Cracking the Code: An Empirical Analysis of Consumer Bankruptcy Outcomes

Chapter 13 is a cornerstone of the bankruptcy system. Its legal requirements strike a balance between the rehabilitation of debtors through keeping assets and reducing debt, and the repayment of creditors over a period of years. Despite the accolades from policymakers, the hard truth is that the majority of the half-million families each year that seek refuge in chapter 13 bankruptcy will not achieve the debt relief of a discharge. Prior research found that those who drop out of bankruptcy quickly endure the serious financial struggles that they had before bankruptcy—now even worse off for having spent thousands of dollars to seek help. Despite the profound inefficiency of chapter 13 bankruptcy, we previously did not know what differentiates those who succeed in chapter 13 from those who fail. This article is the first study to use a national random sample to predict which debtors obtain a discharge of debt. Using sophisticated statistical techniques that allow us to control for unobservable or unmeasurable effects at the local level, we identify the factors that make completing chapter 13 bankruptcy more likely. We find, among other robust effects, that blacks are more than twice as unlikely to receive debt relief than non-blacks, that those without an attorney have extremely low odds compared to those who hire an attorney, and that families with children fare worse. We also find that the local variations in bankruptcy practice that have been deemed “best practices” do not correlate with higher rates of bankruptcy completion. We discuss the implications of our findings for the millions of families who struggle to repay their debts in bankruptcy, and suggest concrete fixes to increase the efficacy of the consumer bankruptcy system. This article upsets the debate about bankruptcy reform and will help shape policy and practice in upcoming decades.