Chapter 7 or 13: Are Client or Lawyer Interests Paramount?

Abstract

Households often rely on professionals with specialized knowledge to make important financial decisions. In many cases, the professional's financial interests are at odds with those of the client. We explore this problem in the context of personal bankruptcy. OLS, fixed effects, and IV estimates all show that attorneys play a central role in determining whether households file under Chapter 7 or Chapter 13 of the bankruptcy code. We present evidence suggesting that some attorneys maximize profits by steering households into Chapter 13 bankruptcy even when the households' objective financial benefits are low and the probability of case dismissal is high. An attorney-induced Chapter 13 filing increases household legal fees and reduces the probability of long-term debt relief.KEYWORDS: consumer bankruptcy, principal agent problems * We thank Tina Lindsay and Jocelyn Rick for helpful discussions regarding institutional factors affecting personal bankruptcy. We thank

Debt Relief and Debtor Outcomes: Measuring the Effects of Consumer Bankruptcy Protection

“…-U.S. Supreme Court, Local Loan Co. v. Hunt, 292 U.S. 234 (1934) In 2010, 1.5 million Americans filed for over $450 billion in debt relief through the consumer bankruptcy system. 1 American households receive more resources through the bankruptcy system than through all state unemployment insurance programs combined (Lefgren, McIntyre, and Miller 2010), with nearly one in ten American households having filed for bankruptcy at some point (Stavins 2000). The U.S. bankruptcy system is also among the most generous in the world, allowing debtors to choose between Chapter 7 bankruptcy that provides debt relief and protection from wage garnishment in exchange for a debtor's non-exempt assets, and Chapter 13 bankruptcy that adds the protection of most assets in exchange for a partial repayment of debt.…”

Consumer Bankruptcy Stigma: Understanding Relationships with Familiarity and Perceived Control

“…A discussion of the legal intricacies of the bankruptcy chapters is beyond the scope of this paper. However, in brief, scholars argue that Chapter 7 bankruptcies are more strongly associated with a "fresh start," as they allow for an immediate discharge of unsecured debts (see Braucher, Cohen, and Lawless 2012;Cohen and Lawless 2012;Lefgren, McIntyre, and Miller 2010;Miller 2015;White 2007). In contrast, Chapter 13 bankruptcies are infused with a symbolic, "moral statement in favor of honoring one's commitments" (Jacoby 2001, 229) because they require debtors to undergo a 3-to 5-year payment plan.…”

“…The benefits of the chapters vary depending on an individual debtor's circumstances (Sullivan and Worden 1990). In practice, African American debtors are more likely than Caucasian debtors to file for Chapter 13 bankruptcies, meaning that they are also more likely to have debt repayment plans (Braucher, Cohen, and Lawless 2012;Cohen and Lawless 2012;Lefgren, McIntyre, and Miller 2010;ProPublica 2017). Collecting race and ethnicity data during bankruptcy cases would facilitate greater understanding of racial and ethnic patterns in bankruptcy and bankruptcy stigma (Braucher, Cohen, and Lawless 2012).…”

Do 401k plan advisors take their own advice?

“…An example of this type of work is Bergstresser, Chalmers, and Tufano (2009) who find that broker-sold funds perform worse than directly-sold funds. A similar approach is taken by Lefgren, McIntyre, and Miller (2010) who show that bankruptcy filings are driven by a lawyer's interest rather than by a client's circumstances.…”