A Tale of Two Chapters Financial Data
According to statistics compiled by the Administrative Office of the U.S. Courts (AOUSC), during the year ended Sept. 30, 2001 (FY 2001), nationwide 960,844 chapter 7 cases and 333,700 chapter 13 cases were closed. Thus, nearly three times as many cases are closed in chapter 7 as in chapter 13.3 Excluding cases from North Carolina and Alabama,4 case closings during the year amounted to 928,980 chapter 7 cases and 302,046 chapter 13 cases.
Chapter 13 is used primarily by individual consumers to reorganize their financial affairs under a repayment plan that must be completed within three to five years. Individuals are ineligible to file a chapter 13 case unless they have regular income, and most chapter 13 cases result in at least some payments to creditors. About one-third of chapter 13 debtors complete their repayment plans, and many others make payments for a period of time before their case is dismissed.
In chapter 7, assets that are not exempt from creditors are collected and reduced to money, which is distributed to creditors by a private trustee appointed to administer the estate. Chapter 7 debtors are not required to have assets or equity, and relatively few chapter 7 cases result in collection and payment of funds to creditors. There were 35,874 chapter 7 asset cases closed during the year—about 3.9 percent of all chapter 7 cases closed during the year.
Total disbursements to creditors are much higher in chapter 13 than in chapter 7. During FY 2001, $5.17 billion was disbursed in chapter 7 and chapter 13 cases combined, with about 70 percent of this total coming in chapter 13 cases. More than $4 billion was disbursed to creditors, including about $2.52 billion distributed to secured creditors, $1.17 billion to general unsecured creditors and $366 million to priority creditors. One would expect the costs associated with administering assets under chapter 7 to be higher than the costs of distributing the proceeds of voluntary payments from debtors under chapter 13, and they are. Table 1 shows the amount and percent of disbursements to the three main creditor categories and for all other payments during FY 2001.
In chapter 13 cases, the proportion of disbursements paid to secured creditors was much higher than in chapter 7, amounting to well over one-half of total disbursements. Due to recent changes in reporting requirements for chapter 13 standing trustees, a better breakdown of the nature of secured debt payments in chapter 13 cases is becoming available. During FY 2001, the amount reported included $460.9 million in post-petition mortgage payments, $233.5 million in mortgage arrears, $873.9 million in other secured debt payments, and $467.9 million where the type of secured creditor was not reported. Of course, chapter 7 payments of secured debts do not include any post-petition mortgage payments.
The reality of asset liquidation in chapter 7 is that a relatively small number of very large cases account for the bulk of all disbursements. About six percent of chapter 7 asset cases involved more than $100,000 in disbursements, but these large cases accounted for more than 78 percent of the total amount disbursed. Although we do not have case-by-case data on distributions in chapter 13 cases, we suspect that very few involve more than $100,000 in payments. Thus, an alternative comparison of financial data in the two chapters would exclude the very large chapter 7 cases, most of which are business cases or cases originally filed under chapter 11. Table 2 compares disbursements between the large and small chapter 7 cases.
When the largest chapter 7 asset cases are excluded, the proportion of total disbursements paid to secured creditors (8.9 percent) falls to less than one-sixth the average for chapter 13 cases (54.2 percent). However, the proportion paid to general unsecured creditors in the smaller chapter 7 cases is nearly double the proportion paid either in chapter 13 cases or the larger chapter 7 cases (See Table 3).
Although direct financial comparisons between chapter 7 and chapter 13 cannot be made, sufficient data is available to make certain comparisons. Both the annual dollar amount and the percentage of total disbursements paid to creditors are much higher in chapter 13 cases, with the bulk of the payments being made to secured creditors. The majority of the money disbursed in chapter 7 asset cases comes from a small number of relatively large cases. In the smaller chapter 7 asset cases, a higher percentage of disbursements is paid to general unsecured creditors than in both chapter 13 cases and in larger chapter 7 cases.
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 or the Department of Justice. Return to article
2 As noted in our previous article, "Several factors create difficulties for making case-based comparisons between chapter 7 and chapter 13 disbursements. Disbursements in chapter 7 cases are made when the case is closed and are reported at that time. The average life span of chapter 7 cases filed by consumers in which assets are liquidated and disbursed is about three months. Chapter 7 trustees report the disbursements individually for each case. Chapter 13 payments, by contrast, are made monthly during the life of the case, typically three to five years. At the end of each fiscal year, standing chapter 13 trustees report in the aggregate the disbursements they made to various classes of creditors. Disbursements from a single case may be spread over five annual reports. Although the total disbursements from each case become part of the case file in the court, there is no national database of case-by-case distributions comparable to the one for chapter 7. Therefore, direct comparisons are not possible. Additionally, some chapter 13 payments include non-delinquent post-petition mortgage payments and installment payments to debtors' attorneys." Return to article
3 The ratio of chapter 7 to chapter 13 filings is somewhat lower because the closing figures are based on the chapter at closing and many cases that are filed under chapter 13 or chapter 11 are converted to chapter 7. Also, most chapter 7 cases are closed about four months after filing, while chapter 13 cases are often three to five years old at closing. Return to article
4 The six judicial districts in North Carolina and Alabama are not part of the U.S. Trustee program and are served by bankruptcy administrators. The financial information in this article does not include Alabama and North Carolina cases. These two states account for about nine percent of chapter 13 filings and three percent of chapter 7 filings nationwide. Return to article
5 In chapter 7 cases, "other disbursements" include trustee and attorney fees, other professional fees, prior chapter costs, administrative expenses and money returned to debtors. A fuller breakdown of these expenses is included in Table 2. In chapter 13 cases, the priority debt disbursements include $7 million in post-petition child support payments. The other chapter 13 disbursements include the cost of operating the program (approx. $212 million), refunds to debtors ($169.6 million), plan payments to debtors' attorneys ($272 million) and several other relatively small expense categories.