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BANKRUPTCY BY THE NUMBERS
Sources of Variability in Chapter 13 Performance1
Contributing Editors:
Gordon Bermant
Burke, Va.
and
Ed Flynn
Executive Office for United States Trustees
Lawyers, trustees and judges who work regularly with
chapter 13 consumer cases understand the chapter's operation very well. The
norms and practices in each judicial district have been thoroughly rehearsed by
these participants, who repeat their parts of the chapter 13 process hundreds if
not thousands of times each year. If one were to conduct surveys of satisfaction
with the ways chapter 13 operates in the more than 90 judicial districts, we
believe that the operations would receive generally favorable report cards from
the local participants.
From a national perspective, the most noticeable feature of chapter 13
performance is its variability. There is great variance among districts in the
percentage of consumer cases filed in chapter 13 and in confirmation
requirements; returns to secured, priority and unsecured creditors; successful
completion rates; and associated trustee management practices. This variability
has been observed for many years and has become the subject of critical
commentary. The thrust of the criticism is that the fairness of the disparate
chapter 13 practices must be called into question.2
There is therefore an apparent anomaly: Chapter 13 practices are favorably
received in their individual venues, but disparities of practice among the
venues create concern that in some locations the chapter 13 practice does not
operate as it should for the benefit of debtors, creditors or both. Note that we
are not referring to problems of dishonesty or serious mismanagement, of which
no one approves, but rather of variability of practices approved within the
local bankruptcy communities.
The variability in
chapter 13
practice invites the question of whether some practices are preferable over
others. It is in the spirit of seeking such "best practices" that we are
reviewing the quantitative information available from the standing trustees,
courts and other sources of information to see what they tell us about how
chapter 13 works throughout the country. This information will eventually
require supplementation with questionnaires and other methods of inquiry.
In recent contributions to this column, we presented some early findings of
our work.3 We extend those
findings here by focusing on a more detailed review of stability and change
during fiscal years 1998 and 1999. We have two purposes: first, to provide an
accurate account of chapter 13 disbursements to secured, priority and general
unsecured creditors, and second, to demonstrate variability in performance at
the state and judicial district level. We proceed by "drilling down" from
information aggregated at the national level to information about separate
judicial districts.
Disbursements Nationwide, Fiscal Years 1998 and 1999
Table 1 summarizes the disbursements made by chapter 13 standing trustees
during fiscal years 1998 and 1999. Payments to creditors are divided into
secured, priority and general unsecured classes. The attorney fees reflect only
those that were paid out through the plan; this can range from a small to a very
large portion of the total fee for the lawyer's service. The trustee percentage
fees represent the costs of operating the trustee operations. The "other"
category includes, among other costs, noticing and clerks' office fees paid by
trustees through the chapter 13 trust fund.
There was an overall increase in disbursements of 11.6 percent from 1998 to
1999. Creditors, excluding debtors' attorneys taking part of their fees through
the plan, received 86 percent of all disbursements in 1998 and 87 percent in
1999. Debtors' attorneys took 8.4 percent in 1998 and 7.6 percent in 1999. We do
not know what percentage of total debtor attorneys' fees are represented by the
amounts paid through plans, though we believe it varies considerably from
district to district. These fees are paid at the front end of the plan as an
administrative expense.
The trustee percentage fees, representing approximately what it costs to run
the chapter 13 standing trustee operations, accounted for 4.7 percent of
disbursements in 1998 and 4.8 percent in 1999.
To a first approximation then, chapter 13 is a
$3 billion operation that pays 86-87 cents on every dollar collected to its
primary clients, the creditor body. The secured creditors receive approximately
two-thirds of all creditor disbursements, and the general unsecured creditors
receive between 21 and 23 percent of them. The remainder goes to the category of
creditor classed as priority unsecured. There are good reasons to believe,
however, that this category is treated differently in different districts, so
the exact extent of priority debt and repayment is not completely clear at the
national level.4
Statewide Disbursements, 1998 and 1999
A large percentage of chapter 13 disbursements arise from a small number of
states. Table 2 shows that the same top 12 states out of 485
contributed 70 percent of all disbursements in both 1998 and 1999. The
consistency of this performance is rather striking. Note also that the top six
states contributed 50 percent of the total. At the other end of the scale, 19
states contributed the last 5 percent of the total in 1998, and 17 did so in
1999.
