Those of us on the side of assisting consumer debtors shake our heads every day trying to figure out what creditors want to achieve with tougher stances against IVAs and the creation of hurdle rates to limit access into IVAs.

I can only assume that a driving factor for these reforms is the limit access to the Individual Voluntary Arrangement in a desire to maximize returns to creditors. This is the same mentality that creditors had in the U.S. and why they desired to force through bankruptcy reform to force more people into court controlled repayment plans.

The other motive for making an IVA harder to access could simply be to prevent consumers from entering into a binding debt repayment plan and keep them floating out on rough waters while creditors continue to take what little is available.

U.S. Creditor Tougher Stance Results

An excellent paper "What Do We Know About Chapter 13 Personal Bankruptcy Filings?" by Wenli Li, an economic advisor and economist in the Research Department of the Federal Reserve Bank of Philadelphia, finds what we all knew.

For eight years creditors in the United States paid lobbyist millions and millions to ram through bankruptcy reform. In doing so consumers were painted with a single brush stroke portraying them as abusers of the bankruptcy system by preferring Chapter 7 bankruptcy, a complete wipe out of their debt, as opposed to Chapter 13, where debtors entered multi-year repayment plans administrated by a bankruptcy trustee.

Creditors finally got their wish and President Bush was gleefully happy to sign he Bankruptcy Abuse Prevention and Consumer Protection Act that went into effect in 2005.

Creditors felt that by forcing consumers into Chapter 13 repayment plans they could recover more money. It was the creditor's belief that consumers were grossly abusing the bankruptcy system to "walk away" from their debt.

Those of us helping people with consumer debt problems knew this creditor desired legislation change was nothing more than a way to suck more money back from consumers.

The changes provided no new solutions to help people better deal with overcoming money troubles. The bankruptcy reform was about inflicting more pain on consumers and more liability and administrative work on consumer bankruptcy attorney's. Due to these changes the cost of Chapter 13 bankruptcy increased from around $2,300 to about $4,700.

A Couple of Years On

So after going back and studying the data, what has been learned?

  • Approximately 67% of debtors entering a Chapter 13 plan failed to work their way through the entire process and obtain a discharge of their debt.
  • The recovery rate of secured debt is approximately 32 cents on the dollar.
  • The recovery rate of unsecured debt is about 25 cents on the dollar.

Chapter 13 Performance

Creditor Returns are Pathetic

The payoffs to the creditors are strikingly low considering the substantial cost associated with Chapter 13 bankruptcy cases. In addition to the filing fee and attorney's fees, the debtor pays the trustee 3 to 10 percent of each payment he makes to his creditors through the trustee. Thus, for every dollar owed to creditors, it costs about 3 cents in trustee fees to recover 20 to 30 cents.

Two recent studies of Chapter 13 personal bankruptcy provide a detailed picture of who enters Chapter 13 and how well borrowers and creditors fare. The two studies uncover evidence that paints a rather grim picture of the realities of Chapter 13 personal bankruptcy. Plans are seldom completed successfully, creditors recover relatively little, and borrowers are very likely to re-enter bankruptcy. Thus, these findings raise some flags about the stated rationale for the reform, moving more borrowers from Chapter 7 to Chapter 13. To put it simply, despite some caveats mentioned in this article, based on our research, the Chapter 13 bankruptcy system has a long way to go in terms of providing debt relief for borrowers and debt collection for creditors.