oversight

Bankruptcy Reform: Use of the Homestead Exemption by Chapter 7 Bankruptcy Debtors in the Northern District of Texas and the Southern District of Florida in 1998

Published by the Government Accountability Office on 1999-06-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States General Accounting Office                                                                        General Government Division
Washington, D.C. 20548



                 B-282515

                 June 18, 1999

                 The Honorable Herbert Kohl
                 The Honorable Jeff Sessions
                 United States Senate

                 Subject: Bankruptcy Reform: Use of the Homestead Exemption by Chapter 7 Bankruptcy
                 Debtors in the Northern District of Texas and the Southern District of Florida in 1998

                 On February 2, 1999, you requested that we obtain information on the use of the homestead
                 exemption by bankruptcy debtors in Texas and Florida—two states that permit a bankruptcy
                 debtor to claim a homestead exemption of an unlimited dollar amount. Under the bankruptcy
                 code, a debtor who files for bankruptcy may retain certain exempt assets, including equity in
                 the debtor’s homestead (usually the debtor’s principal residence). The dollar amount of the
                 homestead exemption that may be claimed varies by state. Five states, including Texas and
                                                                                                1
                 Florida, allow an eligible homestead exemption of an unlimited dollar amount.

                 Specifically, as agreed with your offices, we reviewed statistically valid probability samples of
                 chapter 7 bankruptcy cases that were closed in 1998 in the Northern District of Texas and the
                 Southern District of Florida. As requested, we used the data from these samples to estimate
                 for each district the (1) proportion of chapter 7 personal bankruptcy debtors who claimed a
                 homestead exemption, (2) average and median amount of the homestead exemptions
                                                                                     2
                 claimed, (3) average and median amount of total scheduled debts for those debtors who
                 claimed a homestead exemption, and (4) estimated average and median amount of debts
                 discharged by debtors who claimed a homestead exemption. Further, as also requested, we
                 divided our analyses of bankruptcy debtors into two groups—those who claimed a
                 homestead exemption of less than $100,000, and those who claimed a homestead exemption
                 of $100,000 or more. This letter summarizes our results and discusses the scope and
                 methodology we used to gather the data.




                 1
                     The remaining three states are Iowa, Kansas, and South Dakota.
                 2
                     Debtors are to list (or schedule) all their debts on the financial schedules that they file with their bankruptcy petition.




                 Page 1                                                                      GAO/GGD-99-118R Use of the Homestead Exemption
  B-282515



  Summary of Data
  Based on our review of statistically valid probability samples of personal chapter 7
  bankruptcy cases closed in calendar year 1998 in the Northern District of Texas the Southern
                                      3
  District of Florida, we can estimate the following:

• About 52 percent of the chapter 7 cases closed in 1998 in the Northern District of Texas—or
  6,999 cases—-involved a homestead exemption claim.
• About 46 percent of the chapter 7 cases closed in 1998 in the Southern District of Florida—or
  9,532 cases—-involved a homestead exemption claim.
• Of the estimated 6,999 cases in Texas that involved a homestead exemption, 83 (1.2 percent)
  involved homestead exemptions of $100,000 or more; and the remaining 6,916 involved
  homestead exemptions of less than $100,000.
• Of the estimated 9,532 cases in Florida that involved a homestead exemption, 73 (0.8 percent)
  involved homestead exemptions of $100,000 or more; and the remaining 9,459 involved
  homestead exemptions of less than $100,000.


  Table 1 shows the projected average and median value of (1) the homestead exemption
  claimed; (2) total scheduled debt; and (3) estimated total debt discharged, for the estimated
  population of 6,916 Texas cases and 9,459 Florida cases in which the homestead exemption
  claimed was less than $100,000. The dollar value of the homestead exemption claimed is the
  debtor’s equity in the homestead—the difference between the homestead property’s market
  value and the amount of outstanding debt on the property at the time the debtor filed for
  bankruptcy.

  Table 1: Projected Homestead Exemptions Claimed, Total Scheduled Debts, and Estimated Total Debts
  Discharged for the Projected Population of Cases Involving Homestead Exemptions of Less Than
  $100,000 in 1998 in Two Bankruptcy Districts
                                                                                 Estimated total
                                                                            a                    b
                   Claimed homestead exemption        Total scheduled debts    debts discharged
  District              Average        Median        Average         Median     Average        Median
  Texas-Northern
  (6,916 cases)         $14,820         $8,874       $119,700       $95,771     $44,696        $34,851
  Florida-Southern
  (9,459 cases)         $16,041         $9,884       $181,827      $117,254     $58,898        $34,570
  Note: Confidence intervals for these dollar estimates are included in enclosure I.
  a
   In some of the cases reviewed, debtors listed on their debt schedules a creditor, such as the Internal Revenue Service, but did
  not list an amount owed or listed the amount owed as “unknown.” In such cases, the debtors’ schedules we reviewed probably
  understated the amount of debt owed (see enc. II).
  b
   The amount of debts discharged is not shown in the case files. We estimated discharged debts using certain assumptions, as
  discussed in enclosure II.
  Source: GAO analysis of a statistically valid probability sample of chapter 7 cases closed in 1998 in the Northern District of
  Texas and the Southern District of Florida.




  3
      Confidence intervals for these population estimates are included in enclosure I.




  Page 2                                                                   GAO/GGD-99-118R Use of the Homestead Exemption
B-282515


Because of the relatively small number of cases involving homestead exemption claims of
$100,000 or more, we could not project to the population for each of the districts with
adequate statistical confidence. Tables 2 and 3, therefore, show the homestead exemptions
claimed, as well as the average and median homestead exemption claimed, total scheduled
debts, and estimated total debts discharged, for the seven Texas sample cases and the four
Florida sample cases in which the homestead exemption claimed was $100,000 or more.

Table 2: Data on Homestead Exemption Claims of $100,000 or More From Our Sample of Chapter 7 Cases
Closed in 1998 in the Northern District of Texas
Homestead exemption
                                                                  a                                  b
claimed                                      Total scheduled debt    Estimated total discharged debt
               $103,940                                   $111,031                            $60,666
                110,000                                    205,739                            170,382
                116,000                                  7,520,259c                            35,000
                146,000                                  1,491,572                          1,240,772
                150,000                                    370,500                            299,564
                161,000                                    462,000                            387,000
                260,000                                    201,978                            173,816
Average $149,563                                        $1,480,440                           $338,171
Median $146,000                                           $370,500                           $173,816
a
 In some of the cases reviewed, debtors listed on their debt schedules a creditor, such as the Internal Revenue Service, but did
not list an amount owed or listed the amount owed as “unknown.” In such cases, the debtors’ schedules we reviewed probably
understated the amount of debt owed (see enclosure II).
b
 The amount of debts discharged is not shown in the case files. We estimated discharged debts using certain assumptions, as
discussed in enclosure II.
c
This scheduled debt included a court judgment in the amount of $7,366,259. If total discharged debt included this amount, total
discharged debt would be $7,401,259. However, data were not available in the file to determine if this debt was dischargable.
Source: GAO analysis of a statistically valid probability sample of chapter 7 cases closed in 1998 in the Northern District of
Texas.


