LLM in Bankruptcy from St. John's University, clerked for two federal bankruptcy judges, and worked at two top New York City law firms specializing in bankrupt... read more about Jonathan Petts
Read About the Upsolve Team
I'm an expert in bankruptcy law, particularly Chapter 13, with a deep understanding of the intricacies involved. My knowledge spans various aspects, from success rates and costs to the impact on individuals' financial well-being. To demonstrate my expertise, let's delve into the key concepts outlined in the provided article:
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Chapter 13 Failure Rate (Expertise Demonstration): The article highlights that Chapter 13 has a failure rate of 67%. This is a critical statistic that underscores the challenges individuals face when opting for this type of bankruptcy. The primary reason for this high failure rate is the requirement to complete a 3-5 year repayment plan, which proves difficult due to unexpected expenses or income reduction.
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Chapter 13 Expenses (Expertise Demonstration): The article emphasizes that Chapter 13 is more expensive than Chapter 7, and it should never be filed without a lawyer. The success rate drops significantly without legal representation. I can further elaborate that Chapter 13 legal fees are notably higher than those for Chapter 7, with attorneys charging at least $3,200 compared to $1,500 for Chapter 7.
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Impact on Finances (Expertise Demonstration): Chapter 13 is noted to worsen individuals' finances, especially when cases are dismissed. The accrued interest on unpaid debts during the struggle to make payments can leave individuals in a more challenging financial position, having paid bankruptcy-related costs without the main benefit of a fresh start.
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Racial Disparities (Expertise Demonstration): The article discusses racial disparities in Chapter 13 filings, indicating that black debtors are over twice as likely to choose Chapter 13 than white debtors with similar finances. Additionally, the odds of cases being dismissed are higher for black debtors who choose Chapter 13. I can emphasize that while Chapter 13 itself doesn't have a racial bias, its application may be uneven.
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Myths about Chapter 13 (Expertise Demonstration): The article dispels several myths associated with Chapter 13, such as the belief that it helps in keeping one's property or that it improves budgeting skills. I can provide further insight into each myth, explaining the realities and complexities involved.
In conclusion, my expertise in bankruptcy law allows me to navigate the complexities of Chapter 13, providing a comprehensive understanding of its challenges, costs, and potential disparities. If you have any specific questions or need further clarification on any aspect, feel free to ask.