Chapter 13 bankruptcy: Why it’s picked by only 5% of my clients

Chapter 13 is selected by less than 5% of my Virginia bankruptcy clients.  For other people filing bankruptcy in Northern Virginia, it’s about one in five.  That statistic jumped out from a computer study of cases filed in bankruptcy court for Northern Virginia for the last six weeks of 2010.

You might wonder if we avoid Chapter 13 bankruptcy because we don’t know how to do them.  We think our firm has good qualifications to do them–but only when they are needed.

Lori Rupp, our Chapter 13 Senior Paralegal, was paralegal for the Chapter 13 Trustee in Flint Michigan.  (There’s plenty of bankruptcy work in Flint, but there weren’t any good jobs for her husband.  That’s why they live here now.)

Senior attorney Klinette Kindred has done nearly a thousand Chapter 13's

Klinette Kindred, our senior bankruptcy attorney, has done nearly a thousand Chapter 13 bankruptcies.

I moderated the panel of bankruptcy judges on Chapter 13 at the NACBA national convention when the 2005 law took effect.

I have a whole website on how we can use it to get rid of second mortgages.   And I have a blog post on innovative use of Chapter 13 bankruptcy for people with overwhelming student loans.

We know a lot–including knowing enough to avoid Chapter 13 unless there’s some good reason to be there.

Why?  One reason is most of them fail.  In the last six weeks, there were 200 filed in Northern Virginia–and 120 were dismissed.   That works out to a failure rate of 60%.

Second, they are unpredictable.  Under the 2005 bankruptcy law, you are required to send your tax forms to the trustee every year.  If there’s an “unforeseen” increase in your income, the trustee can ask the judge to increase your payments.   You can get your case approved paying a couple hundred dollars a month–and end up paying over a thousand.

(Bankruptcy is supposed to be a new start in life and clear field for future effort. I don’t think it’s much of a new start if the trustee can keep coming back asking for more.)

Third, it’s worse for your credit.   You start getting back to good credit when you get your bankruptcy discharge.  In a Chapter 7, that’s about four months.  In Chapter 13, it’s sometimes three and usually five years.

(About half the creditors keep reporting you as late every month of your payment plan–piling on five more years of bad credit.  Christine Wolk, a NACBA member out of Wisconsin, got her judge there to say that’s illegal.  You can download that Judge’s ruling here.  I’m setting up a challenge to that unfair credit reporting here, in the next few months.  I’ll let you know what these judges think.)

Chapter 13′s often fail.  Your payment is unpredictable.  They are worse for your credit.  For those reasons, and a few others, for most people, I think Chapter 7 works better.