oversight

Personal Bankruptcy: Methodological Similarities and Differences in Three Reports on Debtors' Ability to Pay

Published by the Government Accountability Office on 1999-03-17.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Commercial and
                          Administrative Law, Committee on the Judiciary,
                          House of Representatives


For Release on Delivery
Expected at
10:00 a.m., EST
                          Personal Bankruptcy
on Wednesday
March 17, 1999

                          Methodological Similarities
                          and Differences in Three
                          Reports on Debtors’ Ability
                          to Pay
                          Statement of Richard M. Stana, Associate Director
                          Administration of Justice Issues
                          General Government Division




GAO/T-GGD-99-58
Summary

Personal Bankruptcy: Methodological
Similarities and Differences in Three Reports
on Debtors’ Ability to Pay
               Those who file for personal bankruptcy generally file under chapters 7 or
               13 of the bankruptcy code. Those who file under chapter 7 generally seek
               discharge of their eligible debts. Those who file under chapter 13 submit a
               repayment plan, which must be confirmed by the bankruptcy court, to pay
               all or part of their debts over a period not to exceed 3 or 5 years. Personal
               bankruptcy filings have set new records in each of the last 3 years,
               although there is little agreement on the causes for such high bankruptcy
               filings in a period of relatively low unemployment, low inflation, and
               steady economic growth. Nor is there agreement on the number of debtors
               who seek relief through the bankruptcy process who have the ability to
               pay at least some of their debts and the amount of debt such debtors could
               repay.

               Three reports—by the Credit Research Center (October 1997), Ernst &
               Young (March 1998), and Creighton University/American Bankruptcy
               Institute (March 1999)—have examined different samples of debtors who
               filed for bankruptcy under chapter 7 and estimated the percentage of such
               debtors who could repay a “substantial portion of their debts.” The Credit
               Center estimated that 30 percent of the chapter 7 debtors in its sample
               could repay at least 21 percent of their “nonhousing, nonpriority debts,”
               such as car loans and credit card debts, over a 5-year period. The Ernst &
               Young and ABI reports estimated that 15 percent and 3.6 percent,
               respectively, of the chapter 7 debtors in their individual samples could
               repay (1) all of their nonhousing secured debts (such as auto loans), (2) all
               of their unsecured priority debts (such as certain taxes), and (3) at least 20
               percent of their unsecured nonpriority debts (such as credit card debt)
               over a 5-year period.

               The reports have some characteristics in common. Each used for its
               analysis the data on income, expenses, and debts that debtors file with
               their bankruptcy petitions. Although these are the only data available for
               analyzing debtors’ repayment capacity, the reliability and accuracy of
               these data are unknown. Each report’s estimates also assumed that a
               debtor’s income would be stable over the 5-year repayment period and that
               all debtors who entered a 5-year repayment plan would successfully
               complete their plans.

               Differences in the three reports’ methodologies contributed to each
               report’s different estimate of the percentage of chapter 7 debtors who
               could potentially repay a “substantial portion” of their debts and the
               percentage of those debts that could be repaid over 5-year repayment
               period. These differences include different (1) groupings of the types of
               debts that could be repaid, (2) gross income thresholds to identify those



               Page 1                                      GAO/T-GGD-99-58 Personal Bankruptcy
Summary
Personal Bankruptcy: Methodological Similarities and Differences in Three Reports on
Debtors’ Ability to Pay




debtors whose repayment capacity was analyzed, (3) assumptions about
debtors’ allowable living expenses, (4) treatment of student loans that
debtors had categorized as unsecured priority debts; (5) assumptions
about the administrative expenses that would accompany a debtor
repayment plan. It is also possible that differences in the sampling
methods and time periods each report used to select the debtors for
analysis could have contributed to the different results.




Page 2                                             GAO/T-GGD-99-58 Personal Bankruptcy
Statement

Personal Bankruptcy: Methodological
Similarities and Differences in Three Reports
on Debtors’ Ability to Pay
               Mr. Chairman and Members of the Subcommittee:

               I am pleased to be here today to share our observations on the principal
               methodological similarities and differences of three reports on bankruptcy
               debtors’ ability to pay their debts. These reports endeavor to address an
               important public policy issue—whether some proportion of debtors who
               file for personal bankruptcy have sufficient income, after expenses, to pay
               a “substantial” portion of their debts.

