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

Published by the Government Accountability Office on 1999-07-12.

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

GAO   United States General Accounting Office
      Washington, D.C. 20548



      B-283143

      July 12, 1999

      The Honorable Herb Kohl
      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

      Dear Senator Kohl:

      On June 18, 1999, we provided you a letter in response to your request for data on debtors’
      use of the homestead exemption in chapter 7 bankruptcy cases closed in calendar year 1998
                                                                              1
      in the Northern District of Texas and the Southern District of Florida. On June 29, 1999, your
      office asked that we provide (1) further information on debtors’ use of the homestead
      exemption in these two districts and (2) data on the number of personal chapter 7 bankruptcy
      cases closed in calendar year 1998 in the remaining five districts in Texas and Florida.

      Specifically, your office asked that we provide information--based on our sample of closed
      chapter 7 cases in the Northern District of Texas and the Southern District of Florida--on the
      average and median amount of all homestead exemptions claimed by debtors in these
      districts in 1998. Further, your office asked that we provide data on the estimated average
      and median homestead exemptions claimed for all homestead cases closed in 1998 in each
      district.

      Table I.1 in enclosure I provides the requested data on the estimated average and median
      amount of the homestead exemptions claimed in each district for (1) homestead claims under
      $100,000, (2) homestead claims of $100,000 or more, and (3) all homestead claims combined.
      Table I.1 also includes the confidence intervals for our estimates. As originally requested, our
      June 18, 1999, letter provided data on homestead exemptions under $100,0000 and homestead
      exemptions of $100,000 or more. This presentation adds the combined total.

      Concerning the second part of your request, table II.1 in enclosure II provides data on the
      number of personal chapter 7 bankruptcy cases closed in the remaining five districts in Texas
      and Florida—the Eastern, Southern, and Western Districts of Texas and the Northern and
      Middle Districts of Florida. We obtained data on chapter 7 cases closed in calendar year 1998
      in the remaining five districts in Florida and Texas from the Administrative Office of the U.S.
      Courts. Enclosure III contains our scope and methodology, provided in our earlier report, for
      determining the homestead exemptions claimed by chapter 7 debtors in these two districts.


      1
       Bankruptcy Reform: Use of the Homestead Exemption by Chapter 7 Bankruptcy Debtors in the Northern District of Texas and
      the Southern District of Florida (GAO/GGD-99-118R, June 18, 1999).




      Page 1                                                                      GAO/GGD-99-142R Homestead Exemptions
B-283143


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 Members of the Subcommittee on
Commercial and Administrative Law, House Committee on the Judiciary; and Mr. Ralph
Mecham, Director of the Administrative Office of the U.S. Courts. We will send copies of this
letter to others upon request.

If you have further questions, please contact me or William Jenkins at (202) 512-5777. Key
contributors to this assignment were Christopher Conrad and Wendy Ahmed.

Sincerely yours,




Richard M. Stana
Associate Director
  Administration of Justice Issues




Page 2                                                       GAO/GGD-99-142R Homestead Exemptions
Enclosure I

Data on Chapter 7 Bankruptcy Debtors’ Use
of the Homestead Exemption in Two Districts

                                          This table contains data on the values of the homestead exemptions
                                          claimed 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 estimates for 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 estimates                                        Population estimates
                                     Sample                         Confidence                 Sample                          Confidence
                                     results         Estimate          interval                results         Estimate           interval
Homestead exemption claims
Total number of cases with               414              6,999              +/- 4%                 401            9,532               +/- 4 %
                                            a
homestead exemption claims            (52%)               (52%)       (48% to 56%)                (52%)            (46%)         (42% to 50%)
Number with claims under                 407              6,916              +/- 1%                 397            9,459                +/- 1%
                                            b
$100,000                              (99%)               (99%)      (98% to 100%)               ( 99%)            (99%)        (98% to 100%)
Number with claims of $100,000 or          7                 83              +/- 1%                   4               73                +/- 1%
                                            b
more                                   (1%)                (1%)         (0% to 2%)                 (1%)             (1%)           (0% to 2%)
Homestead claims under
$100,000
                                                                             $12,443                                                   $13,461
Average amount of claims under                                                    to                                                        to
$100,000                             $13,400           $14,820               $17,197           $12,974          $16,041                $18,621
                                                                              $7,026                                                    $6,870
Median amount of claims under                                                     to                                                        to
$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 of
                                                                c                     c                                  c                       c
$100,000 or more                    $149,563                                                  $119,167
Median amount of claims of
                                                                c                     c                                  c                       c
$100,000 or more                    $146,000                                                  $120,418
All homestead claims
                                                                             $13,633                                                   $14,078
                                                                                   to                                                       to
Average amount of claims             $15,703           $16,338               $19,042           $14,033          $16,826                $19,574
                                                                              $7,049                                                    $6,895
                                                                                   to                                                       to
Median amount of claims               $8,000             $9,043              $11,257             $8,000           $9,923               $13,410
                                          a
                                          Percentages in row represent percent of the total number of sample cases or percent of the total
                                          population of chapter 7 cases closed in each district.
                                          b
                                          Percentages in row represent percent of the total number of sample cases or percent of the
                                          estimated total population of cases that included a homestead claim in each district.
                                          c
                                           Sample sizes were too small to assess the precision of projections to all chapter 7 cases closed in
                                          the district.




