BANKRUPTCY BY THE NUMBERS

Measuring Performance in Chapter 13: Comparisons Across States

BY: GORDON BERMANT        Burke, Virginia
& ED FLYNN        Executive Office for United States Trustees (1)


       The consumer provisions pending in the proposed reform legislation rely heavily on projected increases in chapter 13 filings as a vehicle to return large amounts of money to general unsecured creditors. At least four reasons are cited to believe that this reliance is misplaced: 1) the pool of chapter 7 debtors who would move into chapter 13 don't have the capacity to repay at the levels reform proponents hope for; 2) even if current chapter 7 debtors who were means-tested into chapter 13 performed at the level of the average current voluntary chapter 13 debtors (a very big if), they would not repay the amounts of unsecured debt that have been claimed as the fruits of means testing; 3) the various deductions and exclusions in the most recent draft bills set rather easy targets for pre-bankruptcy planning that will allow debtors to remain in chapter 7; and 4) anti-lien stripping language in the legislation significantly reduces the chapter 13 incentives for debtors who might otherwise select the chapter. (2)

       Given the confidence placed on chapter 13 as an ambulance to rescue unsecured creditors, it is a good time to kick the tires. Perhaps the most compelling characteristic of chapter 13 is its regional variability along virtually every important dimension of the practice. Chapter 13 filing rates remain relatively stable over time at about 30 % of total filings. Completion rates hover nationally at about one-third of confirmed plans but this national average is a composite made up of extremely variable figures arising from different courtrooms, divisions, and districts. For example, between 1989-1999, Tennessee displayed chapter 13 consumer-case filing percentages ranging between 55.5% and 65.9%, while Massachusetts ranged between 12.5% and 17.6%. (3) Comparable variations can be found in almost every important part of the practice.

       Wide variation in chapter 13 practice was a cause of concern for the National Bankruptcy Reform Commission. A strongly dissenting minority didn't dispute the findings about variability but opposed the remedies proposed by the majority. The published dissents presaged the means-testing legislative proposals developed in the House and Senate during the last three years. (4)

       Unless one takes the Panglossian position that consumer bankruptcy practice is everywhere a reflection of a system perfectly attuned to local needs and abilities, large variation in chapter 13 performance should be a matter of continuing policy concern. The silver lining in such variability is that districts and states can be viewed as laboratories in which practices are being tested against norms of chapter 13 success. (5)

       This assumes that there is consensus on the norms for chapter 13 success. What are the appropriate measures of chapter 13 performance that allow districts to be compared with each other on all important dimensions of the practice? Here, with one example, we illustrate the problem, show a solution, and indicate that the solution raises its own questions and points to other problems.

Disbursements to creditors

       It should be uncontroversial that one important norm of chapter 13 is to return as much money as is reasonable to creditors, including general unsecured creditors. The reports of the standing trustees to the Executive Office for U.S. Trustees (EOUST) contain meticulous records of these returns, so it is a fairly straightforward matter to aggregate the reports to arrive at a description of where the money comes from as the system now operates. (6)

       For the twelve months ending September 30, 1998, standing trustees disbursed approximately $2.9 billion, of which $2.5 billion went to secured, priority, and unsecured creditors. (7) Table 1 shows the five states with the largest disbursements, the five states with the lowest disbursements, and the six states in the middle of the distribution.

Table 1: Total Payments to All Creditors, by State, FY 98

HIGH FIVE

MIDDLE SIX

LOW FIVE

Minnesota-North Dakota (8) $33,319,502
Tennessee
$303,424,262 Puerto Rico-Virgin Islands (8) $28,884,891 Rhode Island $2,176,580
Texas
$255,751,205 Massachusetts $27,921,556 Hawaii $1,903,131
Georgia
$248,511,363 Kentucky $27,161,966 Vermont $1,400,215
California
$231,785,864 Arizona $25,078,583 Alaska $1,262,719
Florida
$119,442,740 Oregon $24,690,265 South Dakota $1,037,949

blue dashed  line  

     The table shows that the top five states contributed more than 45% of the $2.5 billion disbursed for the entire country. The mean amount per state was slightly over $52 million and the median, falling between the values for Massachusetts and Kentucky, was $27.5 million. Thus Tennessee, with a population approximately equal to the population of Massachusetts, disbursed almost 11 times more money to chapter 13 creditors. Indeed, standing alone, Tennessee generated more than 10% of the national total disbursed to creditors.

       Table 2 shows the top five, middle six, and bottom five states in terms of disbursements to unsecured creditors. The total nationwide disbursements to unsecureds was $536.3 million, of which the top five states contributed 41%. Tennessee by itself contributed 10%. There is considerable overlap between Tables 1 and 2 at the top and bottom of the distribution.

Table 2: Total Payments to Unsecured Creditors, by State, FY 98

HIGH FIVE

MIDDLE

LOW FIVE

South Carolina $8,419,155
Tennessee
$52,501,851 Massachusetts $7,083,781 Connecticut $608,483
California
$49,400,612 Oklahoma $6,884,671 Rhode Island $580,737
Texas
$43.726,556 Oregon $6,600,858 South Dakota $506,284
Georgia
$41,037,131 Utah and Wyoming $5,666,161 Alaska $253,737
Ohio
$31,446,399 Arkansas $5,577,167 Vermont $223,880

blue dashed line      

        So far, then , we see that a small number of states contribute the lion's share of disbursements to creditors, and that payments to unsecured creditors, though not a large percentage of payments to all creditors, nevertheless track those payments reasonably closely.

