Serial Bankruptcy A 20-Year Study of Utah Filers

Serial Bankruptcy A 20-Year Study of Utah Filers

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A 1996 survey of bankruptcy professionals by the American Bankruptcy Institute2 reported that two-thirds of the creditor representatives and nearly half of the judges viewed serial filings as a significant problem. In October 2001, the U.S. Trustee Program launched the Civil Enforcement Initiative to improve the effectiveness of bankruptcy administration. Among other concerns, serial filers and substantial abuse were identified as issues that present significant challenges to the bankruptcy system.3 While serial filers have been identified as a problem, there has been little research on these debtors.

Sullivan, Warren and Westbrook4 found that about 8 percent of their sample of debtors had filed within the previous six years. Norberg5 reported that 28 of 71 debtors (39 percent) in the Southern District of Mississippi listed a previous case on their petition. Debtors who listed only one prior case in the previous six years were significantly more likely than first-time debtors to achieve a discharge. Norberg concluded that filing a single previous case was not an indicator of abuse, but that multiple filings were potentially abusive.

Strand, Hira and Carter6 studied the demographic and financial attributes of repeat debtors. They compared bankruptcy filers in one Canadian district to one U.S. district and found that 14 percent of debtors in each location reported a prior case. Compared to first-time debtors, repeaters were older and had lower incomes, lower assets and lower debt levels.

The Utah Study

Our present study of multiple filers was designed to:

• determine the extent of serial filings in Utah from 1984 to 2004,
• estimate the extent of debtor abuse by serial filers,
• establish a financial and demographic profile of debtors who appear to be abusing the system, and
• develop a statistical model to compare demographic and financial variables of potential abusers to nonabusers.

This study is unique because it utilizes a 20-year time frame and a much larger sample than prior studies that only considered cases filed within the previous six years. Using the PACER/Electronic Case Filing System, previous filings were tracked by Social Security number. Using Social Security numbers reduces but does not completely eliminate the problem of incomplete information on prior filings because debtors could have filed previously in other districts.

The incidence of repeat filers in Utah was measured to estimate the extent to which repeaters may be abusing the bankruptcy system. Utah has the highest filing rate as measured by number of households (36.5) per case7 as well as a high percentage (40 percent) of chapter 13 cases at the time the reference cases were filed in 1997.8 This year was selected in order for sufficient time to elapse to determine the outcome of chapter 13 cases. Nationwide, about 30 percent of filings are chapter 13 cases. Districts with low chapter 13 rates are unlikely to have many serial filers due to the time limit between chapter 7 discharges. About one-third of confirmed chapter 13 plans are completed and the remaining unsecured debts discharged, but this rate varies considerably among districts.9 Only 26.5 percent of 1997 chapter 13 filers in Utah completed their plans.10

Because the data were limited to the information in the court records and individual circumstances were unknown, abuse was characterized only by the number of times a debtor filed. The 20-year period (1984-2004) was used because it is the longest time frame available on PACER. Only debtors who filed in the same status (always joint with same spouse or always single) were included in the study to eliminate possible marital status changes that might justify a repeat filing.

Methodology

A conceptual framework was developed to sort repeat filers into categories based on the number of filings and the time frame during which these cases occurred. Debtors with three filings within two years and debtors with four or more filings during the 20 years were classified as serial filers and potential abusers. (See Figure 1).

After a random start, cases were systematically selected from the 12,055 debtors who filed for bankruptcy in Utah in 1997. Financial, employment, family and demographic variables were collected from the court records using PACER.

Based on the conceptual framework, all cases with more than one filing were categorized as either a serial filer (potential abuser) or repeat filer (not abuser) based on the number and pattern of filings. Thus, the dependent variable consisted of these two categories. Independent variables included demographic and financial characteristics from the bankruptcy files: 1997 chapter, filing status, marital status, household size, secured debt, unsecured debt, monthly income and monthly expenses.

Descriptive statistics were used to compare the two groups of debtors. Analysis continued by establishing bivariate relationships between the independent variables and the dependent variable (serial or repeat filer). The t tests were used to compare the two groups on continuous variables including income and debt levels. Chi-square analyses evaluated whether serial (abuser)/repeat (nonabuser) status is independent of each categorical variable. Because the dependent variable (serial or repeat) was dichotomous, logistic regression was used. The logistic regression model was built using a “backward elimination” approach, starting with the full model containing all independent variables. At successive steps, new models were computed by eliminating the independent variable that was the least significant in its association with the dependent variable: serial vs. repeat filers. The final model contained all independent variables that remained significant in the presence of all other variables in the model.

