Military Personnel: Bankruptcy Filings among Active Duty Service 
Members (27-FEB-04, GAO-04-465R).				 
                                                                 
A declaration of bankruptcy is an extreme example of the failure 
to manage personal finances. Debtors who file personal bankruptcy
petitions usually file under chapter 7 or chapter 13 of the	 
bankruptcy code. Generally, debtors who file under chapter 7 of  
the bankruptcy code seek a discharge of all 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 3-year period  
unless, for cause, the court approves a longer period not to	 
exceed 5 years. This letter responds to the request of the	 
Ranking Minority Member, Subcommittee on Oversight of Government 
Management, the Federal Workforce, and the District of Columbia, 
Senate Committee on Governmental Affairs. We determined (1) the  
rate of personal bankruptcy filings among active duty military	 
personnel, and how that rate compared with the rate found in the 
U.S. population; and (2) factors that should be considered when  
attempting to compare the rate of bankruptcy filings for active  
duty military personnel with the rate for the U.S. population.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-465R					        
    ACCNO:   A09400						        
  TITLE:     Military Personnel: Bankruptcy Filings among Active Duty 
Service Members 						 
     DATE:   02/27/2004 
  SUBJECT:   Bankruptcy 					 
	     Military personnel 				 
	     Comparative analysis				 
	     Financial management				 
	     Debt						 
	     Health care costs					 
	     Military pay					 
	     Housing allowances 				 

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GAO-04-465R

United States General Accounting Office Washington, DC 20548

February 27, 2004

The Honorable Richard J. Durbin
Ranking Member
Subcommittee on Oversight of Government Management, the

Federal Workforce, and the District of Columbia Committee on Governmental
Affairs United States Senate

Subject: Military Personnel: Bankruptcy Filings among Active Duty Service
Members

A declaration of bankruptcy is an extreme example of the failure to manage
personal finances. Debtors who file personal bankruptcy petitions usually
file under chapter 7 or chapter 13 of the bankruptcy code.1 Generally,
debtors who file under chapter 7 of the bankruptcy code seek a discharge
of all their eligible dischargeable debts.2 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 3year period
unless, for cause, the court approves a longer period not to exceed 5

3

years.

This letter responds to your December 16, 2003, request. As agreed with
your office, we determined (1) the rate of personal bankruptcy filings
among active duty military personnel, and how that rate compared with the
rate found in the U.S. population; and (2) factors that should be
considered when attempting to compare the rate of bankruptcy filings for
active duty military personnel with the rate for the U.S. population. 4

To respond to this request, we obtained information on the rate of
bankruptcies among active duty military personnel from a 1999 Department
of Defense (DOD) survey. The survey population included service members
from the active duty services and reservists serving on active duty
assignments for at least 6 months. We also discussed bankruptcy and
compensation with officials in the Office of the Under

1 Title 11, United States Code.
2 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.
3 See U.S. General Accounting Office, Personnel Bankruptcy: The Credit
Research Center Report on
Debtors' Ability to Pay, GAO/GGD-98-47 (Washington, D.C.: Feb. 9, 1998).
4 For information on reservists and income changes, see U.S. General
Accounting Office, Military
Personnel: DOD Needs More Data to Address Financial and Health Care Issues
Affecting Reservists,
GAO-03-1004 (Washington, D.C.: Sept. 10, 2003).

Secretary of Defense for Personnel and Readiness. We used data on
bankruptcy filings for the U.S. population from the Administrative Office
of the U.S. Courts. We also used findings from GAO; Congressional Budget
Office; Congressional Research Service; and Department of Labor, Bureau of
Labor Statistics reports on compensation, military housing allowances,
other benefits, and unemployment. We conducted our review from January to
February 2004, in accordance with generally accepted government auditing
standards.

Results in Brief

DOD had limited data on the rate of bankruptcies among active duty
military personnel. Responses to DOD's 1999 active duty survey-the most
current data available-show that 1.2 percent, or about 16,000, of the 1.3
million active duty members in the survey population said that they had
declared personal bankruptcy during the 12 months preceding the survey.
This compares with a total of approximately 1.3 million personal
bankruptcies filed in the United States in 1999. From 1999 through 2003,
the number of personal bankruptcies increased from approximately 1.3
million to over 1.6 million for the U.S. population.

