Personal Bankruptcy: Analysis of Four Reports on Chapter 7 Debtors'
Ability to Pay (Letter Report, 06/21/1999, GAO/GGD-99-103).

This report compares and evaluates the methodologies used by four
reports on bankruptcy debtors' ability to repay their debts--two by
Ernst & Young LLP under the sponsorship of VISA and Mastercard, one by
Creighton University under the sponsorship of the American Bankruptcy
Institute, and one by the Executive Office for U.S. Trustees. These
reports focus on a major public policy issue--the amount of income that
those who file for personal bankruptcy have available to pay their
debts. GAO discusses each report's research methodology for estimating
the number of bankruptcy debtors who would be able to pay a portion of
their debts and the amount of debt such debtors could repay.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-99-103
     TITLE:  Personal Bankruptcy: Analysis of Four Reports on Chapter 7
	     Debtors' Ability to Pay
      DATE:  06/21/1999
   SUBJECT:  Comparative analysis
	     Financial analysis
	     Bankruptcy
	     Proposed legislation
	     Income statistics
	     Debt
	     Debt collection
	     Personal liability (legal)
	     Statistical methods

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    United States General Accounting Office GAO               Report
    to Congressional Requestors June 1999         PERSONAL BANKRUPTCY
    Analysis of Four Reports on Chapter 7 Debtors' Ability to Pay
    GAO/GGD-99-103 United States General Accounting Office GAO
    Washington, D.C.  20548 General Government Division B-282761 June
    21, 1999 The Honorable Charles E. Grassley Chairman, Subcommittee
    on Administrative Oversight and the Courts Committee on the
    Judiciary United States Senate Dear Mr. Chairman: As you
    requested, this report compares and evaluates the methodologies
    used by four reports on bankruptcy debtors' ability to pay their
    debts-two by Ernst & Young LLP (Ernst & Young) under the
    sponsorship of VISA U.S.A. and MasterCard International,1 one by
    Creighton University under the sponsorship of the American
    Bankruptcy Institute (Creighton/ABI),2 and one by the Executive
    Office for U.S. Trustees (EOUST).3 These reports address a major
    public policy issue-the amount of income that those who file for
    personal bankruptcy have available to pay their debts.
    Specifically, you requested that we evaluate and compare each
    report's research methodology for estimating the number of
    bankruptcy debtors who would be able to pay a portion of their
    debts and the amount of debt such debtors could repay. Last year,
    we reported on our evaluation of a similar report by the Credit
    Research Center.4 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.5
    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 1
    Chapter 7 Bankruptcy Petitioners' Ability to Repay: The National
    Perspective, 1997 (March 1998) and Chapter 7 Bankruptcy
    Petitioners' Repayment Ability Under H.R. 833: The National
    Perspective (March 1999). 2 Marianne B. Culhane, J.D., and
    Michaela M. White, J.D., "Taking the New Consumer Bankruptcy Model
    for a Test Drive: Means-Testing Real Chapter 7 Debtors ," VII ABI
    L. Rev. 27 (March 1999). 3 Gordon Bermant and Ed Flynn, Executive
    Office for U.S. Trustees, Incomes, Debts, and Repayment Capacities
    of Recently Discharged Chapter 7 Debtors (January 1999). 4
    Personal Bankruptcy: the Credit Research Center Report on Debtors'
    Ability to Pay (GAO/GGD-98-47, Feb. 9, 1998). 5 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. Page 1
    GAO/GGD-99-103 Personal Bankruptcy B-282761 the court approves a
    period not to exceed 5 years. Recent congressional bankruptcy
    reform proposals would establish "needs-based" provisions for
    personal bankruptcy in which a debtor who was determined to be
    able to pay a specified portion of his or her debts would be
    required to file under chapter 13 of the bankruptcy code.
    Determining which of these four reports most accurately reflects
    what Results in Brief    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. Each of the four reports
    represents a reasonably careful effort to estimate (1) 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 (the "can-pay"
    debtors) and (2) the amount of debt such debtors could potentially
    repay over a 5-year repayment period. "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. The
    reports' estimates of the proportion of "can-pay" debtors in their
    respective samples were 15 percent (Ernst & Young, March 1998;
    EOUST, January 1999); 10 percent (Ernst & Young, March 1999), and
    3.6 percent (Creighton/ABI). The reports' estimates of the amount
    of unsecured nonpriority debt (such as credit card debt) that the
    "can-pay" debtors could potentially repay over 5 years ranged from
    about $1 billion to about $4 billion. 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. It was not the
    objective of any of these reports to estimate the potential net
    gain to creditors (secured or unsecured) under "needs-based"
    bankruptcy and, consequently, none of the reports attempted to do
    so. Under current bankruptcy law, many chapter 7 debtors already
    repay at least some of their debt, either because they voluntarily
    reaffirm--that is, agree to repay-- some debts (usually home
    mortgage or vehicle loans) or because the debts cannot be
    discharged in bankruptcy (such as most student loans). 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. Page
    2                                        GAO/GGD-99-103 Personal
    Bankruptcy B-282761 To develop its percentage and dollar
    estimates, each of the reports made a number of assumptions, which
    varied by report. Each of the reports included three assumptions:
    (1) the data in debtors' schedules on incomes, expenses, and debts
    were accurate and could be used as the basis for forecasting
    debtors' income and expenses for a 5-year period; (2) debtors'
    income and living expenses would not change over 5 years; and (3)
    all debtors required to enter a 5-year repayment plan would
    complete that plan. Proposed "needs-based" legislation specified
    the use of the second and third assumptions for identifying "can-
    pay" chapter 7 debtors. However, none of these three assumptions
    has been validated. For example, about 36 percent of the more than
    953,180 debtors who entered a chapter 13 plan during calendar
    years 1980 through 1988 completed their repayment plans.6 If
    "needs-based" bankruptcy provisions were enacted, the completion
    rate could be higher or lower than this. However, there is no
    empirical basis for assuming that the completion rate would be 100
    percent. To the extent that the completion rate is less than 100
    percent, the amount of debt repaid to creditors could be less than
    estimated in the reports. 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. A
    change in a single assumption could affect each report's results.
    For example, according to Ernst & Young, had its 1998 report used
    the same median household income test as that used in the
    Creighton/ABI report, the Ernst & Young report's estimate of "can-
    pay" debtors would have been 10 percent rather than 15 percent.
    Similarly, the Creighton/ABI reported noted that had it used the
    two Ernst & Young reports' method of determining debtors'
    transportation ownership allowance, its estimate of can-pay
    debtors would have been 6.8 percent rather than 3.6 percent.
    Personal bankruptcy filings have set new records in each of the
    past 3 Background    years, reaching about 1.4 million in calendar
    year 1998, of which more than 1 million were chapter 7 filings.
    There is little agreement on the causes for such high personal
    bankruptcy filings in a period of relatively low unemployment, low
    inflation, and steady economic growth. Nor is there agreement on
    the number of debtors who seek relief through the bankruptcy
    process who have the ability to pay at least a portion of their
    debts and the amount of debt such debtors could potentially repay.
    6 The cases of all 953,180 debtors had been closed by September
    30, 1993. Page 3
    GAO/GGD-99-103 Personal Bankruptcy B-282761 Several bills were
    introduced in the 105th Congress that would implement some form of
    "needs-based" bankruptcy for those who file for personal
    bankruptcy under chapter 7 of the bankruptcy code.7 The conference
    report on the Bankruptcy Reform Act of 1998, H.R. 3150, passed the
    House in October 1998, but did not reach a vote in the Senate. In
    the 106th Congress, the conference report version of H.R. 3150 was
    introduced in the House as H.R. 833, and a bill with somewhat
    different provisions, S.625, was introduced in the Senate. Each of
    these bills has included provisions for determining when a debtor
    could be required to file under chapter 13 of the bankruptcy code,
    rather than under chapter 7. Currently, the debtor usually
    determines whether to file under chapters 7 or 13. Generally,
    these bills would require debtors who filed under chapter 7 and
    whose gross monthly income met a specified income threshold to
    undergo a detailed analysis of their income, expenses, and debts
    to determine whether they could proceed under chapter 7 or be
    required to file under chapter 13. Under chapter 13, debtors enter
    into a repayment plan, which must be approved by the bankruptcy
    court, to repay their debts over a period not to exceed 3 years,
    unless for cause the bankruptcy court approved a period not to
    exceed 5 years. The "needs-based" bankruptcy reform bills
    introduced in the 105th and 106th Congress would generally mandate
    a 5-year repayment period for debtors required to file under
    chapter 13, rather than under chapter 7. Generally, the private
    panel trustee8 would be responsible for making the initial
    determination of whether a debtor would be permitted to proceed
    under chapter 7. Under the bankruptcy code, a debtor's debts may
    be grouped into three general categories for the purposes of
    determining creditor payment priority: (1) secured debts, for
    which the debtor has pledged collateral, such as home mortgage and
    automobile loans; (2) unsecured priority debt, such as child
    support, alimony, and certain back taxes; and (3) unsecured
    nonpriority debt, such as credit card debts, student loans, and
    other unsecured personal loans. In analyzing debtors' repayment
    capacity, the four reports focused principally on the proportion
    of total unsecured nonpriority debt that debtors could potentially
    repay. In general, "needs- 7 The two bills on which the House and
    Senate, respectively, principally focused in the 105th Congress
    were H.R. 3150 and S.1301. 8 Panel trustees are individuals,
    usually attorneys, appointed by the U.S. Trustee, who are
    initially responsible for reviewing debtors' financial schedules
    and filing motions with the bankruptcy court regarding whether a
    debtor has met the statutory qualifications to proceed under
    chapter 7. The "needs-based" provisions of the various bankruptcy
    reform bills would change the standards the panel trustee and
    bankruptcy court use to make this assessment. Page 4
    GAO/GGD-99-103 Personal Bankruptcy B-282761 based" bankruptcy
    bills introduced in the 105th and 106th Congress would require
    debtors to file under chapter 13 if the debtors met or exceeded a
    specific income standard and could repay all their nonhousing
    secured debts, all their unsecured priority debts, and a minimum
    specified amount of their unsecured nonpriority debts over a 5-
    year period. To evaluate and compare the four reports' research
    methodologies, we Scope and      assessed the strengths and
    limitations, if any, of each report's assumptions Methodology
    and methodology for determining debtors' ability to pay and the
    amount of debt that debtors could potentially repay. The comments
    and observations in this report are based on our review of the
    March 1998 and March 1999 Ernst & Young reports, the March 1999
    Creighton/ABI report, and the January 1999 EOUST report; some
    additional information we requested from each report's authors;
    independent analyses using the Creighton/ABI report's database;
    and our experience in research design and evaluation. We reviewed
    specific aspects of each report's methodology, including the
    proposed legislation on which the report was based, how the
    bankruptcy cases used in the analysis were selected, what types of
    assumptions were made about debtors' and their debt repayment
    ability, how debtors' income and allowable living expenses were
    determined, and whether appropriate data analysis techniques were
    used. We also assessed the similarities and differences in the
    methodologies used in the four reports. In addition to reviewing
    the reports, we had numerous contacts with the reports' authors.