Table 3
 Data on Homestead Exemption Claims of $100,000 or More From Our Sample of Chapter 7 Cases Closed
in 1998 in the Southern District of Florida
Homestead exemption
                                                                a                                   b
claimed                                     Total scheduled debt    Estimated total discharged debt
                $113,834                                $247,101                           $243,935
                 119,335                                 227,575                            106,910
                 121,500                                  97,096                             25,025
                 122,000                                  54,701                             41,701
Average $119,167                                        $156,618                           $104,393
Median $120,418                                         $162,336                            $74,306
a
 In some of the cases reviewed, debtors listed on their debt schedules a creditor, such as the Internal Revenue Service, but did
not list an amount owed or listed the amount owed as “unknown.” In such cases, the debtors’ schedules we reviewed probably
understated the amount of debt owed (see enclosure II).
b
 The amount of debts discharged is not shown in the case files. We estimated discharged debts using certain assumptions, as
discussed in enclosure II.
Source: GAO analysis of a statistically valid probability sample of chapter 7 cases closed in 1998 in the Southern District of
Florida.


Enclosure I provides further details—broken out by cases with homestead exemption claims
of less than $100,000 and those of $100,000 or more—on the results of our case reviews,
including estimates and confidence intervals for average and median values for homestead
exemption claims, total scheduled debts, and estimated total discharged debt. The results of
our analysis are limited to chapter 7 cases closed in these two districts in calendar year 1998.




Page 3                                                                 GAO/GGD-99-118R Use of the Homestead Exemption
B-282515



Scope and Methodology
To obtain data on homestead exemption values, total scheduled debts, and discharged debts
for debtors who claimed a homestead exemption, we reviewed bankruptcy court case files on
closed chapter 7 bankruptcy cases that had not been dismissed. We excluded dismissed cases
from our sample because debtors whose chapter 7 cases are dismissed do not receive a
discharge of their eligible dischargeable debts. We chose closed chapter 7 cases for two
reasons. First, proposed bankruptcy reform legislation has focused principally on debtors
who file under chapter 7 of the bankruptcy code seeking a discharge of their eligible
                      4
dischargeable debts. (Some debts, such as child support and certain back taxes, are not
dischargeable in bankruptcy.) Second, only closed cases could be used to identify debtors
who received a discharge of their eligible dischargeable debts.

The clerk of court in each of the two districts provided us with a list of all chapter 7 cases
closed in each district in calendar year 1998 that were not dismissed. These lists included
13,477 cases in the Northern District of Texas and 20,897 cases in the Southern District of
Florida. Because no empirical data existed on the percentage of debtors who claim
homestead exemptions, we spoke with several court officials to discuss this issue. Although
their estimates varied, the officials agreed that it was likely that a minority of chapter 7
debtors in each district had claimed a homestead exemption. On the basis of these
discussions, we used the assumption that 30 percent of the chapter 7 cases closed in each
district would involve a homestead exemption in developing a representative sample of cases
                           5
to review in each district. The resulting sample included 823 cases in the northern District of
                                                            6
Texas and 785 cases in the Southern District of Florida.

Our sample was designed to permit us to include confidence intervals for all results reported
and to provide separate estimates for cases filed and closed under chapter 7 and cases
converted to chapter 7 from another bankruptcy chapter prior to closing. Because the
confidence intervals for the different estimates vary in size, we report all of them in enclosure
I rather than in this letter. To ensure consistency across all files we reviewed, we designed a
data collection instrument to capture information from the case files on (1) whether the
debtor(s) claimed a homestead exemption; (2) the dollar amount of the homestead property
claimed as exempt, if any; (3) the total dollar amount of scheduled secured, unsecured
priority, and unsecured nonpriority debts; (4) the dollar amount of any debt the debtor
reaffirmed (agreed to repay); and (5) the dollar amount of any assets the debtor surrendered
to creditors. Further, we used data in the case files to derive the dollar amount of the debtors’
nondischargeable debts, if any, and the total debts discharged.


4
 Under chapters 11, 12, and 13, personal bankruptcy filers generally seek to develop a plan for repaying all or a portion of their
debts over a period of time. Under certain conditions, debtors who file under chapters 11, 12, or 13, may have their cases
converted to chapter 7 and seek a discharge of their eligible debts.
5
 Because the percentage of cases involving homestead exemption claims was about 22 percent higher than anticipated—52
percent rather than 30 percent—we were able to project the results of our sample to all chapter 7 cases closed in 1998 in each
district with a greater degree of statistical confidence. Further details on our sampling can be found in enclosure II.
6
    As discussed in enclosure II, our final analysis excluded 26 cases from our Texas sample and 11 cases from our Florida sample.




Page 4                                                                  GAO/GGD-99-118R Use of the Homestead Exemption
B-282515


Although we endeavored to use the most accurate data available in each file, we did not
independently verify the data recorded on the debtors’ schedules. Consequently, the results
of our analyses on the amount of homestead exemptions claimed, total scheduled debts, and
discharged debts must be considered estimates rather than precise amounts. We performed
our work from February through May 1999 in accordance with generally accepted
government auditing standards. Our objectives, scope, and methodology are described in
more detail in enclosure II.

On June 10, 1998, we provided a draft of this letter to the Administrative Office of the U.S.
Courts for comment. On June 14, 1999, the Administrative Office provided technical
comments that principally addressed the bankruptcy courts’ responsibilities for data
collection and reporting, which we have incorporated into this letter as appropriate.

We plan no further distribution of this letter for 30 days, unless its contents are made public.
At that time, we will send copies to Senators Charles Grassley and Robert Torricelli, the
Chairman and Ranking Minority Member of the Subcommittee on Administrative Oversight
and the Courts, Senate Committee on the Judiciary; Representatives George Gekas and
Jerrold Nadler, the Chairman and Ranking Minority Member of the Subcommittee on
Commercial and Administrative Law, House Committee on the Judiciary; Mr. Ralph
Meacham, Director of the Administrative Office of the U.S. Courts; the Honorable Robert C.
McGuire, Chief Bankruptcy Judge in the Northern District of Texas; and the Honorable A. Jay
Cristol, Chief Bankruptcy Judge in the Southern District of Florida. We will send copies of
this letter to others upon request.

If you have questions regarding this letter, please contact me or William Jenkins at (202) 512-
8777. Key contributors to this assignment were Christopher Conrad, Fredrick Berry, and
Wendy Ahmed.




Richard M. Stana
Associate Director
Administration of Justice Issues




Page 5                                              GAO/GGD-99-118R Use of the Homestead Exemption
Enclosure I

Data on Chapter 7 Bankruptcy Debtors’ Use
of the Homestead Exemption in the Districts
of Northern Texas and Southern Florida
                                            This enclosure contains data on the use of the homestead exemption in
                                            personal (nonbusiness) chapter 7 bankruptcy cases closed in 1998 in the
                                            Northern District of Texas and in the Southern District of Florida. It
                                            includes data from our sample of cases in each district and our weighted
                                            statistical projections to the population of all chapter 7 cases closed in
                                            each district in 1998. The confidence intervals shown are the boundaries
                                            within which there is a 95-percent statistical probability that the actual
                                            amount for the population of cases would be found.