The 23.6 percent increase in personal bankruptcy filings for the U.S.
population may not readily translate into a comparable rate of increase
for active duty military personnel. Loss of employment and medical-related
problems (e.g., medical costs and loss of income during illness or
accident) are among the major causes that contribute to personal
bankruptcies in the U.S. population, but unemployment and catastrophic
medical expenses are factors not confronted by active duty military
personnel. In addition, Congress has authorized increased cash
compensation- increases in basic pay, housing allowance, and special
pays-for active duty military personnel since 1999. For example, average
annual military basic pay increases have exceeded average private-sector
wage increases for fiscal years 2000 through 2004. DOD has also identified
a need to improve the financial literacy and responsibility of military
members. And in May 2003, DOD formally launched a financial readiness
campaign to address military members' poor financial habits and increase
financial management awareness, savings, and protection against predatory
practices.

Limited Data Available on Personal Bankruptcies among Active Duty Military
Personnel

DOD had limited data on the rate of personal bankruptcies among active
duty military personnel. DOD officials indicated that their most recent
data on bankruptcies among active duty military personnel (which included
reservists on active duty assignments for at least 6 months) were gathered
from September through December 1999 as part of a DOD-wide survey.5 For
the survey population, 1.2 percent of the active duty military members
said that they (and spouse, if applicable) "went bankrupt (declared
personal bankruptcy)" in the 12 months prior to completing the survey. The
1.2 percent rate of personal bankruptcy projected to the 1.3 million
military personnel included in the survey population translates into
approximately

5 Defense Manpower Data Center, Tabulations of Responses from the 1999
Survey of Active Duty Personnel: Volume 2: Programs and Services, Family,
Economic Issues, and Background, DMDC Report No. 2000-006 (Arlington, Va.:
September 2000).

16,000 personnel on active duty declaring personal bankruptcy during the
12 months preceding the survey. The survey included neither follow-up
items to determine the events that precipitated the bankruptcy nor did it
include a breakout of the percentage of reservists serving on active duty
assignments for at least 6 months compared with full-time active duty
personnel declaring bankruptcy.

In 1999, the total number of personal bankruptcies filed in the United
States was 1.3 million.6 We did not calculate a per capita rate because we
could not determine the number of individuals versus households filing for
personal bankruptcy. Although trend data from 1999 through 2003 are not
available for military personnel, the total number of personal bankruptcy
filings in the United States increased by 23.6 percent to 1.6 million from
1999 through 2003.

Changes in Bankruptcy Rate for U.S. Population May Not Be Indicative of
Changes for Military Personnel

Changes in the rate of bankruptcy filings for the U.S. population may not
readily translate into comparable rate changes for active duty military
personnel. Among the factors that suggest caution in generalizing the 23.6
percent increase found in the U.S. population to the active duty military
personnel population are changes in civilian unemployment rates and
military cash compensation. Also, DOD has reported that it has placed
additional emphasis on financial counseling since the 1999 survey data
were gathered.

Unemployment and Catastrophic Medical Expenses Not Factors for Active Duty
Military Personnel

The 23.6 percent increase in personal bankruptcy filings for the U.S.
population may not result in a similar increase in bankruptcies for active
duty military personnel because (1) an increase in civilian unemployment
for fiscal years 1999 through 2003 was not a factor for active duty
military personnel and (2) all active duty military personnel and their
families have medical coverage. Unemployment and medical expenses have
been shown to be related to bankruptcy filing.

The relationship between filing for bankruptcy and unemployment is
illustrated by the findings from one study in which over two-thirds of the
individuals filing for bankruptcy had job-related financial stress, with
layoffs being identified as a major factor.7 For each of the fiscal years
from 1999 through 2003, an increase or a decrease in the total number of
U.S. personal bankruptcy filings was accompanied by an increase or a
decrease in the unemployment rate for the same fiscal year (see table 1).
In contrast to the changing unemployment picture for civilians, active
duty

6 Administrative Office of the U.S. Courts, Personal Bankruptcy Filings
Continue to Rise in Fiscal
Year 2003 (Washington, D.C.: Nov. 14, 2003).
7 See Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence Westbrook,
The Fragile Middle Class:
Americans in Debt (New Haven, Conn.: Yale University Press, 2000). The
authors noted that job
related financial stress was implicated in over two-thirds of the more
than 2,400 bankruptcy filings
they examined. They also noted that while layoffs were a major factor in
the decision to file for
bankruptcy, other serious job-related trouble could result even if workers
had a job, because the job
may change and both income and benefits may erode.