    On March 16, 1999, we met with one of the authors of the
    Creighton/ABI report, and on March 25, 1999, we met with the
    authors of the two Ernst & Young reports to discuss our questions
    and observations about each report's methodology and assumptions.
    Following these discussions, we created a detailed description of
    each report's methodology (see app.I), which we sent to the
    authors of each report for review and comment. On the basis of the
    comments received, we amended our methodological descriptions as
    appropriate. The authors of the Creighton/ABI report responded to
    written questions we submitted. Ernst & Young, Creighton/ABI, and
    EOUST provided additional details on their methodologies and
    assumptions that were not fully described in their reports. We did
    not verify the accuracy of the data used in any of these reports
    back to the original documents filed with the bankruptcy courts.
    However, the Creighton/ABI authors provided us with a copy of the
    database used in their analysis. Ernst & Young declined to provide
    a copy of their database, citing VISA's proprietary interest in
    the data. (VISA U.S.A. and MasterCard International sponsored the
    Ernst & Young reports.) We received the EOUST report in early
    April and, because of time constraints, did not request the
    database for the report. We reviewed the Page 5
    GAO/GGD-99-103 Personal Bankruptcy B-282761 Creighton/ABI data and
    performed some analyses of our own to verify the authors'
    categorization of data used in their analyses. In our review, we
    found that the Creighton/ABI researchers prepared and analyzed
    their data in a careful, thorough manner. The team that reviewed
    the reports included specialists in program evaluation,
    statistical sampling, and statistical analysis from our General
    Government Division's Design, Methodology, and Technical
    Assistance group. We did our work between February and May 1999 in
    Washington, D.C., in accordance with generally accepted government
    auditing standards. On May 18, 1999, we provided a draft of our
    report to Ernst & Young, the authors of the Creighton/ABI report,
    and EOUST for comment. Each provided written comments on the
    report. In addition, on May 28, 1999, we met with representatives
    from Ernst & Young to discuss their comments on the draft report.
    Ernst & Young and Creighton/ABI also separately provided technical
    comments on the report, which we have incorporated as appropriate.
    The Ernst & Young, Creighton/ABI, and EOUST written comments are
    summarized at the end of this letter and contained in appendixes
    III through V. Each of the reports found that at least some
    portion of chapter 7 debtors- Shared Characteristics ranging from
    3.6 percent to 15 percent--met the definition of "can-pay" of the
    Four Reports              debtors as that term was defined in each
    report's methodology.  The amount of unsecured nonpriority debt
    that each report estimated these "can-pay" debtors could repay
    over 5 years ranged from about $1 billion to about $4 billion. It
    is important to note that these estimates do not necessarily
    represent unsecured nonpriority creditors' potential net gain from
    implementing needs-based bankruptcy, compared with current
    bankruptcy practice. It was not the objective of any of these
    reports to estimate the potential net gain to creditors (secured
    or unsecured) under "needs-based" bankruptcy and, consequently,
    none of the reports attempted to do so. Currently, many chapter 7
    debtors repay at least some of their debts. Debtors may
    voluntarily reaffirm-that is, agree to repay-specific debts (most
    commonly home mortgage or vehicle loans) or they may, in effect,
    be required to repay others. Some debts, including such unsecured
    nonpriority debts as most student loans, cannot be discharged in
    bankruptcy. Following the close of their bankruptcy cases, debtors
    remain financially responsible for all debts reaffirmed with the
    bankruptcy court and all debts that cannot be discharged in
    bankruptcy. Page 6                                       GAO/GGD-
    99-103 Personal Bankruptcy B-282761 In developing its estimates of
    "can-pay" debtors and the total amount of debt such debtors could
    repay, each report made a number of assumptions, which varied by
    report. Three of these assumptions were used in all four reports:
    (1) the data in debtors' schedules of current estimated income,
    current estimated monthly expenses, and debts were accurate and
    could be used as the basis for forecasting debtors' income and
    expenses for a 5-year period; (2) debtors' income and allowable
    living expenses would remain unchanged during the 5-year repayment
    period; and (3) all debtors required to file under chapter 13 and
    enter a 5-year repayment plan would complete that plan. The
    reports used the second and third assumptions because proposed
    "needs-based" legislation specified their use in identifying "can-
    pay" chapter 7 debtors. However, none of these assumptions has
    been validated. Each report's data on debtors' income, debts, and
    most living expenses were from the financial schedules that
    debtors generally file at the same time as their bankruptcy
    petitions.9 The instructions for the income and expense schedules
    specifically ask the debtors to enter their "estimated" monthly
    income or expenses. Although these schedules are the only source
    of detailed debtor financial data publicly available, the data in
    the schedules are of unknown accuracy and reliability. Both Ernst
    & Young and Creighton/ABI, for example, developed separate
    methodologies for valuing the amount of unexpired vehicle leases
    because the data debtors reported on the schedule for unexpired
    leases was incomplete or inconsistent. In some cases, for example,
    debtors reported the monthly lease payment rather than the total
    amount of the payments due on the remainder of the lease. To the
    extent this occurred, it would have understated the amount owed on
    the lease and, thus, overstated a debtor's repayment capacity. The
    National Bankruptcy Review Commission's October 1997 report noted
    that there had been no empirical report of the accuracy of the
    financial data initially reported by bankruptcy debtors, and it
    recommended random audits of such data. Each report noted that the
    proposed legislation used in its analysis required the use of the
    assumptions that all "can-pay" debtors who entered a 5-year
    repayment plan would complete the plan without modification and
    that such debtors' income and expenses would remain stable during
    the 5-year repayment period. All four reports noted that a
    debtor's income 9 Federal bankruptcy rule 1007 provides, among
    other things, that schedules and statements other than the
    statement of intention shall be filed with the bankruptcy
    petitions in a voluntary case, or if the petition is accompanied
    by a list containing the names and addresses of all the debtor's
    creditors, within 15 days thereafter. Page 7
    GAO/GGD-99-103 Personal Bankruptcy B-282761 and/or expenses may
    change during the course of a 5-year repayment plan and that any
    such changes could affect a debtor's repayment capacity. The
    Creighton/ABI and EOUST reports asserted that it was likely that
    many debtors would experience a change in income, expenses, or
    both over the 5-year period that would reduce their ability to
    complete their repayment plans. Available evidence suggests that
    at least some percentage of debtors would be unable to complete
    their chapter 13 repayment plans. A 1994 AOUSC report10 reviewed
    the outcomes of all 953,180 chapter 13 cases filed between
    calendar years 1980 and 1988 and terminated by September 30, 1993.
    The report found that about 36 percent of debtors who voluntarily
    entered a 3- to 5-year bankruptcy debt repayment plan under
    chapter 13 were able to complete their repayment plans and obtain
    discharges.11 Another 14 percent of these debtors were unable to
    complete their chapter 13 plans and had their eligible debts
    discharged after their cases were converted to chapter 7. About 49
    percent had their cases dismissed and did not receive a discharge
    of their eligible dischargeable debts. The results of the AOUSC
    report caution against making broad conclusions about debtors'
    ability to maintain debt payments over a 5-year period based on
    the data in the initial debtor financial schedules alone. If
    needs-based bankruptcy provisions were enacted, at least some
    debtors are likely to experience a change in their financial
    circumstances during a 5-year repayment period that could increase
    or decrease their repayment capacity. Thus, at least some
    percentage of debtors who complete their repayment plans are
    likely to have those repayment plans modified during the 5-year
    repayment period. In addition, there is no empirical basis for
    assuming that the completion rate would be 100 percent, as assumed
    in each of these reports. To the extent that the completion rate
    was less than 100 percent, the amount of debt repaid to creditors
    could be less than estimated in the reports. The reports differed
    in their sampling methods, the calendar period from Differences in
    the Four which the sample of debtors was selected, the proposed
    legislation used as Reports                          the basis for
    their repayment capacity analyses, the income levels used to
    screen debtors for further repayment analysis, the methods used to
    impute interest for certain debts, and the assumptions used to
    estimate debtors' 10 Bankruptcy Statistical Trends: Chapter 13
    Dispositions (October 1994). 11 This total included "hardship
    discharges." A hardship discharge generally may be granted to a
    chapter 13 debtor who fails to complete the plan payments due to
    circumstances for which the debtor should not justly be held
    accountable. An AOUSC official and EOUST said such chapter 13
    discharges were rare. Page 8
    GAO/GGD-99-103 Personal Bankruptcy B-282761 allowable living
    expenses and debt repayments. Thus, the reports also differed in
    the proportion of debtors-the "can-pay debtors--they estimated
    would have sufficient income, after paying allowable living
    expenses, to repay all of their nonhousing secured debts, all
    their unsecured priority debts, and a specific minimum portion of
    their unsecured nonpriority debts over a 5-year period. The
    different methods and assumptions used in each report's analysis
    are discussed in detail in appendixes I and II. The two Ernst &
    Young reports, the Creighton/ABI report, and the EOUST Sampling
    Differences    report used different types of samples drawn from
    different populations of bankruptcy petition filers. These
    differences limit the degree to which the results of each report
    can be compared. The Ernst & Young reports were based on a
    national probability sample of about 2,200 drawn from all chapter
    7 bankruptcy cases filed nationwide during calendar year 1997. The
    cases were selected randomly from the petitions filed in all
    federal bankruptcy districts, largely in proportion to each
    district's total chapter 7 filings. Consequently, the results of
    the Ernst & Young reports can be generalized to all chapter 7
    petitions filed nationwide in calendar year 1997. The
    Creighton/ABI report used randomly selected chapter 7 cases that
    met certain qualifications from seven judgmentally selected
    bankruptcy districts.12 The districts used in the report were
    originally chosen for a different purpose-a report of debtors'
    reaffirmations of their debts.  The report's results can only be
    generalized to these seven districts. Therefore, neither
    extrapolation of the Creighton/ABI results to the nation nor
    comparison to the results of Ernst & Young's March 1998 report is
    supported by the methods used. The Creighton/ABI report's authors
    acknowledged that the two reports were based on different sample
    designs. However, they still portrayed their results as comparable
    with those of the Ernst & Young report. Nevertheless, we recognize
    that statistically valid probability samples of less than national
    scope, such as Creighton/ABI's, are often mandated by limited
    resources. The results of such samples, appropriately limited to
    the scope of the sample, can provide useful information for
    policymakers. 12 Those districts were the Northern District of
    California, the District of Colorado, the Northern District of
    Georgia, the District of Massachusetts, the District of Nebraska,
    the Middle District of North Carolina, and the Western District of
    Wisconsin. Page 9
    GAO/GGD-99-103 Personal Bankruptcy B-282761 The EOUST report was
    based on a nonprobability sample of nearly 2,000 cases drawn from
    those chapter 7 cases designated as no-asset by the U.S. Trustees
    in 84 of the 90 bankruptcy districts and closed in the first half
    of calendar year 1998. The cases were selected in proportion to
    each district's chapter 7 filings during calendar year 1997. Cases
    from six bankruptcy districts in Alabama and North Carolina were
    excluded from the report because these districts do not have U.S.
    Trustees.13 Because statistical probability sampling methods were
    not used to select the cases closed within each district, standard
    statistical methods are not technically applicable for making
    inferences from these results to the population of no-asset
    chapter 7 cases from those 84 bankruptcy districts closed during
    this period.  However, treating such a sample as if it were a
    random sample may sometimes be reasonable from a practical point
    of view. EOUST, based on its subject matter expertise, asserts
    that these cases are as random as those they would have obtained
    from a statistical random sample of filings from each Trustee's
    office. We have no basis to judge the accuracy of that assertion.