District-wide Disbursements, 1998 and 1999
We can drill down further to learn how disbursements are distributed across
judicial districts. What sources of variation might we expect to find in the
exploration? Note that each of the 12 states in Table 2 has at least two
districts (OH, MI, VA and WA), some have three districts (TN, GA, FL, IL and LA)
and some have four (TX, CA and NY). In general, districts within a state will
differ in terms of population size, rural-urban mix, average income, other
demographic variables, and the bankruptcy law and local rules specific to the
federal district. If there is more than one judicial division within the
district, performance differences in chapter 13 may be even further refined. In
particular, we may expect that the bankruptcy court, chapter 13 standing
trustees and the local bankruptcy bar in each location will have developed a
clear appreciation of what is expected from each participant in the process.
This set of mutual understandings, which may be largely tacit, is often referred
to as "local legal culture."6
On the other hand, districts will share state law (including the state's
decisions regarding exemptions in bankruptcy), the bankruptcy law of the federal
circuit to which the state belongs, and whatever traditions of practice have
been established through the state bar.
There is no theory that successfully relates these and other factors into a
series of predictions about consistency of chapter 13 operations among districts
within a state. Some factors are out of the control of the bankruptcy system
while others are subject to judicial and administrative improvements. When we
drill down into the district performances of states that are large chapter 13
producers, we find variability. All of Tennessee's districts are in the top 25
percent of districts ranked by total returns to creditors. Three Texas districts
also fall in the top 25 percent. On the other hand, though New York is in the
top 25 percent percent of states, no New York district is in the top 25 percent
of districts. The other high-production states fall between these extremes. Such
variability within states, which approximates the amount of variability among
states, is additional evidence, if more were needed, that state exemption
provisions are not powerful causes of behavior in consumer bankruptcy.
Our goal is to determine what practices are most conducive to achieving the
norms inherent in the Bankruptcy Code (e.g., confirmation of feasible
plans tailored to the debtor's individual circumstances that consummate and
return as much to unsecured creditors as the debtor can reasonably afford). One
step in that direction is to develop accurate measurements of average
disbursements per case in addition to the current practice of collecting
total disbursements within a state, district or trusteeship. By using
average disbursements, we can control for differences in population size and
filing rates across districts.
In an earlier article, we showed how this measurement distinguishes among
states in a somewhat surprising fashion.7
Chapter 13 debtors in several states return large amounts to creditors on the
average, but there are not enough of them to make much of a total contribution
to the totals returned nationwide. Looking further into the circumstances that
produce these high rates of return is one promising approach to identifying the
best practices in chapter 13 case administration.
Footnotes
1 All views expressed in this
article are those of the authors and do not necessarily represent the views of
the Executive Office for U.S. Trustees.
2 See, e.g., Whitford,
William C., "The Ideal of Individualized Justice: Consumer Bankruptcy as
Consumer Protections, and Consumer Protection in Consumer Bankruptcy," 68 Amer.
Bankr. L.J. 397 (1994); Whitford, William C., "Has the Time Come to Repeal
Chapter 13?"
65 Ind. L.J. 85 (1989); Braucher, Jean, "Lawyers and Consumer Bankruptcy:
One Code, Many Cultures," 67 Amer. Bankr. L.J. 501 (1993); Klee, Kenneth N.,
"Restructuring Individual Debts," 71 Amer. Bankr. L.J. 431 (1997); National
Bankruptcy Review Commission, Bankruptcy: The Next Twenty Years (1997);
Jones, Edith H. and Zywicki, Todd J., "It's Time for Means Testing," 1999 B.Y.U.
L.Rev. 177 (1999).
Return to article
3 See Bermant, Gordon, and
Flynn, Ed., "Stability and Change in Chapter 13 Activity," 1990-1999, ABI
Journal, November 2000; and Bermant, Gordon, and Flynn, Ed., "Measuring
Performance in Chapter 13: Comparisons Across States," ABI Journal,
July/August 2000.
4 Readers who compare Table 1 with
Table 1 in our November 2000 article will notice some differences between values
reported for 1998 and 1999 in the two tables. The numbers in the present article
reflect final amendments to the annual reports that arrived after the earlier
article had been published.
5 The count of 48 states arises as
follows: Of the 50 states, Alabama and North Carolina are excluded because they
are not administered by the U.S. Trustee Program; the District of Columbia and
Puerto Rico are added; and, for these purposes, North Dakota is administered
with Minnesota and Wyoming is administered with Utah.
6 See, e.g., Sullivan,
Teresa A., Warren, Elizabeth, and Westbrook, Jay Lawrence, As We Forgive Our
Debtors (1989) at 246-252. It is probably wise, when encountering the term
"local legal culture," to take it as an admission of ignorance rather than an
explanation.
7 Bermant, Gordon, and Flynn, Ed,
"Measuring Performance in Chapter 13," supra n. 2.
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