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The Dynamics of Chapter 13 Bankruptcy

Listed author(s):
  • Hulya Eraslan
  • Wenli Li
  • Pierre-Daniel Sarte


    (Federal Reserve Bank of Philadelphia Federal Reserve Bank of Philadelphia)

The “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005†makes extensive changes to U.S. consumer bankruptcy regulations. One of its most important features is to prohibit debtors from filing under Chapter 7 when some or all of a debtor’s unsecured liability can be repaid from future income under Chapter 13. The reasons that underlie these changes are twofold. First, unsecured creditors typically benefit from greater repayment rates under Chapter 13 than under Chapter 7, with the higher filing and processing costs of Chapter 13 assumed to be largely offset by this higher repayment rate. Second, means testing is thought to be effective in predicting higher repayment rates under Chapter 13. While the latter notions are held as conventional wisdom, there has been almost no research that either validates or invalidates these assumptions. In this paper we develop and estimate a bargaining model of repayment plan formation and dissolution for Chapter 13 bankruptcy filers to study the dynamics of Chapter 13 filing. Specifically, we seek to understand the determinants of 1. repayment plans that are acceptable to all parties; 2. the successful consummation of repayment plans; 3. the recovery rates for creditors; and 4. the length of repayment plans and overall time spent in Chapter 13. We then use the estimated structural model to conduct experiments that aim at evaluating the impact of regulatory changes on the duration of the Chapter 13 plan formation process, the type of plan that form, their successful rates and recovery rates.

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 378.

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Date of creation: 03 Dec 2006
Handle: RePEc:red:sed006:378
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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