Personal Bankruptcy:

Analysis of Four Reports on Chapter 7 Debtors' Ability to Pay

GGD-99-103: Published: Jun 21, 1999. Publicly Released: Jun 21, 1999.

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Pursuant to a congressional request, GAO provided information on the methodologies used in four reports on bankruptcy debtors' ability to pay their debts--two by Ernst Young LLP, one by Creighton University, and one by the Executive Office for U.S. Trustees.

GAO noted that: (1) determining which of these four reports most accurately reflects what would happen to chapter 7 debtors if needs-based bankruptcy reform were enacted would depend on the details of the legislation eventually enacted as well as which assumptions about debtors' income, expenses, debts, and repayment capacity prove to be more accurate; (2) each of the four reports represents a reasonably careful effort to estimate: (a) the percentage of chapter 7 debtors who would be required to enter a chapter 13 debt repayment plan if a specific set of proposed needs-based legislative provisions were enacted; and (b) the amount of debt such debtors could potentially repay over a 5-year repayment period; (3) can-pay debtors were defined as those debtors whose gross income met or exceeded a household income test and who could potentially repay a specific minimum amount of unsecured nonpriority debt over 5 years; (4) the reports' estimates of the proportion of the can-pay debtors in their respective samples were 15 percent, 10 percent, and 3.6 percent; (5) the reports' estimates of the amount of unsecured nonpriority debt that the can-pay debtors could potentially repay over 5 years ranged from about $1 billion to $4 billion; (6) it is important to note that these repayment estimates do not necessarily represent unsecured nonpriority creditors' potential net gain from implementing needs-based bankruptcy, compared with current practice; (7) under the bankruptcy law, many chapter 7 debtors already repay at least some of their debt, either because they voluntarily reaffirm some debts or because the debts cannot be discharged in bankruptcy; (8) following the close of their bankruptcy cases, debtors remain financially responsible for all debts that they reaffirm with the bankruptcy court and all debts that cannot be discharged in bankruptcy; (9) to develop its percentage and dollar estimates, each of the reports made a number of assumptions, which varied by report; (10) however none of these assumptions has been validated; and (11) the reports reached different estimates of can-pay debtors principally because each report used different and noncomparable samples of debtors, different proposed needs-based legislative provisions, and different methods and assumptions for determining debtors' allowable living expenses.

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