    Each of the four reports used different proposed legislation as
    the basis for Each Report's Analysis Was its analysis of debtor
    repayment capacity. The two Ernst & Young reports Based on
    Different                and the Creighton/ABI report each used
    different proposed legislation Proposed Legislation
    introduced in or passed by the House of Representatives in 1998 or
    1999. The EOUST report was based on a mix of the provisions in
    specific versions of H.R. 3150 and S.1301, two bills Congress
    considered in 1998. The basic similarities and differences in the
    "needs-based" provisions of the proposed legislation used in the
    Ernst & Young, Creighton/ABI, and EOUST reports are shown in table
    1. Basic differences include the median income thresholds used to
    select debtors for repayment capacity analyses and the two key
    tests used to identify the "can-pay" debtors. 13 These six
    districts have bankruptcy administrators under the jurisdiction of
    the federal judiciary. U.S. Trustees are employees of the
    Department of Justice. According to EOUST, about 2.4 percent of
    the 975,370 consumer chapter 7 cases filed nationally in the year
    ending March 31, 1998, were in the six districts excluded from the
    EOUST sample. Page 10
    GAO/GGD-99-103 Personal Bankruptcy B-282761 Table 1: "Needs-Based"
    Provisions in Congressional Bills As Used in Four Reports on
    Bankruptcy Debtors' Repayment Capacity
    Ernst & Young                      Creighton/ABI
    Ernst & Young                    EOUST (March 1998)
    (March 1999)                (March 1999)               (January
    1999) Proposed legislation used H.R. 3150 as
    H.R. 3150 as passed by the H.R. 833 as introduced        H.R. 3150
    as passed by in analysis                   introduced in February
    House in June 1998.                    in February 1999
    the House, June 10, 1998.
    1998, and S.1301 as approved by Senate Judiciary Commmittee.
    Median income test Annual gross median household income threshold
    used Households of one           Median income for
    Median income for one-        Same as Creighton/ABI. Same as
    Creighton/ABI. person                      one-person household.
    person household with one earner. Households of two to
    Median income for               Median income for family      Same
    as Creighton/ABI. Same as Creighton/ABI. four persons
    households of two to            households of two to four. four.
    Households of more than Median income by                    Median
    income for family      Median income for          Median income
    for family four persons                household size. In
    household of four.            family household of four household
    of four plus tables used, median
    plus $583 annually for     $583 monthly for each income peaked at
    each additional member additional member over families of four and
    over four.a                four.b declined for families of more
    than four. Percent of median income      More than 75 percent
    100 percent or more for       Same as Creighton/ABI. Same as
    Creighton/ABI. needed to pass income test for household of same
    household of same size as size as debtor's.
    debtor's. Debtor's allowable living     Based on IRS
    Same as 1998 Ernst &          Same as 1998 Ernst &       Selected
    expenses- expenses                      Collection Financial
    Young, except interpreted     Young.                     taxes,
    business Standards.                      IRS transportation
    expenses, child support allowance differently.
    and alimony--were deducted from that portion of debtor income over
    the national annual median for household of comparable size.
    Minimum monthly income More than $50. If $50                  Same
    as 1998 Ernst &          No specific income test. Any income
    remaining test after paying allowable or less, debtor could
    Young.                        Test based on amount       from that
    portion of living expenses and           file under chapter 7.
    of unsecured nonpriority debtor income above the repaying all
    nonhousing
    debt that could            national median after secured debt and
    all
    potentially be repaid.c    allowable monthly living unsecured
    priority debt
    expenses and payment over 5 years
    on priority debt.d Minimum percentage of         20 percent. If
    debtor           Same as 1998 Ernst &          $5,000 or 25
    percent,      No specific minimum unsecured nonpriority
    met this test and all           Young.
    whichever was less. If     used. debt to be repaid
    preceding tests, debtor
    debtor met this test, would be required to
    debtor would be file under chapter 13.
    required to file under chapter 13. Page 11
    GAO/GGD-99-103 Personal Bankruptcy B-282761 aFor example, a family
    household of six would be assigned the national median income for
    a family household of four plus $1,166 ($583 X 2). bFor example, a
    family household of six would be assigned the national median
    income for a familiy household of four plus $13,992 ($583 x 24).
    cUnder H.R. 833 as introduced, a debtor could be required to file
    under chapter 13, regardless of household income, if the debtor
    could potentially repay 25 percent of his or her unsecured
    nonpriority debts or $5,000, whichever was less. dThe EOUST report
    assumed that debtors would pay their monthly home mortgage
    payments and payments on all nonhousing secured debt from that
    portion of their gross income that was below the national median
    for a household of comparable size. Source: GAO analysis of Ernst
    & Young, Creighton/ABI, and EOUST reports and the proposed
    legislation used in each report's analysis. Each report relied on
    annual household median income data as reported Differences in
    by the U.S. Census Bureau to select debtors for further analysis
    of their Determination of Debtors'    repayment capacity. Each
    debtor's annual gross household income was Median Income
    compared with the median national annual gross household income
    for a household of comparable size-one person, two persons, and so
    forth. However, in making this comparison, the reports used
    different national median income thresholds from the Census Bureau
    and data for different calendar years (1993, 1996, or 1997).14
    These differences reflect the different median income tests in the
    different proposed legislative provisions used in various reports'
    analyses and the different years from which each report's sample
    was drawn. The Census Bureau reports annual gross median incomes
    for different types of households by household size. Generally,
    for each household size, incomes for nonfamily households of two
    or more are less than incomes for family households of two or
    more. The Census Bureau table chosen for analysis can also make a
    difference. For example, the 1997 annual gross median income for a
    household with one earner was $29,780. This was $11,018 more than
    the 1997 annual gross median income of $18,762 for a 1- person
    household. The Census Bureau defines a household as all persons,
    related and unrelated, occupying a housing unit. The Census Bureau
    defines a family household as a group of two or more persons
    related by birth, marriage, or adoption who reside together. Thus,
    the table chosen for comparison can affect whether a debtor's
    income is determined to be above or below the national median for
    a household of comparable size. To illustrate the effect of each
    report's median household income test, table 2 compares the median
    annual gross household incomes each report would have used had all
    the reports used the 1997 Census Bureau tables. For example, the
    1998 Ernst & Young report determined median income 14 The
    Creighton/ABI report used 1993 data, the two Ernst & Young reports
    used 1996 data, and the EOUST report used 1997 data. Page 12
    GAO/GGD-99-103 Personal Bankruptcy B-282761 using household income
    by household size. Debtors would have been selected for further
    repayment analysis if their incomes were more than 75 percent of
    the Census Bureau amounts shown in table 2. Thus, debtors in four-
    -person households would have been selected for further analysis
    if their 1997 annual gross household incomes were more than
    $39,874 (75 percent of $53,165). In the other three reports,
    debtors in four-person households would have been selected for
    further analysis if their 1997 gross annual incomes were at least
    $53,350-a difference of $13,476. Table 2: Census Bureau Tables and
    Actual Median Household Incomes, by Household Size, That Each
    Report Would Have Used Had All Four Reports Used the 1997 Census
    Tables on Household Incomes Ernst & Young
    Creighton/ABI                      Ernst & Young
    Executive Office for U.S. (March 1998)                     (March
    1999)                       (March 1999)                Trustees
    (January 1999) 1997             1997                1997
    1997              1997              1997             1997
    1997 Census        income              Census            income
    Census            income            Census            income
    Household           table    threshold                table
    threshold              table      threshold               table
    threshold size             incomea             usedb
    incomec               used          incomec              used
    incomec               used 1 person         $18,762       $14,072
    $29,780          $29,780           $29,780           $29,780
    $29,780          $29,780 2 persons         39,343        29,508
    37,562            37,562            37,562           37,562
    37,562            37,562 3 persons         47,115        35,337
    46,783            46,783            46,783           46,783
    46,783            46,783 4 persons         53,165        39,874
    53,350            53,350            53,350           53,350
    53,350            53,350 5 persons         50,407        37,806
    51,101           53,350d            51,101           53,933e
    51,101           60,346f 6 persons         46,465        34,849
    45,473           53,350d            45,473           54,516e
    45,473           67,342f 7 persons or more              42,343
    31,758              42,001           53,350d            42,001
    55,099e           42,001           74,338f aCensus Bureau table H-
    11 for median income by household size. The Census Bureau defines
    a household as all people occupying a housing unit. bBased on the
    provisions of H.R. 3150 as introduced, Ernst & Young used an
    income threshold of 75 percent of the median. In this table, the
    results of that calculation have been rounded to the next highest
    dollar. Debtors above this threshold would have been subject to
    further repayment capacity analysis. cUsed Census Bureau table H-
    12 (one-earner households) for households of one. Used Census
    Bureau table F-8 for families of two or more members. The Census
    Bureau defines a family as a group of two or more people related
    by birth, marriage, or adoption who reside together. dBased on the
    provisions of H.R. 3150 as passed by the House on June 10, 1998,
    used 100 percent of the median income for households of one to
    four persons, and for households of more than four, used 100
    percent of the median income for a family household of four.
    eBased on the provisions of H.R. 833 as introduced, used 100
    percent of the median income for households of one to four
    persons, and for households of more than four, used 100 percent of
    the median income for a family household of four plus $583
    annually for each additional household member over four. fBased on
    the higher of the provisions of H.R. 3150 as it passed the House
    on June 10, 1998, or S.1301 as approved by the Senate Judiciary
    Committee, used 100 percent of the median income for households of
    one to four persons; and for households of more than four, used
    100 percent of the median income for a family household of four
    plus $583 monthly for each additional household member over four.
    Source: 1997 Census Bureau tables for median annual household
    incomes and Ernst & Young, Creighton/ABI, and EOUST reports. Page
    13                                                     GAO/GGD-99-
    103 Personal Bankruptcy B-282761 As shown in table 2, in the
    Census Bureau tables, national median incomes peak at households
    of four and decline for households of more than four. Three of the
    reports made adjustments for this fact. Each used a different
    method, based on the specific proposed legislative provisions used
    in its analysis. For family households of four or more, the
    Creighton/ABI report used the median income for a family of four.