                                          Page 3                                                 GAO/GGD-99-142R Homestead Exemptions
Data on Chapter 7 Bankruptcy Debtors’ Use of the Homestead Exemption in Two Districts




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 4                                                GAO/GGD-99-142R Homestead Exemptions
Enclosure II

Personal (Nonbusiness) Chapter 7 Cases
Closed in Calendar Year 1998 in Five
Bankruptcy Districts
                                        This enclosure includes information on the number of personal
                                        (nonbusiness) chapter 7 bankruptcy cases closed in calendar year 1998 in
                                        each of five bankruptcy districts—the Eastern, Southern, and Western
                                        Districts of Texas and the Northern and Middle Districts of Florida.

Table II.1: Personal Chapter 7
Bankruptcy Cases Closed in Five                                                                     District
Bankruptcy Districts in Calendar Year   Category of closed              Eastern       Southern        Western   Northern   Middle
1998                                    cases                            Texas          Texas           Texas    Florida   Florida
                                        Filed and closed
                                        under chapter 7
                                        Discharge granted                  4,386           11,137       9,632      4,089    34,939
                                        Discharge denied,
                                        waived, or revoked                      4             11           9          8       176
                                        Dismissed or
                                        transferred to another
                                        district                              92              247         118         43       305
                                          Subtotal                         4,482           11,395       9,759      4,140    35,420
                                        Filed under another
                                        chapter but
                                        converted to chapter
                                        7 prior to closing
                                        Discharge granted                    231             772         794         89       813
                                        Discharge denied,
                                        waived, or revoked                      0              1           1          0        43
                                        Dismissed or
                                        transferred to another
                                        district                              34              139          32          1        29
                                          Subtotal                           265              912         827         90       885
                                        Total                              4,747           12,307      10,586      4,230    36,305
                                        Source: Administrative Office of the U.S. Courts




                                        Page 5                                                GAO/GGD-99-142R Homestead Exemptions
Enclosure III

Objective, 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. This enclosure describes our methodology for
                   determining the amount of the homestead exemption chapter 7 debtors
                   claimed in calendar year 1998 in these two districts. A description of our
                   methodology for determining the total amount of scheduled debts and
                   estimating the total amount of discharged debts is found in enclosure II of
                                      1
                   our earlier report.

                   To determine the amount of the homestead exemption claimed, we
                   reviewed the statutory provisions defining property eligible for a
                   homestead exemption in Texas and Florida. 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

                   1
                    Bankruptcy Reform: Use of the Homestead Exemption by Chapter 7 Bankrtupcy Debtors in the
                   Northern District of Texas and the Southern District of Florida in 1998 (GGD-99-118R, June 18, 1999).




                   Page 6                                                 GAO/GGD-99-142R Homestead Exemptions
Enclosure III
Objective, Scope, and Methodology




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. 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 III.1. The table
shows the population of cases from which we selected our sample in each
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 7                                                 GAO/GGD-99-142R Homestead Exemptions
Enclosure III
Objective, Scope, and Methodology




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
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 III.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



Page 8                                                 GAO/GGD-99-142R Homestead Exemptions
Enclosure III
Objective, Scope, and Methodology




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
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 III.2 and III.3
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 9                                  GAO/GGD-99-142R Homestead Exemptions
                                            Enclosure III
                                            Objective, Scope, and Methodology




Table III.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 10                                                 GAO/GGD-99-142R Homestead Exemptions
                                              Enclosure III
                                              Objective, Scope, and Methodology




Table III.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 11                                              GAO/GGD-99-142R Homestead Exemptions
                         Enclosure III
                         Objective, 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 12                                              GAO/GGD-99-142R Homestead Exemptions
                            Enclosure III
                            Objective, 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 13                                                 GAO/GGD-99-142R Homestead Exemptions
  Enclosure III
  Objective, 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 14                                                 GAO/GGD-99-142R Homestead Exemptions
                        Enclosure III
                        Objective, 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 III.2
                        and III.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 15                                                GAO/GGD-99-142R Homestead Exemptions
Enclosure III
Objective, 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. Our work was performed from February through May 1999 in
accordance with generally accepted government auditing standards.




Page 16                                GAO/GGD-99-142R Homestead Exemptions
Enclosure III
Objective, Scope, and Methodology




Page 17                             GAO/GGD-99-142R Homestead Exemptions
Page 18   GAO/GGD-99-142R Homestead Exemptions
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