Personal Bankruptcy:

The WEFA Report on the Financial Costs of Bankruptcy

GGD-98-116R: Published: Apr 22, 1998. Publicly Released: Apr 22, 1998.

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Pursuant to a congressional request, GAO evaluated the reasonableness of the assumptions and the reliability of the conclusions of the February 1998 report by the WEFA Group on the financial costs of personal bankruptcy.

GAO noted that: (1) the WEFA report included three basic national estimates for 1997: (a) the total amount of secured, unsecured priority, and unsecured nonpriority debt held by all debtors who filed for bankruptcy under chapter 7 or chapter 13; (b) total creditor losses in each debt category based on the estimated percent of the total debt in each category that chapter 7 and chapter 13 debtors would repay; and (c) the total legal, court, and collection costs incurred by debtors, the bankruptcy system, and creditors, respectively; (2) as the WEFA report noted, the report's estimates were based on a variety of data sources and assumptions regarding industry and government practices; (3) a number of these data sources and assumptions were discussed only in general terms; (4) without a more detailed explanation, it is difficult to assess the reliability of the data used; the reasonableness of the report's assumptions; and, thus, the accuracy of the report's estimates of creditor losses and bankruptcy system costs in 1997; (5) it is important to note that the National Bankruptcy Review Commission concluded that there is a general lack of reliable, accurate data on the bankruptcy system, and the data that are available are splintered among several central reporting agencies and the 94 bankruptcy districts; (6) in its review GAO identified two categories of issues: (a) strengths and limitations that could be assessed from the information provided in the report; and (b) potential strengths and limitations that could not be fully assessed because the report provided insufficient data on which to base an assessment; (7) the report provided the most detailed information on its method of estimating the debts held by those who filed for personal bankruptcy in 1997 under chapter 7 or chapter 13 of the bankruptcy code; (8) GAO identified four major concerns with regard to these debt estimates; (9) the report offered insufficient information on which to assess the overall reasonableness and reliability of the report's estimates of creditor losses from chapter 7 and chapter 13 bankruptcy filers in 1997; (10) the report provided little detailed information about how it estimated bankruptcy system costs; (11) the WEFA report concluded that its assumptions were conservative, and, therefore, that its estimates of the financial costs of bankruptcy represent a lower bound on the total economic costs of bankruptcy; and (12) for the reasons discussed, GAO cannot determine whether the report's conclusion is valid, and GAO believes the report's estimates of creditor losses and bankruptcy system costs should be interpreted with caution.

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