    For each additional household member over four, the 1999 Ernst &
    Young and EOUST reports used the median income for a family of
    four, plus $583 annually (Ernst & Young) or $583 monthly (EOUST)
    for each additional family household member over four. Table 2
    shows the difference these adjustments would make. Had each report
    used the 1997 Census tables, the median income used for a family
    of six would have ranged from $34,849 (1998 Ernst & Young) to
    $67,342, (EOUST). As would be expected, the higher the median
    household income used for comparison, the lower the percentage of
    debtors whose household incomes met or exceeded the income level
    used for comparison. Almost half of the debtors in the 1998 Ernst
    & Young report sample passed the median income test, while less
    than 20 percent passed the test in the 1999 Ernst & Young and
    EOUST reports (see table 3). Because the Ernst & Young reports
    used the same debtor sample and 1996 median income data, the
    different pass rates for the two reports reflect solely the
    different median income thresholds used. For the Creighton/ABI and
    EOUST reports, the different pass rates may reflect, to some
    degree, differences in the debtors in each report's sample and the
    each report's use of median income tables for different calendar
    years-1993 and 1997, respectively. Page 14
    GAO/GGD-99-103 Personal Bankruptcy B-282761 Table 3: Results of
    Four Reports Analyses of the Percentage of Chapter 7 Bankruptcy
    Debtors Who Could Pay A Substantial Portion of their Unsecured
    Nonpriority Debts Ernst & Young                 Creighton/ABI
    Ernst & Young                        EOUST (March 1998)
    (March 1999)                     (March 1999)
    (January 1999) Median Income Test                 Gross income,
    adjusted Gross income,                          Gross income,
    adjusted          Gross income, adjusted for household size,
    adjusted for                    for household size, is 100 for
    household size, is the exceeds 75 percent of         household,
    size is 100 percent or more of                       higher of
    median income national median.              percent or more of
    national median. For            standard in H.R. 3150 or National
    median               national median. For            family
    households of more S.1301. For family household incomes
    family households of            than four, added $583
    households of more than peaked at families of         more than
    four, used            annually for each family        four, added
    $583 monthly four and declined for         income for family
    member over four.a              for each family member families of
    more than         households of four.
    over four.b four.                  47%                       24.2%
    19%                        17.7% Percentage of debtors in sample
    who passed median income test Percentage of debtors who
    17%                         4.0% Not in proposed legislation
    13.7% passed median income test and have net monthly income above
    $50c Percentage of debtors who                                 15%
    3.6% Not in proposed legislation
    12.2%d passed median income test, have net monthly income above
    $50, and can repay 20 percent of unsecured nonpriority debt over 5
    years Percentage of debtors who                   Not in proposed
    Not in proposed                                  10 %
    13.4% can repay at least $5,000 or                     legislation
    legislation 25 percent of unsecured nonpriority debt (whichever is
    less) over 5 years Percentage of debtors who                   Not
    in proposed             Not in proposed                   Not in
    proposed                               15%e had any net income
    available                     legislation
    legislation                    legislation to pay unsecured
    nonpriority debts. Total estimated unsecured
    $4 billion       $870 million (national                         $3
    billion Less than $1 billion to $3.76 nonpriority debt that all
    "can-                                         projection from 7
    billiong pay" debtors could repay
    districts)f over 5 years                                      aFor
    example, a family of six would be assigned the national median
    income for a family of four plus $1,166 ($583 X 2). bFor example,
    a family of six would be assigned the national median income for a
    family of four plus $13,992 ($583 X 24). cNet after deducting
    allowable living expenses and full repayment of nonhousing secured
    debt and unsecured priority debt over 5 years. dEOUST provided
    estimates for repayment of 20 percent of unsecured nonpriority
    debt and repayment of $5,000 or 25 percent of unsecured
    nonpriority debt, whichever was less. Both estimates assumed that
    debtors would use 100 percent of net income available for payment
    of unsecured nonpriority debt. eThis is EOUST's maximum estimate.
    This estimate represents the percentage of debtors with any
    available net monthly income that could be applied to the payment
    of unsecured nonpriority debts after paying monthly allowable
    living expenses and payments for secured debts and unsecured Page
    15
    GAO/GGD-99-103 Personal Bankruptcy B-282761 priority debts. This
    measure of debt repayment was not included in any of the proposed
    legislation used in the analyses of these four reports. fThe
    Creighton/ABI report included this estimate in its report, noting
    that the estimate was true if the results for its seven
    judgmentally selected districts were true for all 90 bankruptcy
    districts. Although the Creighton/ABI report provided this
    national estimate, the results of its analysis cannot be used for
    national estimates. gThe higher figure assumes that after
    allowable living expenses and payments on unsecured priority debt,
    all remaining available income above the national median, no
    matter how small, would be used for payment of unsecured
    nonpriority debts. The lower figure assumes that amount collected
    would be reduced by (1) debtor attorney and chapter 13 trustee
    fees and (2) some portion of debtors whose repayment capacity is
    reduced during the 5-year repayment period by such factors as
    divorce or unemployment. The EOUST report noted that it considered
    the lower figure to be more realistic. The EOUST report assumed
    that debtors would pay their home mortgages and all nonhousing
    secured debt from that portion of their gross income that was
    below the national median for a household of comparable size.
    Source: Ernst & Young, Creighton/ABI, and EOUST reports. Table 3
    also shows the percentage of debtors in each report's sample that
    passed each major repayment capacity test. The final estimates of
    the percentage of "can-pay" debtors in each sample ranged from 3.6
    percent to 15 percent. EOUST provided three estimates-15 percent
    if debtors used all their available net income, no matter how
    small, to pay their unsecured nonpriority debt; 12.2 percent if
    the can-pay debtors paid at least 20 percent of their unsecured
    priority debt; and 13.4 percent if they paid $5,000 or 25 percent,
    whichever was less. Under the "needs-based" provisions used in
    these analyses, two principal variables affected each report's
    estimate of the percentage of debtors who had sufficient income to
    pay the minimum specified percentage of their unsecured
    nonpriority debts. These were the (1) total amount of the debtor's
    nonhousing secured and unsecured priority debts and (2) debtor's
    allowable living expenses. Under the "needs-based" provisions of
    the proposed legislation used in the two Ernst & Young reports and
    the Creighton/ABI report, payments on nonhousing secured debt and
    unsecured priority debt plus allowable living expenses were
    deducted from income to determine whether the debtor had any net
    income available for payment of unsecured nonpriority debts. For
    debtors with the same living expenses, the higher the payments on
    secured debt and unsecured priority debt were relative to income,
    the less income the debtor would have for payment of unsecured
    nonpriority debt. Conversely, the lower such payments were
    relative to income, the greater the net income available for
    payment of unsecured nonpriority debts. Further, under the
    proposed needs-based legislation, debtors would be allowed housing
    allowances in excess of the IRS standards if necessary for payment
    of home mortgage debt. Thus, assuming that all other living
    expenses were the same, debtors whose mortgage payments exceeded
    the IRS housing allowance would be permitted higher living
    expenses than Page 16
    GAO/GGD-99-103 Personal Bankruptcy B-282761 debtors whose mortgage
    payments were less than the IRS housing allowance or who were
    renters. The two Ernst & Young reports and the Creighton/ABI
    report used the IRS Differences in Interpreting    collection
    financial standards as the basis for determining debtors' the IRS
    Expense Standards      allowable living expenses. These standards
    and their application in the for Allowable Living           Ernst
    & Young and Creighton/ABI reports are discussed in more detail in
    Expenses                       appendix I. EOUST did not use the
    IRS standards to determine debtors' allowable living expenses,
    concluding that they were cumbersome and difficult to apply
    consistently across debtors. The EOUST report assumed that debtors
    would (1) pay their home mortgage and other secured debts from
    that portion of their income that was at or below the national
    median for a family of comparable size and (2) pay their unsecured
    priority and unsecured nonpriority debts from that portion of
    their income that was above the national median. The EOUST
    report's methodology is described in detail in appendix II. The
    IRS uses its collection financial standards to help determine a
    taxpayer's ability to pay a delinquent tax liability. The IRS has
    established specified dollar allowances for housing and utility
    expenses; transportation expenses; and food, clothing, and other
    expenses. However, the IRS has not established specific dollar
    allowances for "other necessary expenses," such as taxes, health
    care, court-ordered payments (e.g., child support or alimony),
    child care, and dependent care. Since there are no specific dollar
    standards, the IRS determines whether individual expenses in this
    category are reasonable and necessary on a case-by-case basis. The
    IRS guidance notes that some of these "other necessary expenses,"
    such as taxes, health care, and court-ordered payments, are
    "usually considered to be necessary." However, the taxpayer may be
    required to substantiate the amounts and justify expenses for
    other expense items, such as child care, dependent care, and life
    insurance. Each of the proposed "needs-based" bankruptcy bills
    used in the Ernst & Young and Creighton/ABI analyses provided that
    debtors would be permitted the IRS allowances for national and
    local necessary expenses (housing and utilities; transportation;
    and food, clothing, and other expenses), and for other necessary
    expenses. However, none of the proposed bills specified how the
    discretionary allowances for "other necessary expenses" were to be
    determined. There are also other provisions of the IRS collection
    standards that are not mentioned in the bills. For example, the
    IRS standards permit a taxpayer 1 Page 17
    GAO/GGD-99-103 Personal Bankruptcy B-282761 year in which to
    modify or eliminate excessive necessary or unallowable conditional
    expenses, if the tax liability cannot be paid within 3 years. The
    "needs-based" provisions of the proposed legislation used in the
    Ernst & Young and Creighton/ABI reports provided that debtors'
    monthly debt repayment expenses were to include whatever amounts
    were necessary to pay monthly mortgage payments and to pay in full
    over 5 years all nonhousing secured debts (such as auto loans) and
    all unsecured priority debts (such as child support and certain
    back taxes). Thus, by implication, debtors were to be permitted
    expenses in excess of the maximum IRS allowances where necessary
    to repay debt. For example, if a debtor's total monthly vehicle
    debt payment exceeded the maximum applicable IRS transportation
    ownership allowance, the higher debt payment would be used as the
    ownership allowance. A basic description of the IRS collection
    financial standards is presented in table 4. With the exception of
    debt repayment, both Ernst & Young reports and the Creighton/ABI
    report generally used the IRS standards as expense ceilings. The
    principal difference was in the methods used to determine the
    debtors' transportation allowances. Page 18
    GAO/GGD-99-103 Personal Bankruptcy B-282761 Table 4: Basic
    Description of IRS                              National or local
    Description of expense category and IRS Collection Financial
    Standards       IRS standard              standard
    guidelines Housing and utilities Local, by county.           IRS
    standard is a cap-taxpayer allowed Dollar amount set       amount
    actually spent or IRS allowance, according to family whichever is
    less. Includes mortgage or rent, size. No difference property
    taxes, interest, parking, necessary if taxpayer owns or
    maintenance and repair, homeowner's or rents.
    renter's insurance, homeowner dues, condominium fees, and
    utilities. Transportation Ownership              Applied
    nationally,     IRS standard is a cap. Provides maximum but IRS
    considers it monthly allowance for the lease or purchase a local
    standard        of up to two automobiles-$372 for first
    automobile, $294 for second automobile. No ownership allowance is
    included if taxpayer has no vehicle lease or purchase payments.
    Operating and          Local, by census        IRS standard is a
    cap. Allowed in addition to public                 region and
    ownership allowance, if taxpayer has transportation
    metropolitan            payments for lease or purchase of vehicle.