               The three reports were issued by the Credit Research Center (Credit
                        1                2
               Center), Ernst & Young, and Creighton University/American Bankruptcy
                               3
               Institute (ABI). Last year we reported on our analyses of the Credit Center
                                            4
               and Ernst & Young reports. It is important to emphasize that our review of
               the ABI study is still underway. Consequently, it is too early for us to
               discuss the results of our analysis of the ABI report. Our objective in
               reviewing each of these reports has been the same—to assess the
               strengths and limitations, if any, of the report’s assumptions and
               methodology for determining debtors’ ability to pay and the amount of
               debt that debtors could potentially repay. We have used the same criteria
               to review each report.

               The Credit Center report estimated that 30 percent of the chapter 7
               debtors in its sample could pay at least 21 percent of their “nonhousing,
               nonpriority debt,” after deducting their mortgage debt payments and living
               expenses (exclusive of debt payments). Ernst & Young and ABI estimated
               that 15 percent and 3.6 percent, respectively, of the debtors in their
               individual samples had sufficient income, after deducting allowable living
               expenses, to pay all of their nonhousing secured debts, all of their
               unsecured priority debts, and at least 20 percent of their unsecured
               nonpriority debts. The reports have some characteristics in common, such
               as the use of debtor-prepared income, expense and debt schedules, the
               assumption that the debtor’s income would remain stable over a 5-year
               repayment period, and the assumption that all debtors who entered a 5-

               1
                John M. Barron, Ph.D., and Michael E. Staten, Ph.D., Personal Bankruptcy: A Report on Petitioners’
               Ability to Pay (October 7, 1997).
               2
                Ernst & Young, LLP, Chapter 7 Bankruptcy Petitioners’ Ability to Repay: The National Perspective,
               1997 (March 11, 1998).
               3
                Marianne B. Culhane, J.D., and Michaela M. White, J.D., Taking the New Consumer Bankruptcy Model
               for a Test Drive: Means-Testing Real Chapter 7 Debtors (March 8, 1999).
               4
                Personal Bankruptcy: The Credit Research Center Report on Debtors’ Ability to Pay (GAO/GGD-98-
               47, Feb. 9, 1998) and Personal Bankruptcy: The Credit Research Center and Ernst & Young Reports on
               Debtors’ Ability to Pay (GAO/T-GGD-98-79, March 12, 1998).




               Page 3                                                   GAO/T-GGD-99-58 Personal Bankruptcy
             Statement
             Personal Bankruptcy: Methodological Similarities and Differences in Three Reports on
             Debtors’ Ability to Pay




             year repayment plan would successfully complete the plans—an
                                                                         5
             assumption that historical experience suggests is unlikely. However, the
             reports have some methodological differences, including different (1)
             groupings of the types of debts that could be repaid; (2) gross income
             thresholds used to identify those debtors whose repayment capacity was
             analyzed, (3) assumptions about debtors’ allowable living expenses, (4)
             treatment of student loans that debtors had categorized as unsecured
             priority debts; and (5) and assumptions about administrative expenses.

             The remainder of my statement discusses in greater detail the similarities
             and differences in the findings and methodologies of the three reports. A
             summary of these similarities and differences is found in attachment I.



             Debtors who file for personal bankruptcy usually file under chapter 7 or
Background   chapter 13 of the bankruptcy code. Generally, debtors who file under
             chapter 7 of the bankruptcy code seek a discharge of their eligible
                                   6
             dischargeable debts. Debtors who file under chapter 7 may voluntarily
             reaffirm—that is, voluntarily agree to repay—any of their eligible
             dischargeable debts. Debtors who file under chapter 13 submit a
             repayment plan, which must be confirmed by the bankruptcy court, for
             paying all or a portion of their debts over a period not to exceed 3 years
             unless for cause the court approved a period not to exceed 5 years.

             Personal bankruptcy filings have set new records in each of the past 3
             years, although there is little agreement on the causes for such high
             bankruptcy filings in a period of relatively low unemployment, low
             inflation, and steady economic growth. Nor is there agreement on (1) the
             number of debtors who seek relief through the bankruptcy process who
             have the ability to pay at least some of their debts and (2) the amount of
             debt such debtors could repay.