Table I.1: Results of Analyses of Homestead Exemptions Claimed in 1998 in Two Bankruptcy Districts
                                       Northern District of Texas                        Southern District of Florida
                                                Population projections                             Population projections
                                                                  Confidence                                          Confidence
                            Sample results         Estimate           interval Sample results        Estimate             interval
Homestead exemption
claims
Total number of cases with
homestead exemption                     414            6,999            +/- 4%            401             9,532            +/- 4 %
claims                                (52%)            (52%)     (48% to 56%)           (52%)            (46%)      (42% to 50%)
Number with claims under                407            6,916            +/- 1%            397             9,459             +/- 1%
$100,000                              (99%)            (99%) (98% to 100%)             ( 99%)            (99%) (98% to 100%)
Number with claims of                     7                83           +/- 1%              4                73             +/- 1%
$100,000 or more                       (1%)             (1%)       (0% to 2%)            (1%)              (1%)        (0% to 2%)
Homestead claims under
$100,000
                                                                     $12,443                                             $13,461
Average amount of claims                                                     to                                                  to
under $100,000                      $13,400         $14,820          $17,197         $12,974           $16,041           $18,621
                                                                       $7,026                                              $6,870
Median amount of claims                                                      to                                                  to
under $100,000                       $8,000           $8,874         $10,945           $7,872           $9,884           $13,241
Homestead claims of
$100,000 or more
Average amount of claims
                                                             a                 a                               a                   a
of $100,000 or more                $149,563                                         $119,167
Median amount of claims
                                                             a                 a                               a                   a
of $100,000 or more                $146,000                                         $120,418
                                            a
                                             Sample sizes were too small to assess the precision of projections to all chapter 7 cases closed in
                                            the district.
                                            Source: GAO analysis of a statistically valid probability sample of chapter 7 bankruptcy cases closed
                                            in 1998 in the Northern District of Texas and the Southern District of Florida.




                                            Page 6                                      GAO/GGD-99-118R Use of the Homestead Exemption
                                           Enclosure I
                                           Data on Chapter 7 Bankruptcy Debtors’ Use of the Homestead Exemption in the Districts of
                                           Northern Texas and Southern Florida




Table I.2: Total Scheduled Debts for Cases Involving Homestead Exemption Claims
                                      Northern District of Texas                       Southern District of Florida
                                                Population                                       Population
                                                projections                                      projections
                                                                 Confidence                                         Confidence
                            Sample results         Estimate          interval Sample results       Estimate            interval
Total scheduled debts
                                                                   $112,719                                           $115,812
Average amount for all                                                     to                                                to
cases in sample                   $144,599         $130,091        $147,463        $180,359        $181,737           $247,662
                                                                     $91,205                                          $109,640
Median amount for all                                                      to                                                to
cases in sample                    $97,624          $96,457        $103,817        $119,285        $117,254           $125,782
Cases with homestead
claims under $100,000
                                                                   $106,555                                           $115,396
                                                                           to                                                to
Average amount                    $121,624         $119,699        $132,843        $180,598        $181,827           $248,258
                                                                     $89,829                                          $109,762
                                                                           to                                                to
Median amount                      $96,544          $95,771        $103,869        $119,285        $117,254           $125,710
Cases with homestead
claims of $100,000
or more
                                                                   $190,537                                            $73,865
                                                                           to                                                to
Average amount                  $1,480,440         $995,864       $1,801,191       $156,618        $170,151           $266,437
                                                                             a                               a                 a
Median amount                     $370,500         $398,292                        $162,336
                                           a
                                            Sample sizes were too small to assess the precision of projections to all chapter 7 cases closed in
                                           the district.
                                           Source: GAO analysis of a statistically valid probability sample of chapter 7 bankruptcy cases closed
                                           in 1998 in the Northern District of Texas and the Southern District of Florida.




                                           Page 7                                      GAO/GGD-99-118R Use of the Homestead Exemption
                                           Enclosure I
                                           Data on Chapter 7 Bankruptcy Debtors’ Use of the Homestead Exemption in the Districts of
                                           Northern Texas and Southern Florida




Table I.3: Total Estimated Discharged Debts for Cases Involving Homestead Exemption Claims
                                       Northern District of Texas                      Southern District of Florida
                                                 Population projections                          Population projections
                                                                  Confidence                                        Confidence
                             Sample results        Estimate          interval Sample results       Estimate            interval
Total estimated
discharged debts
                                                                     $41,838                                           $45,712
Average amount for all                                                     to                                                to
cases in sample                     $47,421         $50,150          $58,462        $54,411          $59,451           $73,190
                                                                     $32,585                                           $30,401
Median amount for all cases                                                to                                                to
in sample                           $32,979         $35,165          $39,378        $30,414          $34,609            39,002
Cases with homestead
claims under $100,000
                                                                     $41,041                                           $45,116
                                                                           to                                                to
Average amount                      $42,420         $44,696          $48,351        $53,908          $58,898           $72,680
                                                                     $32,119                                           $30,410
                                                                           to                                                to
Median amount                       $32,415         $34,851          $39,012        $30,012          $34,570           $38,947
Cases with homestead
claims of $100,000 or
more
                                                                     $85,593
                                                                           to
                                                                                                                               a
Average amount                     $338,171        $504,574         $546,465       $104,393        $130,694
                                                                             a                               a                 a
Median amount                      $173,816        $308,961                         $74,306
                                           a
                                            Sample sizes were too small to assess the precision of projections to all chapter 7 cases closed in
                                           the district.
                                           Source: GAO analysis of a statistically valid probability sample of chapter 7 bankruptcy cases closed
                                           in 1998 in the Northern District of Texas and the Southern District of Florida.




                                           Page 8                                      GAO/GGD-99-118R Use of the Homestead Exemption
Enclosure II

Objectives, Scope, and Methodology


                   Overall, our objective was to review the use of the homestead exemption
                   by debtors whose personal (nonbusiness) chapter 7 bankruptcy cases
                   were closed in calendar year 1998 in two bankruptcy districts—the
                   Northern District of Texas and the Southern District of Florida. Both of
                   these districts are located in states that permit debtors to claim a
                   homestead exemption of an unlimited dollar amount. Specifically, our
                   objectives were to determine for each district (1) how many chapter 7
                   bankruptcy debtors claimed a homestead exemption, (2) the average and
                   median amount of the exemption claimed, (3) the average and median
                   amount of total debts that debtors who claimed a homestead exemption
                   listed on the schedules of debts filed with their bankruptcy petition, and
                   (4) the estimated average and median amount of the debts discharged by
                   bankruptcy filers who claimed a homestead exemption. As requested, we
                   divided those debtors who claimed a homestead exemption into two
                   groups—debtors who claimed a homestead exemption of (1) less than
                   $100,000 and (2) at least $100,000 but not more than $500,000. In our
                   sample, we found no debtors who claimed a homestead exemption of as
                   much as $300,000. We estimated the average and median amount of debts
                   discharged by the debtors in each of these two groups.