    If statistical area        taxpayer has no vehicle lease or
    purchase payment or no vehicle, only the operating allowance is
    permitted. Includes such expenses as insurance, normal
    maintenance, fuel, and registration fees. One-person household
    allowed one operating allowance; two-person households usually
    allowed no more than two unless taxpayer can demonstrate that
    additional vehicles are necessary for income production. Food,
    clothing, other National (except for National standard allowance
    is provided expenses                  Alaska and
    regardless of amount actually spent. Food, Hawaii), by income
    housekeeping supplies, apparel and services, and household
    personal care products and services, and size.
    miscellaneous. Adjusted for income and number of persons in the
    household. Other necessary           No standard other
    Includes such expenses as charitable expenses
    than expense must contributions, child care, dependent care, be
    necessary and        health care, payroll deductions (e.g., taxes,
    reasonable. Actual union dues), and life insurance. amount allowed
    determined on individual basis by IRS. Source: IRS internet site
    and IRS regulations. Page 19
    GAO/GGD-99-103 Personal Bankruptcy B-282761 Differences Between
    the Ernst & The IRS transportation allowance is divided into two
    categories- Young and Creighton/ABI            ownership costs and
    operating costs, which includes an allowance for Interpretationsof
    the IRS          debtors with no vehicles. The IRS ownership
    allowance is a single national Transportation Allowances
    standard15 for payments on leased or purchased vehicles-currently,
    $372 for the first car and $294 for the second car, with a maximum
    of two cars allowed.16 According to the IRS, the "ownership costs
    provide maximum allowances for up to two automobiles if allowed as
    a necessary expense." The operating portion of the IRS standard is
    derived from Bureau of Labor Statistics (BLS) data. The operating
    allowance varies by census region and metropolitan statistical
    area. The current allowance for Boston, Massachusetts, for
    example, is $220 (no vehicles), $274 (one vehicle), or $328 (two
    vehicles). IRS regulations describe the application of the
    ownership and operating allowances as follows: "If a taxpayer has
    a car payment, the allowable ownership cost added to the allowable
    operating cost equals the allowable transportation expense. If a
    taxpayer has no car payment, or no car, only the operating cost
    portion of the transportation standard is used as the allowable
    expense." Differences in the Ownership       Each report used
    different methods to assign the ownership portion of the
    Allowances Used                    transportation allowance. There
    were essentially two differences---secured vehicle debt payments
    that were less than the IRS allowance and ownership allowances for
    debt-free vehicles. In effect, Ernst & Young did not use the IRS
    ownership allowances. It interpreted H.R. 3150 and H.R. 833 to
    require the use of secured vehicle debt payments as the ownership
    allowance. Ernst & Young totaled all vehicle debt, added 10
    percent for interest (equivalent to 9 percent for 2 years), and
    amortized the resulting total over 60 months. The resulting
    monthly amount was used as the ownership allowance, whether it was
    more or less than the maximum applicable IRS ownership allowance.
    In all of the proposed "needs-based" bankruptcy bills, debt
    payments could exceed the maximum applicable IRS housing and
    transportation allowances. For secured vehicle debt, Creighton/ABI
    totaled all vehicle debt, added 24 percent for interest
    (equivalent to 9 percent for 5 years), and amortized the resulting
    total over 60 months. The resulting monthly vehicle debt payment
    was used as the ownership allowance if it was equal to or more
    than the 15 In its description of the Collection Financial
    Standards, IRS notes that the "ownership cost portion of the
    transportation standard, although it applies nationwide, is still
    considered part of the local standards." 16 The current allowances
    used in our examples were applicable as of October 15, 1998. Page
    20
    GAO/GGD-99-103 Personal Bankruptcy B-282761 maximum IRS ownership
    allowance for a household of the same size and number of vehicles
    as the debtor's. If the monthly secured debt payment was less than
    the maximum IRS ownership allowance for a household of the same
    size and number of vehicles as the debtor's household,
    Creighton/ABI added the difference to the debtor's transportation
    ownership allowance. For example, the IRS ownership allowance for
    a one-vehicle household is a maximum of $372 a month. This
    allowance applies to any one-vehicle household regardless of size.
    If a debtor in a one-vehicle household had a monthly payment for
    secured vehicle debt of $333, Creighton/ABI would have allowed an
    additional monthly allowance of $39, for a total ownership
    allowance of $372. Both the IRS standards and Ernst & Young would
    have allowed $333. It is important to note that the IRS standards
    permit an ownership allowance for vehicle lease payments. Similar
    to secured vehicle debt payments, monthly lease debt payments that
    exceeded the IRS transportation ownership allowances would be
    permitted under needs- based bankruptcy. However, both Ernst &
    Young and Creighton/ABI found the data on vehicle leases to be
    inconsistently reported among the debtors in their samples and
    sometimes inconsistently reported on the schedules of an
    individual debtor. Debtors did not necessarily show on their
    schedules the total amounts remaining to be paid on unexpired
    vehicle leases or the amount of the monthly payments on such
    leases. Therefore, neither report may have accurately captured the
    amount remaining to be paid on unexpired leases and the monthly
    vehicle lease costs. The other principal difference in the
    treatment of the transportation ownership allowance was that the
    Creighton/ABI report provided an ownership allowance for debt-free
    vehicles. The IRS standards would include only an operating
    allowance for debt-free vehicles. Because there were no secured
    debt payments for debt-free vehicles, Ernst & Young did not
    include an ownership allowance for such cars. Creighton/ABI
    included the maximum IRS ownership allowance for debt-free cars-
    one allowance for one person households, one allowance for
    households of two or more with one vehicle, and two allowances for
    households of two or more with two or more vehicles. Differences
    in the Operating    Crieghton/ABI's and Ernst & Young's methods of
    assigning vehicle Allowances Used                 operating
    allowances were the same except for households of two or more
    persons with more than two vehicles. Under the IRS collection
    financial standards, IRS' normal practice is to limit vehicle
    operating allowances to one for households of one and two for
    households of two or more, unless the taxpayer can demonstrate
    that any additional vehicles are necessary Page 21
    GAO/GGD-99-103 Personal Bankruptcy B-282761 for producing income.
    However, debtors are not required to provide information on their
    bankruptcy financial schedules regarding whether any or all of
    their vehicles are necessary for producing income. Both Ernst &
    Young and Creighton/ABI determined the number of debtor vehicles
    by using the larger of the number of vehicles shown on schedules
    B17 or D.18 If a debtor reported no vehicles on either schedule,
    both Ernst & Young and Creighton/ABI assigned one "no car"
    operating allowance. In addition, both Ernst & Young and
    Creighton/ABI followed the general IRS practice and limited
    households of one to one operating allowance. For households of
    two or more, Crieghton/ABI also followed the general IRS practice,
    limiting such households to a maximum of two operating allowances.
    Ernst & Young placed no limit on the number of operating
    allowances for households of two or more. It included operating
    allowances for the larger of the number of cars listed on
    schedules B or D. Ernst & Young stated it did so because data were
    not available on which vehicles were necessary for producing
    income. We found no evidence that the Ernst & Young reports or the
    Creighton/ABI report double counted any portion of the
    transportation allowances used in their reports. The similarities
    and differences in the Ernst & Young and Creighton/ABI
    interpretations of the IRS transportation allowances are discussed
    in more detail in appendix I. The Creighton/ABI report stated that
    "we believe that a substantial part of the difference between
    Ernst & Young's results and our own results is due to the
    treatment of motor vehicle expense." The Creighton/ABI report
    noted that had it used Ernst and Young's interpretation of the
    transportation allowance under H.R. 3150, its estimate of "can-
    pay" debtors would have been about twice as large--6.78 percent
    rather than 3.6 percent. Despite the methodological differences in
    each report, and the different Similarities and Differences years
    from which the samples were drawn, there is considerable
    similarity in Incomes and Debts              in the
    characteristics of those debtors in each report's sample who would
    Between "Can-Pay" and             not be required to file under
    chapter 13 (see table 5). The amount of the "Can't Pay" Debtors
    median income for these "can't pay" debtors was $20,136 to
    $21,204. Similarly, the median amount of unsecured nonpriority
    debts for the "can't pay" debtors was $20,303 to $23,570. The data
    for the "can-pay" debtors was somewhat more varied. The median
    household income of the "can- 17 Schedule B-Personal Property. 18
    Schedule D-Creditors Holding Secured Claims. Page 22
    GAO/GGD-99-103 Personal Bankruptcy B-282761 pay" debtors ranged
    from $44,738 and $52,080. The median amount of unsecured
    nonpriority debt for these debtors ran from $30,813 to $39,085.
    Table 5:  Median Household Income and    Debtor
    Ernst & Young Ernst & Young Creighton/ABI
    EOUST Median Unsecured Nonpriority Debts of    characteristics
    (March 1998)          (March 1999)         (March 1999)
    (January 1999) Bankruptcy Debtors Who Would and         Year from
    which Would Not Be Required to File Under      sample of Chapter
    13, as Determined by Four        debtors was
    Cases closed in Reports on Debtor Repayment Capacity     drawn
    1997 filings         1997 filings       1995 filings first half of
    1998 Debtor's median family income All debtors in
    $22,290a             $22,290a           $21,264
    $22,800b sample Debtors who                       20,417
    21,204            20,688                 20,136 would not be
    required to file under chapter 13 Debtors who
    44,738               51,974            52,080
    46,350 would be required to file under chapter 13 National median
    35,492               35,492            40,611
    35,492 household income Debtor's median unsecured nonpriority debt
    All debtors in                    24,611               24,405
    20,581                 23,190 sample Debtors who
    23,570               23,472            20,303
    21,508c would not be required to file under chapter 13 Debtors who
    30,813               39,085            33,526
    34,680d would be required to file under chapter 13 aNot in
    published report; data separately provided to GAO. bNot in initial
    report; data separately provided to GAO. cIncluded debtors who
    fell below the median income thresholds set in both H.R. 3150 and
    S.1301. dIncluded the 300 debtors whose household incomes were
    above the median income thresholds set in both S.1301 and H.R.
    3150, after deducting business expenses, child support and alimony
    payments, and day care expenses listed on schedule J, plus
    priority debt payments listed on schedule. Source: Ernst & Young,
    Creighton/ABI, and EOUST reports and additional data provided by
    Ernst & Young and EOUST. The 1998 Ernst & Young report did not
    include any allowance for debtor Differences in Debtor
    attorney fees or the costs of administering a chapter 13 repayment
    plan. Attorney Fee and                         The Creighton/ABI
    report and the 1999 Ernst & Young report based their
    Administrative Costs                     attorney fee estimates on
    the same 1996 report that found that the average total debtor
    attorney fee in chapter 13 cases was $1,281, of which $428 was
    Page 23
    GAO/GGD-99-103 Personal Bankruptcy B-282761 paid up front and the
    $800 balance through the repayment plan (subject to the trustee's
    percentage fee). Based on this report, the Creighton/ABI report
    assumed that debtor attorney fees would add about $800, or $13 per
    month, to the debtor's monthly expenses. The 1999 Ernst & Young
    report assumed that debtors who were required to file under
    chapter 13 would incur an average attorney fee of $1,281. The
    report treated as an unsecured nonpriority debt any difference
    between this total and the amount the debtor indicated on the
    bankruptcy petition that he or she had already paid an attorney.
    If no amount was indicated as already paid, Ernst & Young assumed
    that the debtor owed $800-the same as Creighton/ABI. The 1999
    Ernst & Young report and the Creighton/ABI report both included
    estimates of chapter 13 administrative expenses. Each report
    assumed that administrative expenses could consume about 5.6
    percent of debtor debt payments under a chapter 13 plan-the 1995
    average chapter 13 trustee fees as a percentage of disbursements
    to creditors. However, each report applied this percentage
    somewhat differently. The 1999 Ernst & Young report included three
    different estimates of these costs-$92 million, $138 million, and
    $249 million--based on three different assumptions (see app. I).