             5
              A 1994 report by the Administrative Office of the U. S. Courts reviewed the outcome of 953,180
             chapter 13 cases filed between calendar years 1980 and 1988 and terminated by September 30, 1993.
             AOUSC found that debtors received a discharge in about 36 percent of the terminated cases. A chapter
             13 discharge is generally granted when a debtor successfully completes a court-approved repayment
             plan
             6
              Eligible debts may be discharged in bankruptcy proceedings. A dischargeable debt is a debt for which
             the bankruptcy code allows the debtor’s personal liability to be eliminated. By statute, some types of
             debts and obligations, such as alimony, child support, some student loans, and certain taxes cannot
             generally be discharged in bankruptcy proceedings. The debtor remains financially responsible for
             nondischargeable debts after the close of his or her bankruptcy case.




             Page 4                                                    GAO/T-GGD-99-58 Personal Bankruptcy
                         Statement
                         Personal Bankruptcy: Methodological Similarities and Differences in Three Reports on
                         Debtors’ Ability to Pay




                                                                                       th        th
                         Several bills have been introduced in the 105 and 106 Congresses that
                         would implement some form of “needs-based” bankruptcy. Each of these
                         bills includes provisions for determining when a debtor could be required
                         to file under chapter 13, rather than chapter 7. Currently, the debtor
                         generally determines whether to file under chapter 7 or 13. Generally,
                         these bills would establish a “needs-based” test, whose specific provisions
                         vary among the bills. H.R. 3150, the bill used in the Ernst & Young and ABI
                         analyses, would require a debtor whose gross monthly income met a
                         specified income threshold to file under chapter 13 if the debtor’s net
                         monthly income after allowable expenses was more than $50 and would be
                         sufficient to pay 20 percent of the debtor’s unsecured nonpriority debt
                         over a 5-year period. Debtors who did not meet these criteria would be
                         permitted to file under chapter 7.

                         Under the bankruptcy code, a debtor’s debts may be grouped into three
                         general categories for the purposes of determining creditor payment
                         priority: (1) secured debts, for which the debtor has pledged collateral,
                         such as home mortgage or automobile loans; (2) unsecured priority debt,
                         such as child support, alimony, and certain taxes; and (3) unsecured
                         nonpriority debt, such as credit card debts. In analyzing debtors’ ability to
                         pay, the three reports have focused principally on the percentage of total
                         unsecured nonpriority debt that debtors could potentially repay.

                         The Credit Center, Ernst & Young, and ABI reports have each attempted to
Shared Characteristics   estimate (1) how many debtors who filed under chapter 7 may have had
of the Three Reports     sufficient income, after expenses, to repay a “substantial” portion of their
                         debts, and (2) what proportion of their debts could potentially be repaid.

                         Each of the reports used to some degree data from the financial schedules
                         that debtors file with their bankruptcy petitions. Although these schedules
                         are the only source of the detailed data needed for an analysis of debtors’
                         repayment capacity, the data in the schedules are of unknown accuracy
                         and reliability. There are no empirical studies of the accuracy and
                         reliability of the data debtors’ report in their financial schedules, and the
                         National Bankruptcy Review Commission’s report recommended that
                                                                  7
                         these schedules be randomly audited.

                         To develop its estimate of the total amount of debt that could be repaid
                         over a 5-year period, each report assumed that all debtors would
                         successfully complete a 5-year repayment plan. Each report also assumed
                         that each debtor’s gross income, as reported in the debtor’s financial
                         7
                             Bankruptcy: The Next Twenty Years (October 20, 1997).




                         Page 5                                                      GAO/T-GGD-99-58 Personal Bankruptcy
                        Statement
                        Personal Bankruptcy: Methodological Similarities and Differences in Three Reports on
                        Debtors’ Ability to Pay




                        schedules, would remain unchanged over the 5-year repayment period.
                        Historically, only about one-third of chapter 13 debtors have successfully
                        completed their repayment plans, suggesting that for two-thirds of debtors
                        something changed between the time the plans were confirmed by the
                        bankruptcy court and the time the actual repayment plan was to be
                        successfully completed.