military members-by definition-were employed for each of the 5 years, in
the sense that each military member received a regular salary while on
active duty.8

Table 1: Changes in Bankruptcy Filings and Overall Unemployment in the
U.S. Population for Fiscal Years 1999-2003

                   Personal bankruptcy              Overall unemployment
                                                                  Percent     
           Number of                                              change from 
Fiscal bankruptcy Percent change from fiscal Unemployment rate fiscal year 
year      filings year 1999                    on September 30 1999        
     2003  1,625,813                       23.6               6.0        39.5 
     2002  1,508,578                       14.7               5.7        32.6 
     2001  1,398,864                        6.3               4.3         0.0 
     2000  1,226,037                       -6.8               4.0        -7.0 
     1999  1,315,751                                          4.3 

Sources: Administrative Office of the U.S. Courts for number of bankruptcy
filings; GAO's analysis of court data for the percent change in
bankruptcies; and GAO's analysis of unemployment rates from the U.S.
Department of Labor, Bureau of Labor Statistics.

DOD provides employee benefits that include health coverage to more than
1.3 million active duty service members and their nearly 2 million spouses
and other dependents. The health care for active duty service members and
their dependents costs the federal government about $9 billion per year.
For active duty service members, this benefit offers care in military
treatment facilities and does not require enrollment fees or co-payments
for care or drugs obtained from military treatment

9

facilities. In addition, legislation in 2000 eliminated co-payments for
the families of many active duty military personnel. Medical coverage for
all DOD active duty personnel and dependents is unlike the coverage for
the population in a study that found approximately one household in five
citing medical-related problems (e.g., medical costs and loss of income
during illness or accident) as a reason for filing bankruptcy.10 Given
that health coverage can be a benefit offered as part of employment
compensation, a higher unemployment rate may indicate that more of the
U.S. population was placed at risk for medical expenses.

Increases in Cash Compensation for Military Personnel Greater Than Those
for Average Civilians

The Congressional Budget Office noted that cash compensation for military
personnel consists of basic pay, allowances for things like housing and
food, special pays and bonuses, and the tax advantages that military
members receive because some allowances are not subject to federal income
tax. 11 During the period from 2000 through 2004, Congress authorized
increases in the pays and allowances to active duty military personnel.

8 Active duty military families may, however, be influenced by civilian
unemployment trends if spouses
of military personnel become unemployed.
9 If military treatment facilities are not available or if service member
families choose to use civilian
doctors or medical facilities, two other health care programs provide
service member families with
extensive coverage for medical costs, including a $1,000 annual
catastrophic cost cap.
10 See Sullivan et al., The Fragile Middle Class: Americans in Debt.
11 Congressional Budget Office, Military Compensation: Balancing Cash and
Noncash Benefits
(Washington, D.C.: Jan. 16, 2004).

Military Pay Increases Exceed Civilian Wage Increases

For fiscal years 2000 through 2004, Congress provided average raises in
military basic pay that exceeded the average wage increases found for all
private-sector employees (see table 2). 12 For example, in fiscal year
2002, raises for active duty personnel increased 0.4 to 5.4 percentage
points more than did the raises of the average privatesector worker, and
in fiscal years 2003 and 2004, the military averaged 0.7 and 0.45
percentage points more in their raises, respectively, than did those
working in the private sector. For fiscal year 2005, DOD's budget request
includes a 3.5 percent increase in basic pay, which matches the raise
determined by the statutory formula. Thus, military basic pay raises have
been greater than the raises in wages for the average private-sector
employee for the 5 years since the 1999 data on bankruptcies among active
duty military were gathered.