    The Creighton/ABI report assumed that administrative expenses
    would be 5.6 percent of debtor payments on unsecured priority
    debts, unsecured nonpriority debts, and secured debts (other than
    home mortgages and other real estate claims of $20,000 or more).
    The Ernst & Young, Creighton/ABI, and EOUST reports made a
    reasonably Differences in                   careful effort to
    apply the provisions of proposed legislation as they Proposed
    Legislation             interpreted them and developed estimates
    of the percentage of chapter 7 debtors who could potentially repay
    a specific portion of their unsecured and Methodologies
    nonprority debts. Based on the data available to us, the reports
    reached Used Yielded Different different estimates of "can-pay"
    debtors principally because each report Estimates of Debtor
    used different and noncomparable samples of debtors, different
    proposed Repayment Capacity               "needs-based"
    legislative provisions, and different methods and assumptions for
    determining debtors' allowable living expenses. Together, the
    reports illustrate how the different methods and assumptions used
    to identify "can-pay" debtors can affect the results of the
    analysis. The March 1998 and March 1999 Ernst & Young reports
    estimated that 15 percent and 10 percent, respectively, of chapter
    7 debtors could be required to file under chapter 13 rather than
    chapter 7. Both reports used the same sample and the same method
    of determining debtors' allowable living expenses. The differences
    between the two estimate were the result of two changes in the
    methodology used in the March 1999 report-both resulting from the
    different "needs-based" provisions of H.R. 833 compared Page 24
    GAO/GGD-99-103 Personal Bankruptcy B-282761 with those of H.R.
    3150. The March Ernst & Young 1999 report used a higher median
    income threshold to screen debtors and also used an unsecured
    nonpriority debt repayment threshold of $5,000 or 25 percent,
    whichever was less. The March 1998 report used a median income
    screen of more than 75 percent of the median and an unsecured
    nonpriority debt repayment threshold of 20 percent. The 1999 Ernst
    & Young report did not discuss the contribution of each of these
    changes to the March 1999 report's revised estimate of "can-pay"
    debtors, and because Ernst & Young did not provide us their data,
    we had no basis for assessing the contribution of each change to
    the 1999 report's estimates. The 1998 Ernst & Young and
    Creighton/ABI reports were based on different versions of H.R.
    3150. Ernst & Young used the H.R. 3150 as introduced in early
    1998, while Creighton/ABI used the version that passed the House
    in June 1998. One of the differences between the two versions of
    the bill was the median household income test used to screen
    debtors for further repayment capacity analysis. The later version
    of H.R. 3150 used in the Creighton/ABI report (1) included
    different Census Bureau tables with generally higher household
    incomes and (2) required that "can- pay" debtors have at least 100
    percent of the median household income used for screening debtors.
    The version of H.R. 3150 used in the 1998 Ernst & Young report
    required debtors to have household incomes of 75 percent of the
    median income standards used for comparison. Data provided by
    Ernst & Young and Creighton/ABI illustrate how a change in just
    one variable can affect the estimates in the reports we reviewed.
    According to Ernst & Young, using the higher income standards in
    the June 1998 version of H.R. 3150 would have reduced its March
    1998 report's estimate of "can-pay" debtors from 15 percent to 10
    percent. Conversely, the Creighton/ABI report noted that if it had
    used the same interpretation of the IRS transportation ownership
    allowance as Ernst & Young, its estimate of "can-pay" debtors
    would have been 6.8 percent rather than 3.6 percent. Other changes
    may have a marginal effect, although they are important in fully
    understanding the potential benefit to creditors of implementing
    needs-based bankruptcy reform. For example, in its estimates, the
    1998 Ernst & Young report did not include any allowance for debtor
    attorney fees and chapter 13 administrative costs that accompany
    chapter 13 repayment plans. However, according to Creighton/ABI,
    including such fees and costs had little effect on its estimate of
    "can-pay" debtors. Page 25
    GAO/GGD-99-103 Personal Bankruptcy B-282761 The EOUST report
    represents an effort to simplify the analysis required to identify
    "can-pay" debtors. EOUST has an interest in a simplified approach,
    since it would be responsible for overseeing the implementation of
    a needs-based approach to personal bankruptcy. EOUST's estimate of
    the percentage of "can-pay" debtors was closer to that of Ernst &
    Young than to Creighton/ABI's, but its estimate of the amount of
    debt that could actually be repaid was closer to Creighton/ABI's-
    about $1 billion. EOUST also provided data to us that illustrated
    the impact of changed assumptions on the estimate of "can-pay"
    debtors in a sample. The authors reported that 12.2 percent of the
    EOUST debtor sample had sufficient income, after expenses and
    payments on unsecured priority debt, to pay 20 percent of their
    unsecured nonpriority debt, and 13.4 percent of the sample could
    pay $5,000 or 25 percent (whichever was less) of their unsecured
    nonpriority debt. The EOUST report assumed that debtors would pay
    their unsecured nonpriority debts from that portion of their gross
    income that was above the national median. EOUST agreed with
    Creighton/ABI that it was likely that substantially fewer than 100
    percent of the "can-pay" debtors would complete their 5- year
    repayment plans due to job loss, divorce, or other events that
    affected their income, expenses, or both. As a result, EOUST
    thought it likely that the actual amount that could be collected
    from the "can-pay" debtors in its sample was closer to $1 billion
    than $3.76 billion. The higher estimate assumed that all of the
    "can-pay" debtors in the EOUST sample would devote 100 percent of
    their available net monthly income, no matter how small, to debt
    repayment over 5 years. Each of the reports represents a
    reasonably careful effort to estimate the Conclusions
    percentage of chapter 7 debtors in their respective samples who
    had sufficient income, after allowable living expenses, to pay a
    substantial portion of their debts--100 percent of all outstanding
    debts except for unsecured nonpriority debt and most home
    mortgages. However, each report assumed that the "can-pay" debtors
    would continue to pay their monthly mortgage payments, and
    included such payments in debtors' allowable living expenses. Each
    report's analysis rests on three assumptions, which have not been
    validated, about bankruptcy debtors' reported financial data,
    future income and expenses, and repayment plan completion rates.
    Although proposed needs-based legislation specified the use of the
    second and third assumptions for use in means-testing chapter 7
    debtors, each of these assumptions is open to question. Each
    report also used different methods of analyzing debtors' living
    expenses and debt repayment capacity. Page 26
    GAO/GGD-99-103 Personal Bankruptcy B-282761 Together, these
    reports demonstrate the extent to which the estimates of debtor
    repayment capacity are dependent upon the income selection
    criteria and assumptions used in the analysis. Changes in only one
    variable can have a notable effect on the results. Moreover, the
    Creighton/ABI and EOUST reports discuss some of the potential
    variables that could affect the actual amount paid to creditors
    under needs-based bankruptcy. Because it was not their objective,
    none of the reports attempted to estimate the potential net gain
    to creditors (secured and unsecured) under needs-based bankruptcy.
    Which report most accurately reflects what would happen under
    chapter 7 if needs-based bankruptcy reform were enacted is
    unknown. The actual number of debtors who would be required to
    file under chapter 13, the number who would complete their 5-year
    repayment plans as initially confirmed by the bankruptcy court,
    and the amount of debt repaid will depend upon the details of any
    legislation eventually enacted and its implementation. We met with
    Ernst & Young's representatives, including Thomas Neubig, Comments
    from the                  National Director, Policy Economics and
    Quantitative Analysis, on May 28, Authors of the Four
    1999, to discuss their comments on the draft report. Mr. Neubig,
    on behalf of Ernst & Young; Professors Marianne Culhane and
    Michaela White, Reports and Our                    authors of the
    Creighton/ABI report; and Mr. Joseph Guzinski, Assistant
    Evaluation                         Director of EOUST, provided
    written comments on our report (see app. III through V). Ernst &
    Young and the authors of the Creighton/ABI report also separately
    provided technical comments on the report that we incorporated as
    appropriate. EOUST stated that we had accurately described its
    report and had no suggested changes for the report. The specific
    comments of Ernst & Young and the authors of the Creighton/ABI
    report are discussed and evaluated at the end of appendixes III
    and IV, respectively. We focus here on Ernst & Young's and the
    Creighton/ABI authors' major comments and our evaluation of those
    comments. Ernst & Young's written comments included five major
    points. First, they Ernst & Young's Comments stated that our draft
    report did not sufficiently focus on the similarities in and Our
    Evaluation                 the findings of the four reports and,
    specifically, that each of the four reports found that "tens of
    thousands of above-median income chapter 7 debtors could repay a
    significant portion of their debts under needs-based bankruptcy
    proposals." Second, Ernst & Young noted that our discussion
    focused on the variables that could affect each report's estimates
    rather than on distinguishing which report's estimates were based
    on reasonable adherence to proposed legislation and reasonable
    assumptions. Third, Ernst & Young asserted that we should have
    assessed the reports based on Page 27
    GAO/GGD-99-103 Personal Bankruptcy B-282761 which one(s) most
    closely modeled the "reasonable" impact of the proposed
    legislation as drafted. Fourth, Ernst & Young said that we did not
    make clear that the Creighton/ABI's estimates cannot be projected
    nationally and also criticized the Creighton/ABI method of
    determining transportation ownership allowances. Finally, Ernst &
    Young provided information on its sample of 1997 chapter 13 case
    filings that it said showed that, when combined with the
    provisions of needs-based bankruptcy, would probably result in a
    significantly higher repayment plan completion rate for "can-pay"
    debtors. With regard to Ernst & Young's comment that we did not
    sufficiently highlight the similarities in the reports, we believe
    our report fully discusses the similarities and differences in the
    methodologies in the four reports that affected their respective
    estimates. As we noted, a change in a single assumption or
    variable could have a significant effect on each of the report's
    estimates. Although each report found that some portion of the
    chapter 7 debtors in their samples were "can-pay" debtors, the
    reports did not agree on whether these "can-pay" debtors could in
    fact repay the specified minimum portion of their unsecured
    nonpriority debts over 5 years. The Creighton/ABI and EOUST
    reports specifically asserted that the formula used to determine
    the amount of debts that "can-pay" debtors could potentially repay
    was unrealistic and that the actual return to unsecured
    nonpriority creditors would be less than the formula indicated.
