Personal Bankruptcy:

Debtors' Ability to Pay Their Debts

GGD-98-109R: Published: Apr 10, 1998. Publicly Released: Apr 10, 1998.

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Norman J. Rabkin
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Pursuant to a congressional request, GAO addressed congressional concerns on its recent work on personal bankruptcy.

GAO noted that: (1) the sample of bankruptcy petitions used in the study was not designed to be statistically representative of all bankruptcy filings in each of the 13 locations from which the petitions were drawn; (2) the most serious problems with the Credit Research Center report were not strictly statistical; (3) the report's conclusions rest on several fundamental assumptions that were unvalidated and for which no empirical support was cited; (4) two additional fundamental shortcomings were the: (a) report assumed that 100 percent of a debtor's net income would be available for debt repayment each year for 5 years; and (b) report's estimated total debt repayments were based on the assumption that 100 percent of debtors would successfully complete a 5-year repayment plan; (5) the principal issue with regard to the sample of petitions used in the Credit Research Center study was that the sample was not a scientific random sample whose results could be used to generalize to all 13 bankruptcy locations from which petitions were drawn or to all bankruptcy filings nationally in 1996; (6) because of the methods used to select the petitions used in the study, the sample petitions were potentially different from the universe of petitions from which the sample petitions were drawn, and there is little scientific basis for estimating how representative the sample may be of the universe of bankruptcy petitions filed in 1996; (7) a longitudinal study would provide the best information on which to estimate debtors' ability to pay over a multiyear repayment period; (8) GAO does not know how accurate the data in those schedules are, nor does it know how useful the data in those schedules may be for forecasting debtors' ability to repay at least a portion of their debts; (9) even if the financial data reported on these schedules were known to be accurate, a debtor's financial circumstances could improve or deteriorate during the course of the 3- to 5-year repayment plan, thus increasing or decreasing the debtor's repayment capacity; and (10) at the present, there is no reliable information on: (a) the accuracy of the data debtors report on their schedules of estimated income, estimated expenses, and debts; and (b) the reasons why historically only about one-third of chapter 13 repayment plans have been successfully completed.

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