                        The three reports focus on the potential debt that debtors could repay
                        should more debtors be required to file under chapter 13. However, should
                        the number of debtors who file under chapter 13 increase, there would
                        also be additional costs for bankruptcy judges and administrative support
                        requirements that would be borne by the government. This is because
                        bankruptcy judges would be involved in debtor screening to a greater
                        extent than they are now and chapter 13 cases require more judicial time
                        than chapter 7 cases do. None of the reports estimated these additional
                        costs, although the ABI report acknowledges that such additional costs
                        could accompany means-testing of bankruptcy debtors. In addition, the
                                                                                           8
                        Religious Liberty and Charitable Donation Protection Act of 1998 permits
                        chapter 13 bankruptcy debtors to include certain charitable deductions of
                        up to 15 percent of their annual gross income in their allowable living
                        expenses. The implementation of this statute could affect the estimates in
                        each of the three reports. The potential effect could be to reduce (1) the
                        number of bankruptcy debtors who could be required under the “needs-
                        based” tests to file under chapter 13 or (2) the amount of debt repaid to
                        unsecured nonpriority creditors by those debtors who are required to file
                        under chapter 13. The act was enacted after the Credit Center and Ernst &
                        Young issued their reports. The ABI report noted the act could effect the
                        results of debtor means-testing, but did not attempt to apply the act to its
                        sample of debtors.

                        The reports differed in the types of debts that they estimated debtors could
Methodological          repay, their sampling methods, the calendar period from which each
Differences Among the   report’s sample cases were selected, and the assumptions used to estimate
Three Reports           debtors’ allowable living expenses and debt repayments. The ABI report
                        classified student loans differently than the other two reports. We have not
                        analyzed the impact these differences may have had on each report’s
                        findings and conclusions.




                        8
                            P.L. 105-183 (1998).




                        Page 6                                             GAO/T-GGD-99-58 Personal Bankruptcy
                                Statement
                                Personal Bankruptcy: Methodological Similarities and Differences in Three Reports on
                                Debtors’ Ability to Pay




Differences in the Types of     The Credit Center report estimated the percentage of chapter 7 debtors
                                who could repay a percentage of their “nonhousing, nonpriority debt.”
Debts Each Report               These debts included secured nonhousing debt and unsecured nonprority
Estimated Could Be Repaid       debt. The Credit Center estimated that 30 percent of the chapter 7 debtors
                                in its sample could repay at least 21 percent of their nonhousing,
                                nonpriority debts, after deducting from their gross monthly income
                                monthly mortgage payments and monthly living expenses.

                                The Ernst & Young and ABI reports estimated the proportion of debtors
                                who had sufficient income, after living expenses, to repay over a 5-year
                                repayment period:

                              • all of their nonhousing secured debt, such as automobile loans (debtors’
                                payments on home mortgage debt were included in the debtors’ living
                                expenses);
                              • all of their secured priority debts, such as back taxes, alimony, and child
                                support (child support and alimony payments were assumed to continue
                                for the full 5-year payment period unless otherwise noted in the debtors’
                                financial schedules); and
                              • at least 20 percent of their unsecured nonpriority debts.

                                The Ernst & Young and ABI reports estimated that 15 percent and 3.6
                                percent, respectively, of the chapter 7 debtors in their individual samples
                                met all of these criteria.

Sampling Differences            Each of the reports used somewhat different sampling methods, and the
                                bankruptcy filings included in their analyses cover different districts and
                                different calendar periods. The Credit Center selected 2,441 chapter 7
                                cases filed primarily at the beginning of the month in a single, large urban
                                                                                                    9
                                location in each of 13 judgmentally selected bankruptcy districts. The
                                cases were generally selected during the first few days of a one or two
                                month period in 1996. Ernst & Young’s analysis was based on a national
                                random sample of 2,142 calendar year 1997 chapter 7 case filings as
                                reported in VISA’s bankruptcy notification service. VISA collects copies of
                                the bankruptcy petitions filed in the bankruptcy courts. Ernst & Young’s
                                analysis included chapter 7 bankruptcy filings from each of the 90
                                                      10
                                bankruptcy districts. The ABI report is based on 1,041 randomly selected

                                9
                                  This is the number of cases filings used in the analysis. The Credit Center also included an analysis
                                of 1,357 chapter 13 case filings, and compared the repayment capacity of the debtors who filed under
                                chapter 7 and 13.
                                10
                                 The number of cases selected in each district was proportional to each district’s share of total
                                national chapter 7 nonbusiness bankruptcy filings in 1997.




                                Page 7                                                      GAO/T-GGD-99-58 Personal Bankruptcy
                               Statement
                               Personal Bankruptcy: Methodological Similarities and Differences in Three Reports on
                               Debtors’ Ability to Pay




                               chapter 7 case filings from calendar year 1995 in 7 judgmentally selected
                               districts. The Credit Center and ABI reports have one district—Northern
                               Georgia—in common.