    With regard to our focus on the variables and assumptions used in
    each report, we believe that the combined effect of the three
    assumptions used in the "can-pay" formula may lead to a somewhat
    optimistic estimate of the amount of debt "can-pay" debtors would
    repay. Two of these assumptions were particularly important in
    each report's analysis: (1) "can-pay" debtors' living expenses, as
    determined under the formula, would remain unchanged for the
    entire 5-year repayment period, and (2) 100 percent of the "can-
    pay" debtors would complete their repayment plans without
    modification. These two assumptions were based on the means-
    testing criteria specified in proposed legislation for use in
    identifying "can-pay" debtors. However, there is no empirical
    basis for either assumption. Historically, about 36 percent of
    chapter 13 debtors have completed their repayment plans. There is
    no basis for assuming that the implementation of needs-based
    bankruptcy would raise that rate to 100 percent. It seems likely
    that the financial circumstances of at least some of the "can-pay"
    debtors would change during the 5-year repayment period. These
    changes could increase or decrease the debtor's ability to pay his
    or her debts. At least some debtors are unlikely to be able to
    complete their repayment Page 28
    GAO/GGD-99-103 Personal Bankruptcy B-282761 plans for such reasons
    as death, divorce, or unemployment. Since many economic factors
    can change in a debtor's financial situation during 5 years, it
    would seem prudent to base any policy decisions on a wider range
    of assumptions than the somewhat optimistic set of assumptions
    used for the principal estimates in these reports. Therefore, we
    continue to believe that any estimates based on these assumptions
    should be viewed with caution. Ernst & Young stated that we should
    have assessed each report with regard to which report most closely
    modeled the "reasonable" impact of proposed legislation as
    drafted, and that its reports meet that criterion. The Ernst &
    Young statement is principally based on the differences between
    its interpretation and Creighton/ABI's interpretation of the IRS
    transportation ownership allowance. Creighton/ABI's interpretation
    led to a lower estimate of "can-pay" debtors than did Ernst &
    Young's interpretation. This issue is fully discussed in our
    report, including appendix I. We believe it is important that
    policymakers have the information necessary to fully understand
    the methodologies of each report and the effect the similarities
    and differences have on each report's estimates. Moreover, each
    report made assumptions that were not specifically required by the
    underlying proposed legislation used in its analysis. For example,
    Ernst & Young's method of calculating interest on secured debts
    was not specified in either H.R. 3150 or H.R. 833. In addition,
    not every provision of proposed needs-based legislation that could
    have affected each report's analysis and estimates was found
    within the needs-based formula itself. For example, H.R. 833 as
    drafted provides in general that for personal property purchased
    within 5 years of filing for bankruptcy, the amount of the secured
    creditor's claim would not be less than the total amount remaining
    to be paid under the terms of the loan contract, including
    interest. This is the amount of the secured creditor's claim that
    would have to be paid in full under needs-based bankruptcy. Yet
    this may not be the same amount as the amount affected debtors
    listed on their financial schedules. To the extent that the amount
    of such debt listed by any affected debtors did not include the
    remaining unpaid interest owed under the contract, Ernst & Young
    would have understated the amount of the secured claims for such
    debtors, understated secured debt payments and, thus, overstated
    the amount of income available for payment of unsecured
    nonpriority debts. Ernst & Young did not mention this provision in
    its March 1999 report or its potential effect on the estimates in
    that report. Page 29                                      GAO/GGD-
    99-103 Personal Bankruptcy B-282761 With regard to the
    Creighton/ABI sample, our report clearly states that the sample
    cannot be used to make national estimates. However, contrary to
    Ernst & Young's statement in its comments, the Creighton/ABI
    sample is a statistically valid probability sample from the seven
    districts used in its analysis. Consequently, the results of the
    sample can be projected to the population of cases in those seven
    districts. In this characteristic, the Creighton/ABI sample is
    different from the Credit Research Center sample, also mentioned
    in Ernst & Young's comments. That sample was not a statistically
    valid probability sample from the 13 districts used in the sample.
    With regard to Ernst & Young's new data on chapter 13 cases and
    their relevance to the likelihood that a "significantly higher"
    percentage of can- pay debtors would complete their chapter 13
    plans, we note that these chapter 13 data had not been previously
    provided to us or publicly available. Consequently, we have not
    had an opportunity to review them. Ernst & Young stated that its
    data showed the median income of "can-pay" debtors was
    substantially higher than that for the chapter 13 debtors in its
    1997 sample. Ernst & Young states that this higher income,
    combined with the "needs-based" restrictions on debtors' ability
    to move from chapter 13 to chapter 7, would probably result in a
    "significantly higher" chapter 13 completion rate for "can-pay"
    debtors. Although we have not had an opportunity to review these
    data, we have two basic observations. First, current bankruptcy
    law provides that chapter 13 repayment plans will be for 3 years
    unless for cause the bankruptcy court approves a period not to
    exceed 5 years. The repayment estimates of the four reports were
    based on a 5-year repayment plan, 2 years longer than is now the
    case unless extended for cause. This provides 2 additional years
    in which debtors could experience a change in financial
    circumstances that could affect their ability to complete their
    repayment plans. Second, the Ernst & Young data do not alter our
    basic point-that the percentage of "can-pay" debtors who complete
    their 5-year repayment plans is unlikely to be 100 percent. There
    is no empirical basis for assuming that debtors' financial
    circumstances would remain unchanged during the course of a 5-year
    repayment period, that none of the repayment plans would need to
    be modified during that 5-year period, and that 100 percent of
    "can-pay" debtors would complete their 5-year repayment plans
    (modified or not). No one knows why some debtors complete their
    repayment plans and others do not. One reason could be variations
    in the amount of debt that the repayment plans anticipate the
    debtors would Page 30
    GAO/GGD-99-103 Personal Bankruptcy B-282761 repay. For example, in
    the historical study cited in our report, the bankruptcy district
    with the highest completion rate-about 57 percent-- permitted
    debtors to enter into repayment plans in which they paid as little
    as 5 percent of the debt owed to creditors. This is substantially
    less than the percentage that would be required under needs-based
    bankruptcy. For those debtors who fail to complete their plans,
    the return to creditors is likely to be less than estimated in
    these four reports. The Creighton/ABI authors made several points
    in their comments. First, Comments of Creighton/ABI they discussed
    their sample of cases, noting that although theirs was not a
    Report's Authors and Our          national sample, it was a random
    sample for the seven districts that Evaluation
    provided more information on the debtors in each district than did
    Ernst & Young for the debtors in its individual districts.
    Moreover, they continued, insistence on national samples for
    bankruptcy studies, which require extensive collection of case
    file data, would limit participation in public policy debate to
    those with the very deepest pockets. Second, the authors stated
    that they had reweighted their sample based on updated unpublished
    data we provided and noted that the reweighting had minimal effect
    on the report's weighted estimates.  Third, they stated that their
    method of calculating interest on secured claims, rather than
    Ernst & Young's, was the correct approach as a matter of law and
    bankruptcy practice. Finally, they noted that reasonable people
    could differ over the interpretation of H.R. 3150 and the use of
    the IRS transportation ownership allowance. The authors noted that
    Ernst & Young's interpretation provided no allowance for leased
    vehicles, although the IRS expense allowances do provide an
    ownership allowance for leased vehicles. With regard to the
    Creighton/ABI sample, we agree that it is a statistically valid
    probability sample whose results can be projected to the
    population of all chapter 7 cases filed in 1995 in the seven
    districts from which the sample was drawn. Although it is likely
    the Creighton/ABI's sample included more cases in each of its
    seven districts than did Ernst & Young's sample, both reports
    focused their analysis on estimates projected to their respective
    populations, not to individual districts. We agree that
    statistically valid probability samples of less than national
    scope, such as Creighton/ABI's, can be useful for policymaking.
    The Creighton/ABI sample, based on data from a different year than
    Ernst & Young's, provides useful information. Moreover, it is
    possible to make some comparisons to the Ernst & Young sample's
    results. For example, the median income of the "can't pay" and
    "can-pay" debtors in the Creighton/ABI sample and Ernst & Young
    sample are similar, although their data are for different years.
    The principal limitation of this Page 31
    GAO/GGD-99-103 Personal Bankruptcy B-282761 comparison is that one
    cannot statistically estimate whether the results for the
    Creighton/ABI sample would be basically the same or different for
    the 1995 national population of chapter 7 debtors. Second, with
    regard to the reweighting of the Creighton/ABI sample, we agree
    that the results of the reweighting minimally affected the
    report's estimates. The reweighting changed Creighton/ABI's
    original weighted estimates by less than 0.1 percent. With regard
    to Creighton/ABI's assertion that the Ernst & Young method of
    imputing interest on secured claims is incorrect, whether the
    Ernst & Young method is incorrect depends upon the assumptions
    made about the repayment of secured debt. As the Creighton/ABI
    authors noted in their comments, under current bankruptcy law and
    practice the amount of interest paid on secured claims depends on
    the length of time in which the secured claim is repaid.
    Generally, the longer the repayment period, the greater the
    interest paid on the secured claim. If under needs-based
    bankruptcy, secured claims payments were spread over 60 months,
    Creighton/ABI's method is the appropriate one for imputing
    interest on secured claims. Given that the needs-based "can-pay"
    formula amortizes secured claims over 60 months, it is not
    unreasonable to assume that such debts would be repaid over 60
    months. However, if under needs-based bankruptcy secured claims
    were generally paid in less than 60 months, then the interest paid
    would be less. Essentially, the Ernst & Young method assumed that
    most secured debts would be paid in 24 months. This may or may not
    be true under needs- based bankruptcy. However, if it were true,
    the Ernst & Young method of imputing interest on secured claims
    would be appropriate. The difference in the two methods would have
    an effect on each report's estimates. Compared to the
    Creighton/ABI method of imputing interest for 60 months, the Ernst
    & Young method of imputing interest for 24 months would have
    resulted in lower secured debt payments and thus greater income
    available for unsecured nonpriority debt payments. With regard to
    Creighton/ABI's interpretation of the IRS transportation ownership
    allowance under H.R. 3150, we have noted that the Creighton/ABI
    method provided a higher ownership allowance than either the IRS
    would permit or Ernst & Young permitted for debt-free vehicles and
    for debtors whose vehicle debt payments are less than the
    applicable IRS maximum allowance. We agree it is possible that
    adjustments may need to be made in the 5-year repayment plans of
    debtors who incur major vehicle repair or replacement costs. To
    the extent that this proves Page 32
    GAO/GGD-99-103 Personal Bankruptcy B-282761 necessary, Ernst &
    Young underestimated the amount of debt that would actually be
    repaid under needs-based bankruptcy. On the other hand, to the
    extent that such major repair and replacement costs prove to be
    less than those assumed in the Creighton/ABI report, that report
    would have underestimated the amount of income that would be
    available for debt repayment. Finally, it not clear that either
    Ernst & Young or Creighton/ABI was able to accurately capture
    vehicle lease costs because of the lack of consistent data in the
    debtors' schedules. The correct amount to include was the total
    amount remaining to be paid on the lease. To the extent that the
    amounts remaining to be repaid on unexpired vehicle leases were
    not listed on debtors' schedules of secured debt or unsecured
    priority debt, neither Ernst & Young nor Creighton/ABI captured
    the amount remaining to be paid on vehicle leases. As debt
    payments, the monthly lease payments under needs-based bankruptcy
    could exceed the IRS maximum transportation ownership allowances.
    In addition, neither Ernst & Young nor Creighton/ABI would have
    captured the appropriate amount of the unexpired lease where the
    debtor listed only the monthly lease payment on the debt
    schedules. Therefore, it is not clear that either report was able
    to accurately capture the amount of unexpired leases or the
    appropriate monthly payments on such leases for those debtors who
    were leasing vehicles at the time they filed for bankruptcy. We
    are providing copies of this report to Senator Robert Torricelli,
    Ranking Minority Member of your Subcommittee; Senators Orrin Hatch
    and Patrick Leahy, Chairman and Ranking Minority Member of the
    Senate Committee on the Judiciary; Representatives George Gekas
    and Jerrold Nadler, Chairman and Ranking Minority Member of the
    Subcommittee on Commercial and Administrative Law, House Committee
    on the Judiciary; Page 33
    GAO/GGD-99-103 Personal Bankruptcy B-282761 and to the authors of
    the two Ernst & Young reports, the Creighton/ABI report, and EOUST
    report. We will also make copies available to others upon request.