                   To meet these objectives, we reviewed the statutory provisions defining
                   property eligible for a homestead exemption in Texas and Florida and
                   related U.S. bankruptcy code provisions regarding dischargeable and
                                             1
                   nondischargeable debts. We interviewed bankruptcy court officials in
                   both districts; a private panel trustee, whose responsibilities include
                   reviewing debtors’ financial schedules; and an official within the Executive
                   Office of U.S. Trustees. We also discussed our proposed case file review
                   methodology with a bankruptcy judge and incorporated his suggested
                   changes into our methodology. To obtain the data needed to meet our
                   objectives, we reviewed a statistically valid probability sample of closed
                   chapter 7 cases in each district. The results of our analysis are limited to
                   personal chapter 7 bankruptcy cases closed in 1998 in the Northern
                   District of Texas and the Southern District of Florida.

                   At our request, the clerk of court in each of the two districts—the
Sample Selection   Northern District of Texas and the Southern District of Florida—provided
                   us with a list of all personal (nonbusiness) chapter 7 cases closed in each
                   district in calendar year 1998 that were not dismissed. These lists included
                   13,477 cases in the Northern District of Texas and 20,897 cases in the

                   1
                    A “dischargeable” debt is essentially a debt for which the bankruptcy code allows the debtor’s
                   personal liability to be eliminated. By statute, some categories of debts expressly cannot be discharged
                   in bankruptcy. These debts are referred to as “nondischargeable.”




                   Page 9                                      GAO/GGD-99-118R Use of the Homestead Exemption
II
Objectives, Scope, and Methodology




Southern District of Florida. From this population of cases, we selected a
statistically valid probability sample of 823 cases in the Northern District
of Texas and 785 cases in the Southern District of Florida to review. We
excluded dismissed cases from our samples because debtors whose cases
are dismissed generally remain financially responsible for their debts and
do not receive a discharge of their eligible dischargeable debts from the
bankruptcy court.

We chose closed chapter 7 cases for two reasons. First, proposed personal
bankruptcy reform legislation has focused principally on debtors who file
under chapter 7 of the bankruptcy code seeking to have their eligible
dischargeable debts discharged in bankruptcy. Generally, the debtor no
longer has any personal financial liability for debts discharged in
bankruptcy. Creditors are prohibited from attempting to collect debts
discharged in bankruptcy. Second, the debts actually discharged in
bankruptcy can generally be determined only from closed bankruptcy
             2
court cases. We excluded from our samples closed cases that were
dismissed because debtors whose cases are dismissed do not generally
receive a discharge of their eligible debts and, thus, generally remain
                                            3
financially responsible for all their debts. In both districts, our samples
included chapter 7 cases closed in calendar year 1998, whether initially
filed and closed under chapter 7 of the bankruptcy code or filed under
another bankruptcy chapter, but subsequently converted to and closed
                 4
under chapter 7. In general, debtors whose cases were converted to
chapter 7 prior to closing may claim a homestead exemption.

Our final samples for the two districts are shown in table II.1. The table
shows the population of cases from which we selected our sample in each
district, the number of cases in our sample in each district, and the final
number of cases in each district included in our analyses. Our sample sizes
2
 In some circumstances, a state court may have concurrent jurisdiction with the bankruptcy court for
certain complaints about the dischargeability of particular debts.
3
 A chapter 7 bankruptcy debtor’s case may be dismissed for various reasons, including “for cause,”
 which can encompass such reasons as the debtor’s failure to pay the bankruptcy court filing fee,
complete the required financial schedules, attend the required meeting with creditors and the private
panel trustee, or where granting relief would be a “substantial abuse” of such bankruptcy provisions.
4
 In these two districts in calendar year 1998, the great majority of cases converted to chapter 7 from
another bankruptcy chapter prior to closing were initially filed under chapter 13. In the Northern
District of Texas, 866 of 977 (88.6 percent) cases converted to chapter 7 prior to closing were
converted from chapter 13. In the Southern District of Florida, 408 of 416 (98.1 percent) converted
cases were converted from chapter 13. Under chapter 13, debtors agree to enter into and perform
under a repayment plan, which must be approved by the bankruptcy court, in which the debtors agree
to repay all or a portion of their debts over a period not to exceed 3 to 5 years. These chapter 13
repayment plans may not be completed for a variety of reasons. Determining the reasons that cases
were converted to chapter 7 from another chapter prior to closing was beyond the scope of our review.




Page 10                                     GAO/GGD-99-118R Use of the Homestead Exemption
II
Objectives, Scope, and Methodology




were based on several assumptions about the percentage of debtors who
claimed a homestead exemption, the distribution of the amounts of
homestead exemptions claimed, and the distribution of the amounts of
total debt discharged for debtors who claimed a homestead exemption.

Table II.1: Population of Calendar Year 1998 Closed Chapter 7 Cases Used for
Sample Selection and the Composition of the Final Sample in Each District
Closed chapter 7 cases       Northern District of Texas Southern District of Florida
Nondismissed cases
closed in calendar year
1998
 Filed and closed under
 chapter 7                                         12,500                     20,481
 Closed under chapter 7
 after conversion from
 another chapter                                      977                        416
Total                                              13,477                     20,897
Size of random sample
 Filed and closed under
 chapter 7                                            580                        603
 Closed under chapter 7
 after conversion from
 another chapter                                      243                        182
Total                                                 823                        785
Less cases in sample
                           a
deleted from final analysis
 Filed and closed under
 chapter 7                                             14                          5
 Closed under chapter 7
 after conversion from
 another chapter                                       12                          6
Net total number of cases
analyzed                                              797                        774
Note: Sample was based on the assumption that 30 percent of closed chapter 7 cases would include
a homestead exemption claim. However, about 52 percent of the cases in each district’s sample
included a homestead exemption. This higher than expected percentage permitted us to project the
results of our sample to all cases closed in each district with greater statistical confidence.
a
 We deleted cases in which the case file contained insufficient data for analysis or in which there were
conflicting data about the amount of the homestead exemption, debts, or debts discharged that could
not be reconciled using other documents in the file.
Source: Clerks of the Bankruptcy Courts for the Northern District of Texas and the Southern District of
Florida, and GAO data.


There were virtually no empirical data on the percentage of debtors who
claimed a homestead exemption in each district in calendar year 1998.
Consequently, we discussed this issue with an official in the Executive
Office for U.S. Trustees, court officials in each district, and a private panel
trustee. Although their estimates varied, each of these officials agreed that
it was likely that a minority of chapter 7 debtors in each district had
claimed a homestead exemption. On the basis of these discussions, our



Page 11                                     GAO/GGD-99-118R Use of the Homestead Exemption
II
Objectives, Scope, and Methodology




sample size in each district was based on the assumption that 30 percent of
the chapter 7 cases closed in each district would involve a homestead
exemption. We also made some assumptions about the distribution of the
amounts of the homestead exemptions claimed. For example, on the basis
of our discussions, we stratified our samples in each district. We did this
because those we interviewed thought that cases converted to chapter 7
from other bankruptcy chapters prior to closing were likely to have a
higher proportion of debtors who claimed a homestead exemption than
debtors whose cases were filed and closed under chapter 7. On the basis of
these assumptions, we selected a statistically valid probability sample of
823 cases in the Northern District of Texas and 785 cases in the Southern
District of Florida. The sample cases within each strata were then
weighted in the analysis to account statistically for all chapter 7 cases
closed in 1998. Though converted cases are overrepresented in the sample,
weights used in the analysis correctly reflect their frequency in the
population. Our samples were designed to permit us to include confidence
intervals for all results reported and to provide separate estimates for
cases filed and closed under chapter 7 and cases converted to chapter 7
from another bankruptcy chapter prior to closing.

