The bankruptcy process can provide a fresh financial start for consumers who cannot pay their debts, either because of insolvency or insufficient income to meet creditor demands. Personal bankruptcy generally works in one of two ways: liquidating assets to pay one’s debts under Chapter 7 of the U.S. Bankruptcy Code or establishing a repayment plan under Chapter 13 of the code.1
Under a Chapter 7 liquidation, a debtor generally can achieve a fresh financial start more quickly than under a Chapter 13 repayment plan, which can last up to five years.2 However, under Chapter 13, a debtor may be able to save a home from foreclosure, reschedule secured debts and extend them over the life of a Chapter 13 plan (possibly lowering the payments or interest rates), and consolidate debt payments to a trustee who then handles distribution to creditors.
Both nonbusiness and business bankruptcies are available. This article focuses solely on nonbusiness filings as nonbusiness bankruptcies accounted for 97 percent of bankruptcies during the 12-month reporting periods ending Sept. 30, 2006, through Sept. 30, 2021.
Facts and Figures
- In the 16-year span from Oct. 1, 2005, to Sept. 30, 2021, about 15.3 million nonbusiness bankruptcy petitions were filed in the federal courts (i.e., filings involving mainly consumer debt). Of those, 10.3 million – 67 percent of total nonbusiness filings – were filed under Chapter 7, and 5 million – 32 percent of total nonbusiness filings – were filed under Chapter 133
- In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which among other things, instituted a means test to move some filers away from filing for bankruptcy under Chapter 7 and toward filing under Chapter 13. An individual or couple filing jointly may file for bankruptcy under Chapter 7 only if their debts are primarily consumer debt and their monthly income over six months prior to filing for bankruptcy is below the state median for a similar household, or if the debtor’s monthly disposable income falls below a threshold established by a statutory means test.
- The capacity for debt is often driven by recessionary periods. For example, after the Great Recession, which lasted from December 2007 to June 2009, overall bankruptcy filings accelerated. As the economy regained strength and consumer spending patterns remained in check, Chapter 7 and Chapter 13 consumer bankruptcy filings declined steadily through 2019 (Figure 1 and Figure 2).
- However, bankruptcy filing patterns have yet to mimic past patterns during the current period of economic stress caused by the COVID-19 pandemic. Such economic stress caused by the pandemic includes, but is not limited to, periods of record high unemployment, negative gross domestic product (GDP) growth, and an increased demand for health and fiscal responses from government entities. At the onset of the pandemic, during the first half of 2020, Chapter 7 and Chapter 13 consumer bankruptcy filings declined markedly, with the decline in Chapter 13 filings being the more pronounced (Figure 2).
- The percentage of total filings that Chapter 7 filings represented consistently declined from 2010 to 2019, whereas the percentage of filings under Chapter 13 increased within the same period. Since the start of the pandemic in 2020, the reverse trend is observed as the percentage of total filings that Chapter 7 filings represented began to increase while the percentage of filings under Chapter 13 filings decreased (Figure 3).
- The steep decline in Chapter 13 filings in 2020 (Figure 2) corresponds to the decline in mortgage foreclosure filings. The foreclosure filing rate went from 0.36 percent in 2019 to 0.16 percent in 2020 as reported by the Consumer Financial Protection Bureau (CFPB).4 Furthermore, eviction moratoriums slowed the rate of evictions.5 Moreover, consumer debt levels also fell following the start of the pandemic.6 With initiatives such as the CARES Act and other protection programs prohibiting evictions and foreclosures through July 31, 2021, foreclosure and eviction rates could return to pre-pandemic levels once protections were no longer a factor. Concurrent with the increase in consumer spending, there was an increase in disposable income. At this time, the direction or pace of these metrics is unclear.
- While the percentage change of both Chapter 7 and Chapter 13 filings declined across most federal court districts in the 12-month period ending Sept. 30, 2021, compared to 2019 (Map 1 and Map 2), districts in the South were disproportionately affected by the decline in Chapter 13 filings.7 As shown in Map 3, the federal districts in which Chapter 13 nonbusiness bankruptcy filings constituted the highest percentage of total nonbusiness bankruptcy filings from 2006 to 2021 were concentrated in the South.8 The Southern District of Georgia had the highest percentage of Chapter 13 filings as a percentage of total nonbusiness bankruptcy cases at 74 percent, followed by the Middle District of Alabama, in which Chapter 13 consumer filings accounted for 70 percent of total nonbusiness filings. The illustration in Map 4 further indicates that many of the districts with the highest count of Chapter 13 consumer bankruptcies were also located in the South.9
- Nonbusiness Chapter 7 and Chapter 13 filings per thousand population also varied by chapter.10 Per thousand population Chapter 7 filings were highest in distinct areas in the West, Midwest, and Southeast regions of the United States. The highest filings per thousand population occurred in Nevada (2.2 filings) and the lowest in Alaska (0.4 filings) (Map 5). However, per thousand population Chapter 13 filings were more prevalent in the Southeast region of the United States. The largest share of per thousand population Chapter 13 filings occurred in Alabama (2.5 filings) and the smallest was in Alaska (0.1 filings) (Map 6). Although Chapter 7 and Chapter 13 filings per thousand population were both high for the Southeast region of the United States, this area was highest for Chapter 13 filings.
- Based on the most recent results of the American Community Survey (ACS-2019), the states with the highest rates of Chapter 7 bankruptcy filings per household were Nevada, Illinois, and Ohio (each at 0.006 filings) (Map 7). The highest rates of Chapter 13 filings were in Alabama (0.009 filings), Tennessee (0.007 filings), and Georgia (0.007 filings) (Map 8).
1 Other types of bankruptcy include: Chapter 11 (Reorganization/Individual/Small Business), Chapter 12 (Family Farmers or Fishermen), Chapter 15 (Cross-Border Cases), Chapter 9 (Municipalities). Some individuals use Chapter 11 to obtain relief.
2 CARES Act (subsequently extended by the COVID-19 Bankruptcy Relief Extension Act) permitted debtors in plans confirmed prior to March 27, 2021, experiencing COVID-19-related hardship could move to extend their plans to up to 7 years. See Section 1113(b)(1)(C) of the CARES Act.
5 For more information on housing insecurity and the COVID-19 pandemic, please visit consumerfinance.gov/data-research/research-reports/housing-insecurity-and-the-covid-19-pandemic.
6 For more information on debt service ratio trends, please visit fred.stlouisfed.org/series/TDSP(link is external).
7 For more information on consumer spending trends, please visit bea.gov/data/consumer-spending.
8 For more information on why debtors from the South choose Chapter 13 more often than those in other states, please see https://www.stlouisfed.org/open-vault/2019/june/wage-earners-bankruptcy-law-southern-roots(link is external).
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