Last week I discussed an article in The New York Times‘ Dealbook blog that described banks that were failing to report bankruptcy debtors’ debts as discharged. A minor criticism that wasn’t worth raising at the time was the article’s melodramatic characterization of bankruptcy as taking a “heavy toll” on debtors. Actually, New York bankruptcy isn’t a horrible ordeal, and debtors are usually much better off afterward, with the overall “financial” benefits being dispersed quite broadly. That insight is helpful for people considering filing chapter 7, but what about people who file chapter 13?
According to a paper by two researchers, chapter 13 provides significant nonfinancial benefits like living longer. The authors compared 500,000 otherwise similar debtors whose cases were either dismissed or allowed to go forward based on the bankruptcy judge their cases happened to be assigned to. The differences are quite striking, with successful debtors benefiting in the following ways:
- Annual earnings in the five years after the filing were $6,700 higher on average.
- Five-year foreclosure rates fell by 19 percentage points.
- Employment rates increased by 3.5 percentage points.
- Five-year mortality rates fell by 1.1 percent.
In accounting for these findings, the researchers concluded that debtors whose cases are dismissed suffer deteriorating conditions. Successful filers, by contrast, earn about what they did before. However, they were much more likely to keep their jobs or at least stay in the same industry, if not the same state, than if they had not filed. Moreover, creditors that can easily garnish debtors’ earnings encourage debtors to relocate to states that make that more difficult. Chapter 13 prevents the disincentive to work caused by wage garnishment. Finally, the authors suspect that these estimated benefits are about the same for debtors whose circumstances aren’t so tenuous that a stricter bankruptcy judge will dismiss their cases, i.e. that they’re broadly shared.
The authors weren’t completely able to extend their findings to chapter 7 bankruptcies for various reasons, but they did find slightly higher earnings and a similar reduction in mortality rates.
The study says a lot about what happens to people who aren’t able to proceed with a chapter 13 case, but more disturbingly it implies that the many people who avoid bankruptcy suffer needlessly. It’s not an understatement when the authors describe the bankruptcy system as one of the country’s largest social insurance programs, even greater than all state unemployment insurance programs put together.
If you are facing foreclosure or another hardship, talking to a bankruptcy lawyer can help you resolve your financial difficulties. It might save your life.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 Bankruptcy Lawyer Brooklyn NY Bruce Weiner for a free initial consultation.