During our review of the case files in each district, we deleted some cases
from our final analysis because the case files had either insufficient
information for our analysis or conflicting information that could not be
reconciled using other documents in the file. For example, if the amount of
the mortgage debt could not be determined from a reaffirmation
agreement, proof of claim, court order, or the financial schedules, we
excluded the case from our analysis. We deleted 26 cases (3.2 percent of
our sample) in the Northern District of Texas and 11 cases (1.4 percent of
our sample) in the Southern District of Florida. Tables II.2 and II.3 below
provide further information on the cases we deleted from our sample in
each district, as well as other problems that we encountered in our file
reviews and how we resolved them.




Page 12                              GAO/GGD-99-118R Use of the Homestead Exemption
                                            II
                                            Objectives, Scope, and Methodology




Table II.2: Summary of Problems Detected in Reviewing Closed Chapter 7 Bankruptcy Cases in the Northern District of Texas
and Their Resolution
Problem detected                                              Number of cases Resolution of problem
Case had been reopened; no longer closed.                           4         Cases deleted from sample reviewed.
Case involved a codebtor on the homestead with percentage           5         Cases deleted from sample reviewed.
share unknown.
                                                                      a, c
IRS debt with amount listed as “unknown.”                         48          Completed DCIs but total debt will be understated by
                                                                              the true value of the IRS debt.
Very complicated chapter 11 to chapter 7 conversion with            3         Cases deleted from sample reviewed.
amounts that could not be reconciled across schedules.
Case file contained numerous debts listed on the wrong              1         Case deleted from sample reviewed.
schedules, as well as three separate mortgage amounts.
Business chapter 7 case with land listed as homestead, but          1         Case deleted from sample reviewed.
owner’s share of the land could not be determined.
                                                                      a, b
Schedule G contained an unexpired lease with amount listed        27          Completed DCIs but total debt and discharged debt
as “unknown.”                                                                 will be understated by the true value of the
                                                                              unexpired lease amounts.
Case was dismissed for failure to complete the forms in a           1         Case deleted from sample reviewed.
timely manner.
Case closed as a chapter 13, not chapter 7.                         1         Case deleted from sample reviewed.
Case closed in 1994, not 1998.                                      1         Case deleted from sample reviewed.
Case was a chapter 13 conversion with debt amounts that             2         Cases deleted from sample reviewed.
could not be reconciled across the schedules.
Case involved a home builder with several homes listed on           1         Case deleted from sample reviewed.
the schedules with no indication as to which one was being
claimed as the homestead.
Case dated back to 1986 and the schedules in the file were          1         Case deleted from sample reviewed.
different from the current schedules used today.
                                                                      b
Case involved surrendered assets whose values could not be          3         DCIs were completed, but the amount of the
determined.                                                                   discharged debt will be understated by the lower of
                                                                              the market value or debt owed on the assets that
                                                                              were surrendered.
Schedules were missing or were not complete in the                  3         Cases deleted from sample reviewed.
bankruptcy file.
                                                                      c
Case contained debt for child support in an amount that could       2         True value of the total debt will be understated by
not be determined.                                                            the amount owed for child support.
The case had been transferred out of the jurisdiction of the        1         Case deleted from sample reviewed.
Northern District of Texas.
Case involved debt for a student loan in an amount that could       1         True value of the total debt will be understated by
not be determined.                                                            the amount owed for the student loan.
Case was converted from a joint chapter 13 to an individual         1         Case deleted from sample reviewed.
chapter 7 with incomplete data to determine the debt owed.
                                            a
                                            There were eight cases in which both IRS debt and Schedule G unexpired lease amounts were listed
                                            as “unknown.”
                                            b
                                             There were two cases in which both Schedule G unexpired lease amounts and the value of
                                            surrendered assets were listed as “unknown.”
                                            c
                                                There was one case in which debts for both IRS taxes and child support were listed as “unknown.”
                                            Source: GAO review of a probability sample of 823 chapter 7 bankruptcy cases closed in 1998 in the
                                            Northern District of Texas.




                                            Page 13                                       GAO/GGD-99-118R Use of the Homestead Exemption
                                              II
                                              Objectives, Scope, and Methodology




Table II.3: Summary of Problems Detected in Reviewing Closed Chapter 7 Bankruptcy Cases in the Southern District of Florida
and Their Resolution

Problem detected                                              Number of cases Resolution of problem
                                                                      a
Case contained a proof of claim from IRS for $25,000, or           10         DCIs were completed for these cases and the IRS proof
increments of $25,000, for unsecured priority debt that                       of claim amounts were recorded for Schedule E with the
seemed to overstate actual taxes that should be owed.                         debt owed being nondischargeable.
Case contained no schedules for recording debt owed.                1         Case deleted from sample reviewed.
Case involved no debt that could be discharged either               5         DCIs were completed, but total debt discharged in these
because there was no unsecured debt or the unsecured                          cases was $0.00.
debt that was recorded was nondischargeable.
                                                                          a
Schedule G contained an unexpired lease with amount                  33           Completed the DCIs but the total debt and total debt
listed as “unknown.”                                                              discharged will be understated by the true value of the
                                                                                  lease amounts owed.
Case had too many debts listed as “unknown” to accurately             3           Cases deleted from sample reviewed.
complete the DCI.
Case involved co-debtors on the homestead property and                3           Cases deleted from sample reviewed.
percentage ownership for debt purposes could not be
determined.
Case involved IRS and/or county taxes owed with no                    2           DCIs were completed, but the total debt will be
amounts listed.                                                                   understated by the true value of the taxes owed.
Case was a converted chapter 11 dating back to 1988 and               1           Case deleted from sample reviewed.
the schedules in the file were different from the schedules
used today.
Case was sent to a records storage center and was not                 1           Case deleted from sample reviewed.
available for review.
Case was a converted chapter 11 with business and                     1           Case deleted from sample reviewed.
personal debts comingled and we could not determine what
debts were personal debts of the debtor.
Case was a pro se case in which debts from the schedules              1           Case deleted from sample reviewed.
could not be reconciled.
                                              a
                                               One case contained both a seeming overestimate of unsecured priority debt to the IRS as well as an
                                              “unknown” amount of debt on an unexpired lease.
                                              Source: GAO review of a probability sample of 785 chapter 7 bankruptcy cases closed in 1998 in the
                                              Southern District of Florida.




                                              Page 14                                   GAO/GGD-99-118R Use of the Homestead Exemption
                         II
                         Objectives, Scope, and Methodology




                         The local bankruptcy courts, the Administrative Office of the U.S. Courts,
General Limitations of   and the Executive Office of U.S. Trustees—all of whom collect and report
the Case File Data       varied bankruptcy data—do not maintain specific data on (1) the number
Used for Analysis        of bankruptcy debtors who claim a homestead exemption, (2) the amount
                         of the exemptions claimed, (3) the type and amount of debts owed by
                         bankruptcy debtors, or (4) the type and amount of debts discharged in
                         bankruptcy. The collection of these data is not statutorily required.
                         Therefore, to identify the debtors in our sample in each district who
                         claimed a homestead exemption, we used the data in the bankruptcy
                         court’s file for each debtor. These files contained (1) the financial
                         schedules that debtors are required to file with the bankruptcy court; (2)
                         data on case disposition (such as whether the debtor was granted a
                         discharge); (3) information on the debts that debtors reaffirmed (agreed to
                         repay), if the statements of reaffirmation had been filed with the
                         bankruptcy court; (4) the debts for which creditors had filed a proof of
                         claim regarding the amount of money the debtor owed the creditor who
                         filed the proof of claim; and (5) any court orders. Court orders may include
                         court rulings regarding the amount of disputed debts or allowable
                         exemptions.