Table 2: Changes in Military Basic Pay for Fiscal Years 2000-2005

                    Annual percent increase in active duty military pay
               Percent indicated by                                           
Fiscal year statutory formula            Percent actually provided
      2005                      3.5               3.5 requested               
      2004                      3.7 4.15 average, with a range of 3.7 to 6.25 
      2003                      4.1  4.8 average, with a range of 4.1 to 6.5  
      2002                      4.6 6.9 average, with a range of 5.0 to 10.0  
                                    4.1 average, with an initial 3.7 across   
      2001                      3.7 the board, plus a later targeted raise    
                                    that averaged 0.4                         
                                    6.2 average, with an initial 4.8 across   
      2000                      4.8 the board, plus a later targeted raise    
                                    that averaged 1.4                         

Sources: Congressional Research Service and DOD.
Note: The Congressional Research Service noted that targeted and variable
increases were typically keyed to pay grade
groups. In fiscal years 2000 and 2001, Congress authorized additional
targeted increases and they became effective on July 1
of those respective years, whereas the other raises took effect earlier in
the fiscal years.

    Smaller Out-of-Pocket Housing Expenses for Active Duty Military Members

Out-of-pocket housing expenses for active duty military members living in
privatesector housing have decreased during the period since 1999. In
fiscal year 2000, housing allowances did not cover about 19 percent of the
typical active duty military member's housing and utility costs.13 For
fiscal year 2002, DOD plans called for increasing this allowance so that
the out-of-pocket costs for obtaining private-sector

12 See Congressional Research Service, The Library of Congress, Military
Pay and Benefits: Key Questions and Answers, Order Code IB10089
(Washington, D.C.: Jan. 15, 2004). That report noted that upward
adjustments to military basic pay are linked-but not identical-to the
raises calculated with the statutory formula for determining pay increases
for federal General Schedule employees. 37 U.S.C. section 1009 requires
the President to increase military basic pay to match any annual pay
increase for federal General Service employees as mandated by the
statutory formula specified in 5 U.S.C. section 5303(a). This statutory
formula is based on the Employment Cost Index, which is calculated by the
Department of Labor's Bureau of Statistics and measures annual percentage
increases in wages for all private-sector employees. 13 About two-thirds
of the married and one-third of the single military members in the United
States live in private housing in the communities surrounding military
installations. They receive a cash housing allowance to help defray the
cost of renting or purchasing a home and the cost of utilities. The
remaining military families live in government-owned or privatized
housing. These latter families pay no out-of-pocket expenses for housing
or utilities. Families in government housing receive no housing allowance,
while families in privatized housing use their housing allowance to pay
rent and normal utility costs.

housing would decrease to 8 percent in 2003 and 4 percent in 2004.14 The
2005 budget request for DOD seeks to totally eliminate out-of-pocket
expenses for housing for the average active duty military member.

The decreases in out-of-pocket expenses are equivalent to increases in
total compensation. This point can be illustrated using the $910 per month
that DOD identified as the January 2003 national median cost of obtaining
civilian equivalent housing for the most junior level of enlisted military
personnel (i.e., E1-E4) with dependents. The median monthly out-of-pocket
expense in 2003 was $68 (or 7.5 percent), but it would have been about
$173 (19 percent) had the out-of-pocket percentage remained at the fiscal
year 2000 level. This difference of $105 per month translates into $1,260
per year being available for other needs, and the yearly housing allowance
of $10,104 would have been tax exempt.

The intent of the basic allowance for housing program is to provide active
duty service members with accurate and equitable housing compensation when
on-base or other government housing is not provided.15 The legislation
establishing the program required that rates be based on the cost of
adequate housing for civilians with comparable incomes, and that the rates
vary by a member's rank or pay grade; by dependency status-that is, either
having or not having dependents; and by geographic location.16

Special Pays and Tax Treatment for Deployed Active Duty Military Personnel
Enhanced

Relative to their peers who deployed in 1999 when the bankruptcy data for
military personnel were gathered, more recently deployed active duty
military personnel may be eligible to receive higher special pays.17 Since
April 2003, Congress has temporarily increased the family separation
allowance18 by 150 percent and imminent danger pay by 50 percent (see
table 3). The April 2003 increases in these special pays would result in
deployed active duty personnel's having relatively higher cash incomes
today than would their peers who were deployed during the 12 months prior
to the 1999 active duty survey.

Table 3: Changes in Two Special Pays for Deployed Active Duty Military
Personnel-Before and After April 2003

                                   Monthly pay before and after April 2003
                     Special pay       Before      After     Percent increase 
     Family separation allowance         $100       $250                  150 
             Imminent danger pay         $150        225                   50 

Source: GAO.