                               It is possible that there are differences in each sample’s debtor
                               characteristics that could affect each report’s estimate of debtor
                               repayment capacity. The differences could result from the different time
                               periods and the different sampling methods for selecting districts and
                               filers within each district. Such differences, should they exist, could have
                               affected each report’s estimate of the percentage of chapter 7 debtors who
                               could potentially repay a substantial portion of their debts and how much
                               they could repay.

Differences in Assumptions     Both the Credit Center and Ernst & Young reports assumed that debtors
                               would incur no additional debt during the 5-year repayment period. The
Used to Estimate               ABI report assumed that debtors could potentially incur expenses for
Repayment Capacity             major repairs or replacement of automobiles during the course of the 5-
                               year repayment plan, but that they would incur no other additional debt.

                               The Credit Center report was completed before H.R. 3150 was introduced,
                               and its repayment capacity analysis was not based on any specific
                               proposed legislation. The Credit Center report analyzed the repayment
                               capacity of all the chapter 7 debtors in its sample, regardless of their
                               annual gross income.

                               The Ernst & Young and ABI report used the “needs-based” provisions of
                               different versions of H.R. 3150 as the basis for their analysis of debtor
                               repayment capacity. H.R. 3150 passed the House in June 1998. Under the
                               provisions of H.R. 3150 as introduced and as it passed the House, debtors
                               must pass three tests to be required to file under chapter 13:

                             • debtors must have monthly gross income that exceeds a set percentage of
                               the national median income for households of comparable size (debtors
                               below this threshold are presumed to be eligible to file under chapter 7);
                             • debtors must have income of more than $50 per month after allowable
                               living expenses and payments on secured and unsecured priority debts;
                               and,
                             • debtors could repay at least 20 percent of their unsecured nonpriority
                               debts over a 5-year period if they used this remaining income for such
                               payments.

                               In their respective analyses, Ernst & Young used the provisions of H.R.
                               3150 as introduced and ABI used the provisions of H.R. 3150 as it was



                               Page 8                                             GAO/T-GGD-99-58 Personal Bankruptcy
                             Statement
                             Personal Bankruptcy: Methodological Similarities and Differences in Three Reports on
                             Debtors’ Ability to Pay




                             passed by the House of Representatives. The principal effect of using the
                             two different versions of H.R. 3150 was that each report used a different
                             threshold of gross annual income to screen debtors for further repayment
                             analysis. In the Ernst & Young analysis, debtors whose gross annual
                             income was 75 percent or less of the national median income for a
                             household of comparable size were deemed eligible for chapter 7. Debtors
                             whose gross annual income was more than 75 percent of the national
                             median household income were subject to further analysis of their
                             repayment capacity. In the ABI report’s analysis, debtors whose gross
                             annual income was at least 100 percent of the national median income for
                             households of comparable were subject to further repayment analysis.

Differences in Assumptions   The three reports used different estimates of debtors’ allowable living
                             expenses. The Credit Center report established its own criteria for debtors’
About Debtors’ Allowable     living expenses. Basically, the Credit Center’s analysis used the debtor’s
Living Expenses              living expenses as reported on the debtor’s schedule of estimated monthly
                             living expenses. The Ernst & Young and ABI reports used the Internal
                             Revenue Service’s (IRS) Financial Collection Standards, as specified in
                             H.R. 3150. However, Ernst & Young and ABI interpreted them somewhat
                             differently. The principal difference was for transportation expenses. Ernst
                             & Young did not include an automobile ownership allowance for debtors
                             who leased cars or whose cars were debt-free. ABI included an ownership
                             allowance for leased cars and for debtors with debt-free cars. The ABI
                             report noted that this difference in allowable transportation expenses
                             accounted for “a substantial part” of the difference between the ABI and
                             Ernst & Young estimates of the percentage of chapter 7 debtors who could
                             potentially repay at least 20 percent of their unsecured nonpriority debt.

                             ABI also deducted from the debtors’ total unsecured priority debt the value
                             of any student loans and added the value of these loans to debtors total
                             unsecured nonpriority debt. To the extent this was done, it had the effect
                             of freeing debtor income to pay unsecured nonpriority debt.