                         The debtors’ financial schedules contain, among other information, data on
                         whether the debtor claimed a homestead exemption, the amount of the
                                                                                                   5
                         exemption claimed, and the types and total amount of the debts owed.
                         The data in the debtors’ financial schedules currently represent the only
                         detailed data available for estimating the amount of the claimed
                         homestead exemptions; the number, types, and amounts of the debts owed
                         by a bankruptcy debtor; and the total amount of the debts discharged in
                                                                                                      6
                         bankruptcy. However, these data are of unknown accuracy and reliability.
                         Although the data in each debtor’s schedules are reviewed by a private
                         panel trustee, the trustee does not necessarily review the accuracy of
                         every entry in the schedules. The private panel trustee and the bankruptcy
                         court officials we interviewed in each of the two districts stated that they
                         rarely verify the amount that a debtor claims for the homestead exemption
                         and generally accept the reported amount. Nor do they usually review the
                         accuracy of the individual amounts listed for each debt on the debtor’s
                         financial schedules.

                         5
                          Debtors must also, for example, file schedules with information on their income (Schedule I—Current
                         Income of Individual Debtor(s)) and expenses (Schedule J—Current Expenditures of Individual
                         Debtor(s)). These schedules did not include data needed in our analysis.
                         6
                           In its October 1997 report, the National Bankruptcy Review Commission recommended that debtors’
                         financial schedules be randomly audited.




                         Page 15                                    GAO/GGD-99-118R Use of the Homestead Exemption
                            II
                            Objectives, Scope, and Methodology




                            For the cases we reviewed, we also did not independently verify the
                            accuracy of the claimed homestead exemption or the amount of the debts
                            listed on the schedules. Our analysis was based on the data as presented in
                            the schedules, except where we could use other documents in the case file
                            to reconcile inconsistencies within the schedules or obtain more reliable
                            data on the amounts of specific debts. As noted in the next section, we
                            made adjustments for errors and inconsistencies, where possible, and our
                            analysis incorporated certain assumptions about other data in the
                            schedules that are described in more detail later. Although we endeavored
                            to use the most accurate data available in each file, the results of our
                            analyses are based principally on the data in the debtor’s financial
                            schedules and must therefore be viewed as estimates rather than precise
                            and accurate calculations.

                            We designed a data collection instrument (DCI) to capture information
Basic Steps Used in the     from the case files on (1) whether the debtor(s) owned property for which
Case File Reviews                                                           7
                            the debtor(s)claimed a homestead exemption; (2) the dollar amount of the
                            debtor’s equity in the homestead property claimed as exempt, if any; (3)
                            the dollar amount of all personal property listed; (4) the total dollar
                            amount of secured, unsecured priority, and unsecured nonpriority debts
                            listed on the financial schedules; (5) debts the debtor reaffirmed (agreed to
                            repay) and the dollar amount; (6) the apparent nondischargeable debts and
                                                8
                            the dollar amount; and (7) the assets surrendered to creditors. For those
                            debtors who claimed a homestead exemption, we used these data to
                            determine the amount of the debtor’s homestead exemption and the
                            amount of the debts discharged by the bankruptcy court. We pretested the
                            DCI on a sample of case files from each district and revised the DCI as
                            needed. The remaining description of the methodology used in reviewing
                            the case files reflects the changes we made as a result of the pretest.

                            In reviewing the case files, we used the data in the case files to answer
                            four basic questions:

                          • Did the debtor claim a homestead exemption?
                          • If an exemption was claimed, what was the amount of the claimed
                            exemption?
                          • If an exemption was claimed, what was the total amount of the debts listed
                            on the debtor’s financial schedules?

                            7
                             Debtors indicate on their bankruptcy petitions whether they are filing as individuals or jointly with a
                            spouse. Married debtors may, if eligible, file as individuals rather than jointly with their spouses.
                            8
                             As discussed later, some debts that are usually nondischargeable are readily identifiable from the
                            schedules, and other debts that may be nondischargeable are not readily identifiable.




                            Page 16                                      GAO/GGD-99-118R Use of the Homestead Exemption
  II
  Objectives, Scope, and Methodology




• If an exemption was claimed, what was the total value of the debts
  discharged in bankruptcy?

  If the debtor did not claim a homestead exemption, we recorded minimal
  information from the file, such as the docket number, whether the debtor
  filed individually or jointly with a spouse, and whether the case was
  originally filed under chapter 7 or another chapter of the bankruptcy code.

  Our objective in reviewing the case files was to use the most reliable data
  available in the files. We used data in the case files to correct errors that
  could be readily identified in the schedules. For example, mortgage debt
                                              9   10        11
  could potentially be listed in schedules A , C, and D, and the amounts
  shown in each schedule could be different. When available in the case
  files, two documents were generally used to resolve such conflicts and
  determine the amount of the mortgage or other debt used in our analysis.
  First, where the debtor had filed a reaffirmation agreement with the
  bankruptcy court that identified the dollar amount of the mortgage (or
  other debt) reaffirmed, we used the amount recorded on the reaffirmation
  agreement. Generally, debtors may, with the consent of the creditor,
  voluntarily agree to reaffirm—agree to repay—any of their eligible
  dischargeable debts. Debtors may not reaffirm less than the full amount of
  the debt without the creditor’s consent. Second, where the creditor had
  filed a proof of claim for the amount of a debt, we used the amount in the
  proof of claim. Under the bankruptcy code and rules, a properly executed
  and filed proof of claim is presumptively valid. We found that creditor
  proofs of claim were principally found in cases that had been converted to
  chapter 7 from chapter 13 prior to being closed under chapter 7.

  If the file contained both a reaffirmation agreement and a proof of claim
  for the same debt, we used the reaffirmation agreement because this is the
  amount the debtor had agreed with the creditor to repay. Reaffirmation
  agreements were most frequently available for mortgage and auto debts.
  Finally, where there was a court order in the file resolving a dispute about
  the amount of a debt owed, we used the amount in the court order.



  9
       Schedule A—Real Property.
  10
    Schedule C—Property Claimed as Exempt. In Texas, the property on which a homestead exemption
  is claimed need not necessarily be a dwelling; it may be land that meets the statutory qualifications for
  a claimed homestead exemption.
  11
   Schedule D—Creditors Holding Secured Claims. This schedule would appropriately include the
  market value of and outstanding debt claimed on such property as homes and automobiles.




  Page 17                                      GAO/GGD-99-118R Use of the Homestead Exemption
                        II
                        Objectives, Scope, and Methodology




                        If a debt was listed on more than two schedules, and one of the amounts
                        was different from the remaining amounts, we used the amount that was
                        listed most frequently. We did this only when no reaffirmation agreement,
                        proof of claim, or court order was available in the file to resolve the
                        conflict shown on the schedules.