Case volume and per case yield

       Total disbursements to creditors reflect two variables: the number of cases paying during the year multiplied by the average payments per case: in other words, case volume times yield per case. Equivalently, per-case yield equals total disbursements divided by case volume. In the current systems of record keeping and reporting by courts, trustees, and U.S. Trustees, there is no publicly available national database in which payments per individual case and case duration are linked together with a case identifier. Because chapter 13 cases last for up to five years, the calculation of per-case yield requires an estimate of the appropriate case volume to use as a denominator.

       Per case yield is an important measure of chapter 13 performance because it permits comparisons between states with large and small case volumes. This is an essential step because, otherwise, we are faced with a serious confound between case volume and state population. As shown in table 1, with the obvious exception of Tennessee, there is a strong relationship between the population of a state and the amount of chapter 13 money generated in the state. California, Texas, Florida, and Georgia rank 1,2,4, and 10, respectively, and Tennessee ranks 16. The ranks of the middle six states ranged from 13 to 28, and those of the bottom five from 42 to 49. The predominant mediating variable is chapter 13 volume. Table 3 shows the average number of chapter 13 filings during the years 1995-1999 for the high five, middle six, and low five states in the distribution. These numbers, calculated for all the states, served as the denominators for our calculations of per case yield. (9)

Table 3: Average Chapter 13 filings, 1995-1999

HIGH FIVE

MIDDLE SIX

LOW FIVE

Utah+Wyoming 4,794
Georgia
36,765 Arizona 4,396 New Hampshire 272
California
36,057 Minnesota+North Dakota 4,285 Rhode Island 239
Texas
29,913 Oregon 3,474 Vermont 123
Tennessee
28,645 Kentucky 3,406 Alaska 121
Florida
14,412 Oklahoma 3,293 South Dakota 110

      blue dashed line

       Comparisons of Table 3 with Tables 1 and 2 show obvious connections between case volumes and total disbursements, particularly at the extremes of the distributions. But there are also some exceptions and details that, as is often the case in bankruptcy, may turn out to be more interesting than the rule.

       Table 4 shows the top five, middle six, and bottom five states in terms of per case yields to all creditors. Table 5 displays the same rankings for per case yields to unsecured creditors.

Table 4: Per Case Yields to All Creditors, FY 98

HIGH FIVE

MIDDLE SIX

LOW FIVE

Indiana $7,874
Michigan
$12,010 Minnesota+North Dakota $7,776 District of Columbia $4,685
Washington
$11,796 Illinois $7514 Hawaii $5,086
Oklahoma
$11,555 Louisiana $7,438 Maryland $4,496
Vermont
$11,347 Kansas $7,427 New Jersey $4,080
West Virginia
$11,233 Mississippi $7,408 Puerto Rico $2,942

       blue dashed line

       It is quite clear that this measurement changes the cast of characters acting in the ranks of the top, bottom, and middle levels of chapter 13 performance. When the effects of case load per se are removed from the equation, both large and small states can be found at both ends of the distributions as well as in the middle. South Dakota, the state with the lowest case volume, reappears as the national leader. Tennessee, far and away the national leader in total disbursements, is in the middle of the pack on a per- case yield basis to unsecured creditors.

Table 5: Per Case Yields to Unsecured Creditors, FY 98

HIGH FIVE

MIDDLE SIX

LOW FIVE

Louisiana $1,859
South Dakota
$4,603 Idaho $1,841 Arkansas $919
Iowa
$3,527 Tennessee $1,833 New Mexico $900
Ohio
$2,992 Vermont $1,814 Pennsylvania $878
Kentucky
$2,947 Missouri $1,814 New Jersey $763
West Virginia
$2,882 Illinois $1,798 Connecticut $443

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What does this mean?

       Readers will have their own explanations for why some of these states are positioned as they are or how case volume and per case yield relate to each other. In respect to per case yield differences between jurisdictions (10), numerous explanations are theoretically possible and, in the absence of definitive data, plausible a priori. Here, for example, are a few among the possible explanations that are generally compatible with the data but not necessarily with each other:

Rates of plan completion

       Beginning with their FY98 reports to the EOUST, standing trustees have reported the percentage of terminating cases that were completed, converted, dismissed, or granted a hardship discharge. This information allows an initial exploration of the relationship between the percentage of cases that complete and the per case yield to unsecured creditors. Table 6 repeats the information in Table 5 and adds columns showing the percentages of cases terminated by completion during FY98. Table 7 transposes the logic of Table 6, showing the top five, middle six, and low five states in terms of percentage completions, and adds columns showing the related per case yields to unsecured creditors. The two tables together give a fuller representation of a possible relationship between case completion rate and per case yields to unsecured creditors.