Results

Of the original sample of 2,567 cases, 373 cases were eliminated from the analysis due to a change in filing status, resulting in 2,194 cases in the final sample. A total of 235 cases (10.7 percent) were identified as serial filers and possible abusers. Three-quarters (N=171; 73 percent) of these potential abusers filed chapter 13 in 1997, and 64 (28 percent) filed chapter 7. The majority (76 percent) of the potential abusers had their 1997 case dismissed. Only five (2.9 percent) of the 171 serial debtors who filed chapter 13 in 1997 completed their payment plan. Of the 64 serial debtors who filed chapter 7, 51 received a discharge (79.7 percent).

Using the backward-elimination approach, the full logistic regression model began with all independent variables: chapter filed in 1997, filing status, marital status, household size, secured debt, unsecured debt, monthly income and monthly expenses. The logistic-regression model found 1997 chapter, filing status, unsecured debt and monthly income to be the most significant variables in identifying serial filers. Serial filers were nearly five times as likely to have filed for chapter 13 in 1997 than chapter 7. Males and females filing alone were nearly 50 percent less likely than joint filers to be serial filers. Debtors who owed unsecured debts exceeding the median amount were less likely to be serial filers. Debtors who had incomes above the median for this sample were almost twice as likely to be categorized as serial filers. The logistic-regression model correctly predicted 89.3 percent of serial filers who were potentially abusing the system.

Conclusions and Discussion

The principal finding of this study is that 10.7 percent (235 of 2,194) of the sample filed multiple times and thus may have been abusing the bankruptcy system. The results are consistent with the few previous studies of repeat filers.

Another key finding is that out of the 171 serial potential abusers who filed chapter 13 in the reference year of 1997, only 5 (2.9 percent) of them completed their repayment plan. Serial filers who previously discharged their debts in chapter 7 may be filing chapter 13 repeatedly, with no intention of completing a repayment plan, until they can once again file a chapter 7 and discharge their unsecured debts. Also, 20.3 percent (13 of 51) of the serial debtors who filed chapter 7 had their cases dismissed. At the time this study was conducted, debtors who had previously received a chapter 7 discharge could not obtain another chapter 7 discharge for six years, so their only option was to file a chapter 13.

According to the logistic regression, the only significant demographic variable in estimating abuse by repeat filing was the filing status of the debtor. Males and females filing alone were nearly 50 percent less likely to be abusers compared to joint filers. While single parents often experience financial stress, they were not over-represented in this random sample of debtors. Although changes in marital status (i.e., divorce, remarriage, widowhood) are significant economic events, tracking and analyzing these changes was beyond the scope of this study.

Serial filers had higher secured debt but lower unsecured debt than repeat filers (see Figure 2). These serial filers probably discharged debts in previous bankruptcies, resulting in lower unsecured debt levels on their 1997 petitions. In addition, serial filers reported higher monthly income than the rest of the sample. Because these potential abusers were more likely to be joint petitioners, the higher incomes may be due to two earners. The logistic-regression results revealed that unsecured debt and monthly income were the only two financial variables significant in identifying serial filers. Filers with unsecured debt levels above the median were nearly 70 percent less likely to be categorized as potential abusers; debtors with incomes above the median were almost twice as likely to fit the definition of abuse.

Limitations

Because data were limited to the court records, it was difficult to determine whether serial filers were abusing the system or had legitimate reasons for multiple filings. It is not always clear when a bankruptcy petition is filed in bad faith. However, it is hard to imagine a legitimate reason for one couple to file 11 times. One male filed eight cases; one female debtor filed seven times. When the files of these three cases were examined in detail, it was difficult to determine whether they took on more credit obligations between subsequent filings, or if higher debt levels were due primarily to high interest rates, penalties, fees and collection costs. If lenders extended new credit after more than two bankruptcy filings, these creditors are contributing to the bankruptcy epidemic.

Because so few petitioners in Utah have incomes exceeding the state median, the new means test is unlikely to affect the incidence of repeat filers. The serial filers in this study were already filing chapter 13 repeatedly and failing to complete their proposed plans. If more debtors are forced to file 13 rather than 7, then the discharge rate is likely to decrease. Court documents do not provide sufficient information to make judgments about the intentions or individual circumstances of debtors.

