Do Debtors Have an Obvious Financial Rationale for Filing a Chapter 13 Bankruptcy Petition?

Donald Hackney (), Daniel Friesner () and Matthew McPherson ()
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Donald Hackney: Gonzaga University
Daniel Friesner: North Dakota State University
Matthew McPherson: Gonzaga University

Economics Bulletin, 2015, vol. 35, issue 3, 1572-1588

Abstract: The decision to file for bankruptcy, and more specifically to file for Chapter 13 bankruptcy protection, is a major financial decision that impacts the debtor's financial well-being for several years. Under financial economic theory, debtors should make informed choices, which include having clear rationale for making specific chapter filing choices. Based on those choices, expected outcomes accrue to the debtor. Moreover, rationales for the debtor's decisions should be revealed as debtors disclose their assets, liabilities, income and other salient characteristics in the filing process. The common rationales, as characterized by the outcomes accruing from making a choice to file under Chapter 13, are explored in this manuscript. Using a sample of nearly 300 Chapter 13 bankruptcy filings in the Eastern Washington Bankruptcy Court District, approximately 32 percent of all filers accrue no obvious financial benefit from filing under Chapter 13, and would be been better off financially by filing under Chapter 7. These filings are typically attributed to local norms and business practices that occur within a community, also known as “legal culture†. This analysis suggests that legal culture plays a very significant role in Chapter 13 bankruptcy chapter filing choices.

JEL-codes: K3 (search for similar items in EconPapers)
Date: 2015-07-11
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