University of California, Irvine School of Law
When enacted in 1978, the Bankruptcy Code was heralded as a consumer protection victory. It gave families in financial trouble a complex array of legal options, including the ability to repay their debts over a number of years in chapter 13 bankruptcy. That new option was lauded by experts and became popular across the nation. Today over 1 million families are currently in chapter 13 bankruptcy; it remains the first line of defense for families facing foreclosure. For more than thirty years, research has shown that two in three families drop out of chapter 13 before completing their repayment plans and do not receive a discharge of debts. To rebut this statistic, defenders of chapter 13 argued that success was possible without case completion, for example, by curing a default on a mortgage loan early in a case or by regaining financial footing after a period of living on a strict court-imposed budget. With no data on debtors’ circumstances when their cases ended, chapter 13 endured as key component of America’s policy to address household financial distress. This article exposes the real outcomes of chapter 13 bankruptcy for the first time. It provides evidence of what problems families tried to solve in bankruptcy and what problems they did solve in bankruptcy. The data come from a new nationwide empirical study of chapter 13 cases did not end as the law intended - with completion of a repayment plan and a discharge of debt. The findings show that most families receive a temporary reprieve from chapter 13: the halt of collection activity and reduction in stress. However, these benefits evaporate just a few weeks after bankruptcy. More than half of homeowners are already in foreclosure, and families are dealing with renewed dunning calls and struggles in making ends meet. Chapter 13 is a “pretend solution,” a term that I coin to describe a social program that does not work but has escaped critique or reform because its outcomes are hidden. This paper’s data are a clarion call to stop pushing families in financial trouble into chapter 13 and to redesign the consumer bankruptcy system. The data are also a cautionary tale about what happens when well-intention policymakers offer up a generous program but fail to monitor outcomes. A pretend solution can flourish, inoculating policymakers from revisiting the social problem. The paper concludes with a framework for pretend solutions that can be applied in other contexts and a discussion of how policymakers can avoid pretend solutions by focusing sharply on outcomes, not intentions.