Secondly, this study categorized potential abuse based solely on the number of times a debtor filed in this district over a 20-year period. This approach was used because of the limited information in the court records. Ideally, one would examine each case in order to obtain more specific information on their financial situations at each filing to determine if they appeared to be abusing the system. However, examining all the court records may not provide a complete picture of the debtor’s circumstances or intentions. Interviews with debtors and attorneys might shed further light on the circumstances.

The data are also limited to only one federal bankruptcy court district (Utah). Debtors who moved into or out of the state during the 20-year period could have filed in other court districts and therefore may be incorrectly labeled as nonabusers.

Recommendations

Each bankruptcy court should implement policies to identify, evaluate and monitor repeat filers. Using Social Security numbers, court officials can track previous filings and impose greater scrutiny upon those debtors who file multiple times. Some of these debtors may have problems such as alcohol, gambling or other addictions that can be dealt with more efficiently outside of bankruptcy court.

While the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) extends the period between chapter 7 discharges from six to eight years and limits are placed on repeat chapter 13 discharges, serial filers are likely to continue to file multiple chapter 13 cases during the intervening years. The frequency of repeat filings is likely related to chapter 13 filing rates in individual districts, which vary substantially. Replication of this study with a national sample including other bankruptcy court districts, especially those with high chapter 13 filing rates, is needed.

Although there are undoubtedly some instances of abuse, results of this study suggest that abuse of consumer bankruptcy by repeat filers is not extensive and can be managed by identifying serial filers. Among the many changes in practice resulting from the new law, attorneys should require clients to fully disclose prior filings. Trustees should run a check on the social security numbers of debtors reporting prior filings to see their full history to cut down on abusive serial filers.

Author’s Note: The researchers completed Utah State University’s Institutional Review Board human subjects training and confidentiality measures were taken to assure that Social Security numbers and all other personal information remained private. The researchers thank U.S. Bankruptcy Court Chief Judge Glen E. Clark (D. Utah) for granting access to the PACER system and waiving fees. This study is part of a larger project examining serial filers funded by the ABI Endowment Fund.

 

Footnotes

1 Also written by Bonny Llewellyn, M.S., a chapter 13 internal auditor in Salt Lake City.

2 American Bankruptcy Institute (December 1996). Report on the State of the American Bankruptcy System. Available at: www.abiworld.org/Content/ContentGroups/News_Room1/Bankruptcy_Research_Center/Bankruptcy_Reports_Research_and_Testimony/ABI/ABI_Reports_Research/REPORT_ON_THE_STATE.htm

3 Darling, Antonia G. and Redmiles, Mark A., “The Civil Enforcement Initiative: a Review of the First 10 Months and a Look at the next Stage,” 22 Am. Bankr. Inst. J. 5 (2002). Available at www.usdoj.gov/ust/eo/public_affairs/articles/docs/abi_092002.htm.

4 Sullivan, Teresa A., Warren, Elizabeth and Westbrook, Jay L., As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America. New York: Oxford University Press (1989).

5 Norberg, Scott F., “Consumer Bankruptcy’s New Clothes: An Empirical Study of Discharge and Debt Collection in Chapter 13,” 7 Am. Bankr. Inst. L. Rev. 415 (1999).

6 Strand, Judith K., Hira, Tahira K., and Carter, Richard B., “Repeat Consumer Bankruptcy: A Comparative Analysis with One Time Petitioners in the United States and Canada,” Proceedings of the Association for Financial Counseling and Planning Education, 142 (1994).

7 American Bankruptcy Institute, “Households per Filing, Rank (2004).” Available at www.abiworld.org/statcharts/HouseRank.htm.

8 1997 was the reference year because data had already been collected from the case files for a random sample of cases filed that year.

9 Bermant, Gordon, and Flynn, Edward, “Measuring Performance in Chapter 13: Comparisons Across States,” 19 Am. Bankr. Inst. J. 6. (July/August 2000). Available at www.usdoj.gov/ust/eo/public_affairs/ articles/docs/abi082000ch13.htm.

10 Evans, David A., “Predictors of 1997 Chapter 13 Bankruptcy Completion and Dismissal Rates in Utah,” unpublished Master’s thesis, Utah State University, Logan, Utah (2004).

Journal Date: 
Wednesday, February 1, 2006