                             Finally, the ABI report assumed that administrative expenses, such as the
                             trustee fee, would consume about 5.6 percent of debtors’ nonhousing
                             payments to creditors under a 5-year repayment plan. The Credit Center
                             and Ernst & Young reports assumed that none of the debtors’ payments
                             would be used for administrative expenses, but that 100 percent of
                             debtors’ payments would be used to pay creditors.

                             In summary, each of the three reports provide a different perspective on
                             bankruptcy debtors’ ability to pay their debts. Each has added to our
                             knowledge and understanding of the potential impact of means-testing on



                             Page 9                                             GAO/T-GGD-99-58 Personal Bankruptcy
Statement
Personal Bankruptcy: Methodological Similarities and Differences in Three Reports on
Debtors’ Ability to Pay




the number of debtors who would be required to file under chapter 13 and
the amount of debt that such debtors could potentially repay. However,
the assumptions and data used in these reports lead to different estimates
of debtors’ repayment capacity and require the reader to use caution in
interpreting and comparing the results of each report. The actual number
of chapter 7 debtors who could repay at least a portion of their nonhousing
debt could be more or less than the estimates in these studies. Similarly,
the amount of debt these debtors could potentially repay could also be
more or less than the reports estimated.

We agree that there are likely some debtors who file for bankruptcy under
chapter 7 who have the financial ability to repay at least a portion of their
debt, and that those who are able to repay their debts should do so. But we
believe that more research is needed to verify and refine the estimates of
debtors’ repayment capacity to better inform policymakers.

Mr. Chairman, this concludes my prepared statement. I would be pleased
to answer any questions that you or other Members of the Subcommittee
may have.




Page 10                                            GAO/T-GGD-99-58 Personal Bankruptcy
Page 11   GAO/T-GGD-99-58 Personal Bankruptcy
Attachment I

Major Methodological Similarities and
Differences in Three Reports on Debtors’
Ability to Pay
                                                                                                         Creighton University/American
                                         Credit Research Center                Ernst & Young                  Bankruptcy Institute
Specific Aspects of Report                   (October 1997)                     (March 1998)                     (March 1999)
Estimated percent of chapter 7
debtors who could repay
“substantial portion of their debts” 30 percenta                     15 percent                       3.6 percent
                                                                     All nonhousing secured debt, all
Estimated amount of debt that                                        unsecured priority debt, 20
could be repaid over 5-year        21 percent of “nonhousing,        percent of unsecured nonpriority
repayment period                   nonpriority” debts.               debt.                            Same as Ernst & Young.
Proposed legislation used as                                                                          H.R. 3150 as passed by the
basis for assessment of                                                                               House of Representatives, June
repayment capacity                 No specific proposed legislation. H.R. 3150 as introduced.         10, 1998.
Key overall assumptions
                                   Debtors’ income and living                                           Debtors’ income stable for 5-year
Stability of debtors’ income and   expenses remain unchanged over                                       period, but assumed some
expenses                           5-year repayment period.       Same as Center report.                expenses may change.
Percentage of chapter 13 plans
successfully completed             100%                              100%                               100%
                                                                                                        5.6% of annual debtor
Trustee and other administrative                                                                        nonhousing debt payments over
expenses for chapter 13                                                                                 5-year period, not including
repayment plans.                  None                                  None                            debtor attorney fee.
Debtor sample
                                  Sample drawn from single
                                  location in each of 13                National sample that included     Sample drawn from 7
Selection of bankruptcy districts judgmentally selected bankruptcy nonbusiness chapter 7 filings          judgmentally selected bankruptcy
included in sample                districts.                            from all 90 bankruptcy districts. districts.
                                  Generally, May or June of 1996,
Calendar period from which        but months varied among the 13
sample was drawn.                 districts.                            Calendar year 1997.               Calendar year 1995.
                                  Nonrandomly selected sample of
                                  nonbusiness chapter 7 and
                                  chapter 13 filings filed primarily in                                   Random sample of cases closed
                                  the first few days of 1 or 2 months                                     as nonbusiness chapter 7 that
                                  in 1996 in each district. (Total of Random sample from all              were filed in 1995, including
                                  2,441 chapter 7 and 1,357             nonbusiness chapter 7 filings     some cases filed under other
                                  chapter 13 filings.) May include during the year. Analysis included chapters. (Total of 1,041 filings.)
                                  cases that were dismissed and in 2,142 chapter 7 cases, adjusted Excluded cases dismissed
Selection of debtors included in which debtors received no              to exclude estimated percentage because debtor did not file all
final sample used for analysis    discharge of their debts.             of cases dismissed.               required schedules.
Determination of debtor’s
gross annual income
                                  Basically, gross monthly income
Calculation of debtor’s gross     as reported on debtor’s schedule
monthly income                    of estimated monthly income.          Same.                             Same.
                                                                                                           Analysis of repayment capacity
                                                                        Analysis of repayment capacity limited to those debtors whose
                                                                        limited to those debtors whose    reported gross annual income
                                                                        reported gross annual income      was at least100 percent of
                                                                        was greater than 75 percent of    national median income as
Gross income threshold used for                                         national median income as         defined in H.R. 3150 as it passed
further repayment capacity        Examined repayment capacity of defined in H.R. 3150 as                  the House of Representatives,
analysis.                         all debtors in sample.                introduced.                       June 10,1998.




