Does Chapter 13 Prop Up Bankruptcy Filing Rates?

Yesterday, I noted the 14.1% decline in U.S. bankruptcy filings during 2012. Bankruptcy filings did not decline at the same rate everywhere, of course, although they did decline in 89 of the 90 judicial districts in the U.S. (not counting judicial districts in U.S. territories). In the Middle District of Alabama, bankruptcy filings even actually climbed (although by only 9 total filings out of almost 7,800).

The table to the right shows the twenty federal judicial districts where bankruptcy filings declined the least. One thing immediately leaps out: many of these districts are places where the percentage of chaper 13 bankruptcies is very high.

Overall, that trend holds up when one looks across the country. The graph to the right is a scatterplot of the ranking of the ninety federal judicial districts on both dimensions. Along the y-axis is the ranking in decline in total bankruptcy filings from 2011 to 2012, with the districts having the smallest declines getting higher rankings. Thus, the Middle District of Alabama was ranked 1. Along the x-axis is the rank for the percentage of bankruptcy cases that were chapter 13s in each district. On this dimension, the Middle District of Alabama was again ranked 1 with 76.1% of its overall bankruptcy filings being chapter 13s in 2012. The correlation coefficient between the two datasets is 0.55.

The data suggest that bankruptcy filings fall less where chapter 13 rates are higher. Throwing out a hypothesis, I wonder whether this effect stems from chapter 13s being "supply driven" whereas chapter 7s are more "demand driven." When what we might call the "natural demand" for bankruptcy falls, people still find their way into the offices of attorneys filing chapter 13s.

Another possibility is the classic explanation of chapter 13 as a means to avoid foreclosure, and this would tend to occur in economically distressed areas where people are still tending to file bankruptcy. The problem with this explanation is that the list of districts with the highest chapter 13 rates tend to follow historic patterns rather than mapping onto areas of current distress in the real-estate markets.

Others may have hypotheses that can be explored in the comments.