Table 6 : Per Case Yields to Unsecured Creditors(% Successful Completions), FY 98

HIGH FIVE

MIDDLE SIX

LOW FIVE

Louisiana $1,859 (29%)
South Dakota
$4,603 (17%) Idaho $1,841 (40%) Arkansas $919 (31%)
Iowa
$3,527 (41%) Tennessee $1,833 (28%) New Mexico $900 (30%)
Ohio
$2,992 (43%) Vermont $1,814 (34%) Pennsylvania $878 (17%)
Kentucky
$2,947 (37%) Missouri $1,814 (25%) New Jersey $763 (15%)
West Virginia
$2,882 (47%) Illinois $1,798 (29%)

Connecticut

$443 (15%)

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Table 7 : Percent Successful Completions (Per Case Yields to Unsecured Creditors), FY 98

HIGH FIVE

MIDDLE SIX

LOW FIVE

Minnesota-ND 29% ($2,640)
West Virginia
47% ($2,882) Louisiana 29% ($1,859) D.C. 16% ($1,191)
Oregon
46% ($1,900) Washington 28% ($2,635) Connecticut 15% ($443)
Nebraska
44% ($2,288) Tennessee 28% ($1,833) Alaska 15% ($2,094)
Ohio
43% ($2,992) Nevada 27% ($1,648) New Jersey 15% ($763)
Iowa
41% ($3,527) Oklahoma 27% ($2,091) Florida 11% ($1,316)

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       For Table 6, the average completion rates for the top five, middle six, and bottom five per-case- yield states are 37%, 31%, and 22%, respectively. For Table 7, the average per case yield to unsecured creditors for the top five, middle six, and bottom five percent-successful-completion states are $2,717, $2,117, and $1161, respectively. Note that there are large and small states spread throughout the tables, both in terms of overall population and in terms of chapter 13 case volume. The relationships shown in Tables 6 and 7 may be related to factors endogenous to the debtors, or to case management practices, or both. But they strongly support the conclusion that returns to unsecured creditors are higher when plans are completed.

       In one sense, this is not a surprising result, given a prevailing view that unsecured creditors are served late in chapter 13 if at all. But if returns to unsecured creditors are a norm to be honored in chapter 13, and if case management procedures, beginning with plan construction and continuing with plan oversight, lead to higher plan completions, then the relationship demonstrated here counsels attorneys, trustees, and courts to develop and practice such procedures. Given a national completion rate of only about one-third, it seems there is some distance yet to go.


End Notes:

1. All views expressed in this article are those of the authors, and do not necessarily represent the views of the Executive Office for United States Trustees.

2. See previous issues of this column for documentation of points 1, 2, and 3, and also Culhane, Marianne B., and White, Michaela M., Taking the New Consumer Bankruptcy Model for a Test Drive: Means Testing Real Chapter 7 Debtors. 7 Amer. Bnkry. Inst. L.J. 27 (1999). The anti-lien stripping language is contained in a pending amendment to 11 U.S.C. 1325(a) that renders 506 inapplicable to 1325(a)(5) for a purchase money interest in an automobile acquired within five years before filing. See Hildebrand, Hank, Survey Shows Big Impact of Anti-Lienstripping Provision in S. 625, www.abiworld.org/legis/bills/99mayhildebrandsurvey.html (May 27, 1999). We recognize that it may be naive to assert that the intent of the legislation is tied necessarily to realizing high paybacks to general unsecured creditors. Taken all together, the credit counseling, means testing, debtor education, tax form reporting and auditing, anti-lien stripping, and extended chapter 13 plan duration provisions create a climate that could significantly reduce consumer filings-and this might satisfy the fundamental intention of the proponents.

3. See http://www.usdoj.gov/ust/statistics/stats-new/05/statistics5.htm

4. National Bankruptcy Review Commission, BANKRUPTCY: THE NEXT TWENTY YEARS (October 20, 1997). See especially pages 233-302 and the several dissenting reports on consumer bankruptcy. See also Braucher, Jean, Counseling Consumer Debtors to Make Their Own Informed Choices-A Question of Professional Responsibility, 5 Amer. Bnkry. Inst.L.J.165 (1997), and articles cited there.

5. As used here, "norm" means an ideal or aspired-to outcome. When quantified and put onto timetables, norms are expressed as goals.

6. The data here are based on all U.S. jurisdictions except for Alabama and North Carolina, which are not included in the U.S. Trustee Program. These are, however, very active chapter 13 jurisdictions.

7. Excluded from the $2.5 billion is $244 million to debtors attorneys through plans, $127 million back to debtors after their cases terminated, $2.8 million to the trustees as fees for unconfirmed filings, and $1.7 million for miscellaneous noticing.

8. Administered jointly in FY98.

9. The rationale for using this number as the case volume denominator may be derived intuitively or algebraically. Readers who would like full account of the reasoning may contact us at gbermant@erols.com or Edward.Flynn@usdoj.gov.

10. Of course we recognize that several of the states shown in the tables, and others, comprise more than one judicial district. Differences between districts within states, divisions within districts, and courtrooms within divisions, are all sources of variations in chapter 13 practices, of which some are policy-relevant and will be the subject of subsequent research.