                                                   Page 12                                         GAO/T-GGD-99-58 Personal Bankruptcy
                                          Attachment I




                                                                                                           Creighton University/American
                                  Credit Research Center                      Ernst & Young                     Bankruptcy Institute
Specific Aspects of Report            (October 1997)                           (March 1998)                        (March 1999)
Calculation of debtor’s
allowable monthly living
          b
expenses
                              Housing expenses as listed by        IRS allowance, which could be
                              debtor on schedule of estimated      exceeded if necessary to pay
          c
Housing                       monthly expenses.                    monthly mortgage.                       Same as Ernst & Young
                              Expenses as listed on debtor’s
                              schedule of estimated monthly
                                        d
Food and clothing allowance   expenses.                            IRS allowance.                          Same as Ernst & Young
                                                                                                           IRS operating allowance, plus
                                                                                                           monthly payments necessary to
                                                                   IRS operating allowance, plus           pay existing automobile debt in
                                                                   monthly payments necessary to           full over 60 months, or the
                                                                   pay existing automobile debt in         ownership allowance for up to 2
                              Expenses as listed on debtor’s       full over 60 months. No                 debt-free cars. Ownership
                              schedule of estimated monthly        ownership allowance for leased          allowance for leased cars in
Transportation                expenses                             cars.                                   some circumstances.
                                                                   IRS has no fixed dollar amount.
                                                                   Generally included debtor
                                                                   expenses as listed on debtor’s
                              Basically expenses as listed on      schedule for estimated monthly
                              debtor’s schedule of estimated       expenses not covered in other           Generally, same as Ernst &
Other necessary expenses      monthly expenses                     categories.                             Young.
Categorization of debts
Secured debts                 As listed on debtor schedules        Same                                    Same.
                                                                                                           As listed on debtor schedules
                                                                                                           with one exception. Total value of
                                                                                                           all student loans listed was
Unsecured priority debts      As listed on debtor schedules.       Same                                    deducted from total.
                                                                                                           As listed on debtor schedules
                                                                                                           with one exception. Added total
                                                                                                           value of student loans listed to
Unsecured nonpriority debts   As listed on debtor schedules        Same                                    unsecured priority debt total.
                                          a
                                           The Center Report noted that 30 percent of chapter 7 debtors could repay at least 21 percent of their
                                          unsecured nonpriority debts.
                                          b
                                          Both the Ernst & Young and ABI reports used the Internal Revenue Service Collection Financial
                                          Standards for determining debtors’ allowable living expenses.
                                          c
                                           Includes monthly rent, mortgage payments, utilities, property taxes, homeowner’s or renter’s
                                          insurance, maintenance and repairs, and homeowner dues and condominium fees. IRS standards are
                                          adjusted for cost of living at the county level.
                                          d
                                           Except for housing, the Credit Center report did not group a debtor’s monthly living expenses by
                                          category. Rather it determined total monthly allowable expenses, using the expenses listed on the
                                          debtor’s schedule of estimated monthly expenses, with some adjustments, such as deducting monthly
                                          contributions to nonretirement savings.
                                          e
                                           The IRS transportation allowance includes a uniform national standard for ownership expense and
                                          local standards (adjusted for cost-of-living) for operating expenses. A public transportation expense is
                                          included if the debtor does not own or lease a car.
                                          Source: GAO analysis of the Credit Center, Ernst & Young, and ABI reports.




                                          Page 13                                                    GAO/T-GGD-99-58 Personal Bankruptcy
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