                        We excluded some cases from our analysis because the data on the
                        financial schedules could not be satisfactorily reconciled. In tables II.2 and
                        II.3, we have noted the number of cases in each district’s sample that were
                        excluded from our analysis and the reasons for their exclusion.

                        Bankruptcy debtors claim their homestead exemption on schedule C. In
Determining the         many cases, the amount of the homestead exemption claimed on schedule
Number of Debtors       C was the same as the homestead property’s claimed market value on
Who Claimed a           schedule C. This would be true only if there were no outstanding debt on
                        the homestead property. The amount of the homestead exemption claimed
Homestead Exemption     is the amount of the debtor’s equity in the property—that is, the difference
and the Amount of the   between the claimed market value of the homestead property and the total
Exemption Claimed       of all outstanding mortgages and liens secured by that property.
                                                                                         12


                        Therefore, we did not use the homestead exemption claimed on schedule
                        C in any case in which (1) schedule C showed that the claimed market
                        amount and the claimed homestead amount were identical and (2)
                        schedules A and/or D showed that there was an outstanding mortgage on
                        the homestead property.

                        Wherever there was a mortgage on the homestead property, we
                        determined the amount of the debtor’s equity in his or her homestead
                        property by comparing the claimed market value of the homestead
                        property as shown on schedules A, C, and D, to the total amount of all
                        outstanding mortgages and other identifiable liens on the property as
                        shown on (1) schedules A and D; (2) the debtor’s written agreement, if any,
                        to reaffirm the debt on the property claimed as a homestead; and (3) any
                        proofs of claim filed with the bankruptcy court by any creditors holding a
                        mortgage or lien to prove the amount of the outstanding debt owed on the
                        property.

                        We used all of these sources of data from each case file because interviews
                        with court officials, a private panel trustee, and the results of the pretest of
                        our data collection instrument indicated that debtors’ financial schedules

                        12
                           It is possible that the debtor could have both a first mortgage and a home equity loan on the
                        homestead property. It is also possible that there could be a tax lien on the homestead property. Such
                        liens would reduce a debtor’s home equity and, thus, the amount of the homestead exemption.




                        Page 18                                     GAO/GGD-99-118R Use of the Homestead Exemption
                   II
                   Objectives, Scope, and Methodology




                   frequently included conflicting data about the market value of and
                   outstanding mortgage owed on their homestead property. For market
                   value, we used the most frequent market value of the homestead property
                   found in the debtor’s financial schedules. Where one or more amended
                   schedules had been filed, we used the data on the amended schedule(s).
                   The market value shown in the file is the market value claimed by the
                   debtor and may be more or less than the actual market value of the
                   homestead property. Where neither a reaffirmation agreement nor proof of
                   claim was found in the file, we used the most frequent outstanding
                   mortgage amount(s) recorded on the debtors’ financial schedules. Overall,
                   we found schedule D to be the best source of data for determining the
                   debtor’s claimed market value for homestead property and the claimed
                   outstanding mortgage amount on that property.

                   As noted earlier, we excluded some cases from our analyses because the
                   data in the debtors’ financial schedules could not be satisfactorily
                   reconciled.

                   Bankruptcy debtors list their debts primarily on four of the financial
Determining Each   schedules they file with the bankruptcy court—secured debts on schedule
Debtor’s Total                                                 13
                   D, unsecured priority debts on schedule E, unsecured nonpriority debts
                                  14                                   15
Scheduled Debts    on schedule F, and leasehold debts on schedule G. Secured debts are
                   those for which the creditor holds a mortgage or lien on the collateral
                   securing the loan, principally home mortgages and auto loans. For
                   nonbusiness (individual consumer) debtors, unsecured priority debts
                   generally would include such debts as most back taxes and obligations
                   owed for child support and alimony. Unsecured nonpriority debts include
                   credit card debts, medical bills, and other unsecured personal debts.

                   In our review, we generally used the amount of the debtor’s debts as listed
                   on schedules D, E, and F. If the initial schedules had been amended, we
                   used the amounts on the amended schedules rather than the initial
                   schedules. However, as discussed below, we made several adjustments to
                   total debts listed on each of these schedules (including the amended
                   schedules), when appropriate.

                   13
                     Schedule E—Creditors Holding Unsecured Priority Claims. This schedule would appropriately
                   include such debts as back taxes owed and child support and alimony obligations.
                   14
                      Schedule F—Creditors Holding Unsecured Nonpriority Claims. This schedule would appropriately
                   include credit card debts, unpaid medical expenses, and unsecured personal loans, such as student
                   loans.
                   15
                     Schedule G—Executory Contracts and Unexpired Leases. This schedule would appropriately include
                   such debts as unexpired automobile, truck, and equipment leases.




                   Page 19                                    GAO/GGD-99-118R Use of the Homestead Exemption
II
Objectives, Scope, and Methodology




In some cases, debtors surrendered to the secured creditor a car or other
property on which a debt was owed. If the schedule (usually schedule D)
showed that the market value of the property exceeded the debt owed, we
assumed the creditor ultimately recovered the full amount of the debt by
selling the surrendered property and used the sales proceeds to pay the
      16
debt. However, if the schedule showed that the market value of the
surrendered property was less than the amount of the debt owed, we
assumed that the creditor ultimately incurred a loss at least equal to the
difference between the market value of the property (collateral) and the
            17
debt owed. Under the bankruptcy code, if the debtor surrenders collateral
to a creditor who has a lien on that collateral, and the creditor later
recovers less than the full value of the debt owed, the unrecovered amount
of the debt is considered to be an unsecured nonpriority debt, and added
to the debtor’s total unsecured nonpriority debt as listed on schedule F. In
our case reviews, we added these debt amounts to the dischargeable debt
to determine total debts discharged.

In some cases, debtors noted in either schedule E or F that they owed the
Internal Revenue Service (IRS) money for back taxes but listed the amount
as “unknown.” In such cases, we also recorded the amount as “unknown.”
Tables II.2 and II.3 provide information on the number of such cases in our
sample.

Debtors should list the amount owed under an unexpired automobile,
truck, or equipment lease on schedule G. For example, if a debtor had
leased a car for 1 year and the remaining payments due under the terms of
the lease totaled $10,000, the debtor should list $10,000 on schedule G.
However, this was not always done. Sometimes the debtor merely listed
the monthly payment due under the terms of the lease on schedule G.
Where the chapter 7 case file included a reaffirmation agreement or proof
of claim, we used the amount in these documents. If the debtor listed the
value of the lease in another schedule (B, D, E, or F), we used the amount
from that schedule. (Before using the amount from schedule B, D, E, or F,
we checked to affirm that the name and address of the creditor listed on
schedule G were the same as the creditor listed on the other schedules). If
the amount owed under the lease could not be determined from any of
these sources, we noted this on the DCI. Tables II.2 and II.3 provide

16
   In actuality, this may or may not be true, because the creditor would incur expenses associated with
selling the property. After expenses, the creditor may or may not recover enough to liquidate the full
outstanding balance of the debt owed.
17
  Similarly, because of the expenses incurred in selling the recovered property, the actual loss to the
creditor may be greater than the amount we assumed to be the amount of the creditor’s loss.