14 See U.S. General Accounting Office, Military Housing: Management
Improvements Needed as the
Pace of Privatization Quickens, GAO-02-624 (Washington, D.C.: June 21,
2003).
15 See U.S. General Accounting Office, DOD Personnel: Improvements Made to
Housing Allowance
Rate Setting Process, GAO-01-508 (Washington, D.C.: Apr. 16, 2001).
16 See 37 U.S.C. 403.
17 Public Law 108-11, section 1316 (Apr. 16, 2003) and Public Law 108-136,
sections 606, 619 (Nov. 24,
2003).
18 Military families may incur additional expenses such as an increased
need for childcare when active
duty military members are separated from their families during
deployments.

Some or all of the income that active duty military personnel earn while
serving in combat zones is also tax-free.19 The military pay, up to
prescribed amounts, received while in these combat zones is excluded from
gross income and is not subject to federal income tax.

Other special pays may be tax-free as the result of service in a combat
zone. For example, service members who reenlist while serving in a combat
zone are typically eligible to receive any applicable selective
reenlistment bonus tax-free. For fiscal years 1999 through 2003, DOD's
budget for that program grew from $418 million to an estimated $734
million, a 76 percent increase.20

DOD Efforts Under Way to Improve Financial Literacy and Responsibility of
Military Members

We recently reported that DOD identified a need to improve the financial
literacy and responsibility of military members in its July 2002 human
capital strategic plan. 21,22 As part of DOD's balanced scorecard, the
Under Secretary of Defense for Personnel and Readiness reviews issues
affecting force management risk. One of the indicators used in the review
is personal finances, which is evaluated in terms of the selfreported
financial condition of junior enlisted personnel (E1-E4) and their
selfreported ability to pay bills on time. Data to support these
evaluations are supplied on an annual basis through Defense Manpower and
Data Center surveys of active duty service members. Among other things,
DOD is reviewing a draft personal financial management policy that seeks
to establish a uniform approach to educating and training all military
service members.

In May 2003, DOD formally launched a "financial readiness campaign" to
address military service members' poor financial habits and to increase
financial management awareness, savings, and protection against predatory
practices. DOD has also entered into a number of partnerships with
nonprofit organizations and government agencies that have agreed to
support counselors who offer financial assistance programs to military
service members. The services have also made improvements. For example,
the Navy has raised its mandatory number of personal financial management
training hours, and it is using mobile financial management teams to train
financial specialists, including those in geographically remote regions
where

19 Department of the Treasury, Internal Revenue Service, Armed Forces' Tax
Guide: For Use in
Preparing 2003 Returns, Publication 3, Cat. No. 46072M. This publication
noted that all military pay
for the month is excluded from income when an enlisted service member,
warrant officer, or
commissioned warrant officer served in a combat zone during any part of a
month or while
hospitalized as a result of service in the combat zone. The amount of the
exclusion for a
commissioned officer (other than a commissioned warrant officer) is
limited to the highest rate of
enlisted pay, plus imminent danger/hostile fire pay, for each month during
any part of which an officer
served in a combat zone or while hospitalized as a result of service
there.
20 See U.S. General Accounting Office, Military Personnel: DOD Needs More
Effective Controls to
Better Assess the Progress of the Selective Reenlistment Bonus Program,
GAO-04-86 (Washington,
D.C.: Nov. 13, 2003).
21 See GAO-03-1004.
22 Department of Defense, Deputy Assistant Secretary of Defense (Military
Community and Family
Policy), A New Social Compact: A Reciprocal Partnership between the
Department of Defense Service
Members, and Families (July 2002).

there are no financial educators to provide training. The services also
provide financial planning information on their Web sites.

Agency Comments

DOD did not provide formal agency comments. Program officials from the
Office of the Under Secretary of Defense for Personnel and Readiness and
the military services did, however, review a draft of this report and
provided technical comments, which we incorporated as appropriate.

                                     -----

As arranged with your office, unless you publicly announce its contents
earlier, we
plan no further distribution of this report until 14 days from its issue
date. At that
time, we will send copies of this report to the Secretary of Defense. We
will also
make copies available to appropriate congressional committees and to other
interested parties on request. In addition, the report will be available
at no charge at
the GAO Web site at http://www.gao.gov.

If you or your staff have questions about this report, please call me at
(202) 512-5559
([email protected]) or Jack Edwards at (202) 512-8246 ([email protected]).

Sincerely yours,

Derek B. Stewart
Director, Defense Capabilities and Management

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