A Structural Model of Chapter 13 Personal Bankruptcy, working paper

By pushing debtors into the more stringent provisions of Chapter 13, the Bank-ruptcy Abuse Prevention and Consumer Protection Act passed in 2005 aimed to dis-courage debtors from taking advantage of U.S. Personal Bankruptcy Law. Despite a growing literature on consumer bankruptcy, however, there exists virtually no empir-ical evidence on the performance of Chapter 13. In this paper, we construct a novel dataset based on information obtained from court docket records \u85led between 2001 and 2002 in the state of Delaware. We present three main \u85ndings. First, our data indicate that the median creditor recovery rate is actually zero under Chapter 13 both for secured and unsecured debt. Second, close to twenty percent of \u85lers are dismissed without ever obtaining con\u85rmation of even one plan. Third, less than forty percent of debtors actually receive a \u85nancial fresh start by having their debts discharged. To account for these stylized facts, we then build and estimate a structural model of bankruptcy under Chapter 13.The analysis reveals statistically signi\u85cant trade o¤s between proposing a long-term plan versus a short-term plan. A longer plan is costly in that debtors make larger overall payments, but it is more likely to be con\u85rmed by the court. We also \u85nd that the ability to impose a wage order serves as an important enforcement device that helps ensure the success of Chapter 13 repayment plans. Fi-nally, we \u85nd that variations in debtorscircumstances after the initial con\u85rmation o