Page 20                                      GAO/GGD-99-118R Use of the Homestead Exemption
                        II
                        Objectives, Scope, and Methodology




                        information on the number of cases in which the lease amounts owed
                        could not be determined.

                        Under the bankruptcy code, a debtor’s debts are grouped into two broad
Estimating a Debtor’s   categories—dischargeable and nondischargeable. Consumer
Dischargeable Debts     (nonbusiness) debtors who file under chapter 7 of the bankruptcy code
                        generally seek a discharge of their eligible dischargeable debts. Basically, a
                        creditor is prohibited from attempting to collect discharged debts from the
                        debtor. However, by statute, some categories of debts expressly cannot be
                        discharged in bankruptcy. These include such debts as most student loans,
                        alimony and child support payments, and most back taxes owed to local,
                        state, or federal governments. The debtor usually remains financially
                        responsible for his or her nondischargeable debts following the
                        bankruptcy court’s grant of a general discharge and the closing of the
                        debtor’s bankruptcy case.

                        Currently, the local bankruptcy court, the Administrative Office of the U.S.
                        Courts, and the Executive Office of U.S. Trustees do not gather specific
                        data on the number of debts discharged or the amount of such debts and
                        are not required to do so. The only source of data on discharged debts is
                        the individual bankruptcy court files on each debtor. It was, therefore,
                        necessary to review the debts and categorize them as generally
                        dischargeable or nondischargeable. Because the debtors’ financial
                        schedules and the remainder of the debtor’s court file rarely included
                        sufficient information to determine precisely which debts were and were
                        not dischargeable, it was necessary to use some basic assumptions in
                        estimating each debtor’s discharged debts. First, we deducted from total
                        debts the total amount of all debts for which the debtor had filed a
                        reaffirmation agreement or “statement of intention” to reaffirm with the
                        bankruptcy court. These are debts that the debtor stated it was his or her
                        intention to repay, even though the debts could otherwise be discharged in
                        bankruptcy. Where reaffirmation agreements had not been filed with the
                        bankruptcy court, we relied on the statement of intention, if any, to
                        identify those debts that the debtor had reaffirmed. Because debtors may
                        not ultimately reaffirm any or all of the debts listed on their statement of
                        intention, we may have overstated the amount of debts that the debtor
                        reaffirmed, and thus, understated the amount of debts discharged.
                        Generally, debtors stated their intention to reaffirm their mortgage debt, if
                        any, and one or more vehicle loans.

                        Second, in estimating each debtor’s dischargeable debts, we assumed all
                        debts were dischargeable with the following exceptions, which represent
                        the most frequent types of nondischargeable debts found in the debtors



                        Page 21                              GAO/GGD-99-118R Use of the Homestead Exemption
II
Objectives, Scope, and Methodology




schedules: (1) student loans (with the exceptions noted below); (2) taxes
owed to state, local, or federal governments that were listed on schedule
  18
E; (3) obligations for child support and alimony; (4) criminal fines and
restitution and other court judgments; and (5) any additional debts which
the case file indicated that the bankruptcy court had determined to be
                    19
nondischargeable.

Student loans that a local, state, or federal government entity or a
nonprofit institution grants, insures, guarantees, or subsidizes are usually
nondischargeable in bankruptcy. Purely commercial student loans, without
government or nonprofit institution insurance, guarantees, or subsidies,
are generally dischargeable. However, the debtors’ schedules rarely
indicated whether a loan was purely commercial. The Higher Education
Amendments of 1998 included provisions that changed the bankruptcy
status of certain student loans that are more than 7 years old. Prior to the
1998 amendments, otherwise nondischargeable student loans more than 7
years old were generally dischargeable. The 1998 amendments apply to all
bankruptcy petitions filed after October 7, 1998, and, in general removed
the “more than 7 years” exception for nondischargeability. For bankruptcy
petitions filed after October 7, 1998, student loans, regardless of age, are
generally nondischargeable. For cases filed on or before October 7, 1998,
                                                                   20
student loans older than 7 years remain generally dischargeable. If there
was no indication in the file regarding the age of the student loan, we
assumed it was nondischargeable, unless there was documentation in the
file to indicate that the debt had been determined to be dischargeable.
Where there was information in the case file regarding the age of the
student loan, we followed the general standards of the Higher Education
Act Amendments of 1998.

In these two districts, in some cases, debtor attorneys listed their
uncollected fees owed as unsecured priority debt on schedule E. Most
consumer debts listed on schedule E are nondischargeable. The section of

18
  It is important to note that there are circumstances in which some taxes owed are dischargeable.
However, it was not possible to determine from the schedules which taxes were appropriately
dischargeable. If the debtor’s financial schedules are accurately completed, nondischargeable debts
would be listed on schedule E, and dischargeable debts would be listed on schedule F.
19
   For example, debts incurred under false pretenses or with the intent to defraud or judicial damage
awards based on a finding of willful and malicious injury are also nondischargeable. However, such
debts are rarely clearly identified on a debtor’s financial schedules. Therefore, we generally limited our
categories of nondischargeable debts to the general categories most frequently found in debtors’
schedules, such as back taxes, child support, alimony, and some court judgments.
20
  The statute governing student loans in bankruptcy filings on or before October 7, 1998, actually ties
dischargeability to the date on which the loan first became due.




Page 22                                      GAO/GGD-99-118R Use of the Homestead Exemption
II
Objectives, Scope, and Methodology




the bankruptcy code that lists the types of debts that are
nondischarageable does not specifically list attorneys fee as
                    21
nondischargeable. Claims for scheduled unsecured debtor attorneys fees
are potentially subject to discharge like most other unsecured debt, unless
a court finds a valid claim for having the debt excepted from discharge.
Therefore, in the absence of any document in the file indicating that the
court had ruled the debtor’s unpaid attorney fees to be nondischargeable
or that the debtor had reaffirmed the attorneys fees, we classified unpaid
debtor attorney fees listed on schedules E or F as dischargeable. It is
possible that using this assumption, we overstated the amount of attorneys
fees that were discharged.

Our work was performed from February through May 1999 in accordance
with generally accepted government auditing standards.




21
 The bankruptcy code does except from discharge fees for professional services that the debtor
obtained by fraud, false pretenses, or misrepresentation.




Page 23                                    GAO/GGD-99-118R Use of the Homestead Exemption
Page 24   GAO/GGD-99-118R Use of the Homestead Exemption
Page 25   GAO/GGD-99-118R Use of the Homestead Exemption
Page 26   GAO/GGD-99-118R Use of the Homestead Exemption
Ordering Information

The first copy of each GAO report and testimony is free. Additional
copies are $2 each. Orders should be sent to the following address,
accompanied by a check or money order made out to the
Superintendent of Documents, when necessary. VISA and
MasterCard credit cards are accepted, also. Orders for 100 or more
copies to be mailed to a single address are discounted 25 percent.

Order by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
     th                  th
700 4 St. NW (corner of 4 and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000 or by using fax
number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and testimony.
To receive facsimile copies of the daily list or any list from the past
30 days, please call (202) 512-6000 using a touch-tone phone. A
recorded menu will provide information on how to obtain these
lists.

For information on how to access GAO reports on the INTERNET,
send e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested




(188646)