Personal Bankruptcy:

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

T-GGD-99-58: Published: Mar 17, 1999. Publicly Released: Mar 17, 1999.

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Norman J. Rabkin
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Pursuant to a congressional request, GAO discussed the principal methodological similarities and differences of three reports on bankruptcy debtors' ability to pay their debts. The three reports were issued by the Credit Research Center, Ernst & Young, and Creighton University/American Bankruptcy Institute (ABI).

GAO noted that: (1) 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); (2) 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; (3) 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-year repayment plan would successfully complete the plans--an assumption that historical experience suggests is unlikely; (4) however, the reports have some methodological differences, including different: (a) groupings of the types of debts that could be repaid; (b) gross income thresholds used to identify those debtors whose repayment capacity was analyzed; (c) assumptions about debtors' allowable living expenses; (d) treatment of student loans that debtors had categorized as unsecured priority debts; and (e) assumptions about administrative expenses; and (5) these methodological differences contributed to the reports' different estimates of debtors' repayment capacity.

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