    Major contributors to this report are acknowledged in appendix VI.
    If you have any questions about this report, please call me on
    (202) 512-8777. Richard M. Stana Associate Director,
    Administration of Justice Issues Page 34
    GAO/GGD-99-103 Personal Bankruptcy Page 35    GAO/GGD-99-103
    Personal Bankruptcy Contents 1 Letter 40 Appendix I
    Three Assumptions Used in All Three Reports
    40 Methodological           Similarities and Differences in the
    Ernst & Young and                     41 Creighton/ABI Reports
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity 64 Appendix II              EOUST
    Debtor Sample
    64 Description of           Description of the EOUST Report's
    Methodology                             65 Methodology Used in the
    Report by the Executive Office for the U.S. Trustees 69 Appendix
    III             GAO Comments
    73 Comments From Ernst & Young 80 Appendix IV              GAO
    Comments
    86 Comments From the Authors of the Creighton/ABI Report 90
    Appendix V Comments From the Executive Office for U.S. Trustees
    Page 36                                    GAO/GGD-99-103 Personal
    Bankruptcy Contents 91 Appendix VI GAO Contacts and Staff
    Acknowledgments Table 1: "Needs-Based" Provisions in Congressional
    Bills                        11 Tables                As Used in
    Four Reports on Bankruptcy Debtors' Repayment Capacity Table 2:
    Census Bureau Tables and Actual Median
    13 Household Incomes, by Household Size, That Each Report Would
    Have Used Had All Four Reports Used the 1997 Census Tables on
    Household Incomes Table 3: Results of Four Reports Analyses of the
    15 Percentage of Chapter 7 Bankruptcy Debtors Who Could Pay A
    Substantial Portion of their Unsecured Nonpriority Debts Table 4:
    Basic Description of IRS Collection Financial
    19 Standards Table 5:  Median Household Income and Median
    23 Unsecured Nonpriority Debts of Bankruptcy Debtors Who Would and
    Would Not Be Required to File Under Chapter 13, as Determined by
    Four Reports on Debtor Repayment Capacity Table I.1:
    Methodological Similarities and Differences in
    42 the Two Ernst & Young Reports and the Creighton/ABI Report on
    Bankruptcy Debtors' Repayment Capacity Table I.2: How the IRS,
    Ernst & Young, and                                      58
    Creighton/ABI Would Have Determined the Transportation Ownership
    Allowance for Hypothetical Debtors in Boston, Massachusetts, Using
    the Current IRS Collection Financial Standards Allowances
    Abbreviations AOUSC          Administrative Office of the United
    States Courts BLS            Bureau of Labor Statistics EOUSC
    EOUST Page 37                                          GAO/GGD-99-
    103 Personal Bankruptcy Contents IRS         Internal Revenue
    Service Page 38                                 GAO/GGD-99-103
    Personal Bankruptcy Page 39    GAO/GGD-99-103 Personal Bankruptcy
    Appendix I Methodological Similarities and Differences in Three
    Reports on Bankruptcy Debtors' Repayment Capacity This appendix
    describes and discusses the methodological similarities and
    differences in the March 1998 Ernst & Young, March 1999 Ernst &
    Young, and March 1999 Creighton/ABI reports on bankruptcy debtors'
    ability to pay their debts. Because its methodology is distinctly
    different from the methodologies of these three reports, the EOUST
    report is discussed separately in appendix II. In estimating the
    proportion of chapter 7 debtors who could pay a Three Assumptions
    substantial portion of their debts, all three reports used three
    assumptions Used in All Three    that have not been validated: (1)
    the information on debtors' income, expenses, and debts, as
    reported in the debtors' financial schedules, was Reports
    accurate and could be used to project debtors' income and expenses
    over a 5-year period; (2) debtors' income and expenses would
    remain stable over a 5-year debt repayment period; and (3) all
    debtors required to enter a 5-year repayment plan under chapter 13
    would successfully complete that plan. Each report noted that the
    second and third assumptions were used because the proposed
    "needs-based" legislation specified their use in identifying "can-
    pay" debtors and estimating the amount of unsecured nonpriority
    debt they could repay. Although the data from debtors' financial
    schedules were the only publicly available data for assessing
    debtors' repayment capacity, the accuracy of the data in debtors'
    financial schedules is unknown. Moreover, an AOUSC study of about
    953,000 debtors who voluntarily entered chapter 13 found that only
    about 36 percent completed their repayment plans and received a
    discharge from the bankruptcy court. The reasons for this low
    completion rate are unknown. Each report noted that a debtor's
    financial circumstances could change during a 5-year repayment
    period, and that any changes could affect a debtor's repayment
    capacity. Creighton/ABI and EOUST specifically asserted that it
    was unrealistic to assume debtors' income and expenses would
    remain stable for 5 years, and that all debtors would complete
    their repayment plans. If "needs-based" bankruptcy provisions were
    enacted, the repayment plan completion rate for "can-pay" debtors
    could be higher or lower than the rate found by AOUSC. However,
    there is no empirical basis for assuming that the completion rate
    would be 100 percent. To the extent that the completion rate is
    less than 100 percent, the amount of debt that the "can-pay"
    debtors could repay may be less than that estimated in the three
    reports. Moreover, to the extent that debtors who complete their
    5-year repayment plans have them modified during those 5 years,
    the amount of debt actually repaid could be more or less than that
    assumed in these reports' "needs-based" estimates. It would be
    more for those debtors Page 40
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity whose financial circumstances improve
    and could pay more than anticipated. It would be less for those
    debtors' whose financial circumstances deteriorate and could pay
    less than anticipated. The two Ernst & Young reports and the
    Creighton/ABI report attempted to Similarities and
    apply the "needs-based" consumer bankruptcy provisions of
    different Differences in the            proposed bankruptcy bills
    to estimate the number of debtors in their respective samples who
    would be required to file under chapter 13 rather Ernst & Young
    and             than chapter 7 and enter a 5-year repayment plan.
    The major steps in each Creighton/ABI Reports report's analysis
    were the following: *  identify the debtors whose gross annual
    income, adjusted for household size, meets or exceeds a specific
    median national household income for households of the same size
    (all three reports);1 *  for those debtors who passed the median
    income test, determine their allowable living expenses using data
    from the debtors' expense schedules and the IRS collection
    financial standards (all three reports); *  for those debtors who
    passed the median income test, determine their total nonhousing
    secured debts, total unsecured priority debts, and total unsecured
    nonpriority debts (all three reports); *  for those debtors who
    passed the median income threshold, determine whether they had
    more than $50 in projected net monthly income after paying
    allowable living expenses and paying all of their nonhousing
    secured debt and unsecured priority debt over 5 years (1998 Ernst
    & Young and Creighton/ABI); *  for those debtors who passed both
    the median annual income test and the monthly net income test,
    determine whether they could repay at least 20 percent of their
    unsecured nonpriority debt over 5 years if they devoted 100
    percent of their projected net monthly income to the repayment of
    their unsecured nonpriority debt (1998 Ernst & Young and
    Creighton/ABI); *  for those debtors with household incomes at or
    above the median income threshold for households of comparable
    size, determine whether the debtors had sufficient income, after
    paying allowable living expenses, to pay all their nonhousing
    secured debt, all their unsecured priority debt, and $5,000 or 25
    percent, whichever was less, of their unsecured nonpriority debt
    over 5 years (1999 Ernst & Young). Table I.1 details the
    similarities and differences in the repayment capacity
    methodologies used in each of the two Ernst & Young reports and
    the 1 Under H.R. 833 as introduced, debtors, regardless of
    household income, could be required to file under chapter 13 if it
    was determined that they could pay 25 percent or $5,000 of their
    unsecured nonpriority debt, whichever was less. Page 41
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity Creighton/ABI report. The EOUST report
    is not shown in table I.1 because it did not use many of the steps
    described in the table. For example, EOUST did not use the IRS
    collection financial standards to determine debtors' allowable
    living expenses. The EOUST report is discussed in detail in
    appendix II. Table I.1: Methodological Similarities and
    Differences in the Two Ernst & Young Reports and the Creighton/ABI
    Report on Bankruptcy Debtors' Repayment Capacity Data used or
    calculation made                 Ernst & Young
    Ernst & Young                        Creighton /ABI (March 1998)
    (March 1999)                            (March 1999) Debtor sample
    used for analysis National probability sample of          Same
    Probability sample of debtors who debtors who filed under chapter
    7                                         filed under chapter 7 in
    calendar in calendar year 1997.
    year 1995 in each of seven judgmentally selected districts.
    Proposed legislation used in      H.R. 3150 as introduced in
    H.R. 833 as introduced in           H.R. 3150 as passed by the
    analysis                          February 1998.
    February 1999.                      House of Representatives, June
    10, 1998. Determination of debtors' gross income Gross monthly
    income              Estimated current monthly gross       Same
    Same income from schedule I.a Gross annual income
    Multiplied gross estimated            Same
    Same monthly income on schedule I by 12. Determination of family
    size used For debtors who filed as              Same
    Same for median income comparison      individuals, added one, and
    for debtors who filed jointly, added two, to the number of
    dependents listed on schedule I. Initial income screen used to
    Debtors' gross annual income          Debtors' gross annual income
    Debtors' gross annual income determine whether debtors
    exceeded 75 percent of 1996           exceeded 100 percent of 1996
    was 100 percent or more of 1993 would be subject to further
    annual median national income         annual median national
    income national median income for family analysis of their
    repayment       for households of comparable          for a family
    household of           household of comparable size as capacity
    size as reported by U.S. Census       comparable size as reported
    by reported by U.S Census Bureau. Bureau.b
    U.S. Census Bureau.c For one- For one-person households, used
    person households, used             median income for households
    median income for households with one earner. Families of more
    with one earner.d Families of       than four persons were
    assigned more than four members were the median income for a four-
    assigned the Census Bureau          person family. table's annual
    median income for a four-person family plus $583 annually for each
    additional family member. Determination of debtors' allowable
    living expenses Housing and utility expenses for IRS standard
    housing and utility       Same                                Same
    nonhomeowners                     allowance by county of
    residence.e Page 42
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity Data used or calculation made
    Ernst & Young                         Ernst & Young
    Creighton /ABI (March 1998)                         (March 1999)
    (March 1999) Housing and utility expenses for Full mortgage
    payment (except           Same                         Full
    mortgage payment (included homeowners                       as
    noted below), home
    property tax and insurance if not maintenance expenses, utilities
    included in mortgage payment; (electricity, heating, water, sewer,
    excluded property tax and and telephone), property taxes,
    insurance if included in mortgage and homeowner insurancef as
    payment and listed elsewhere); reported on schedule J.g
    maintenance expenses and utilities (excluding cable television) as
    listed on schedule J. Adjustments to homeowner         Used the
    full monthly mortgage          Same                         Used
    the full monthly mortgage housing and utility expenses     payment
    debtor listed on
    payment debtor listed on schedule J unless either of the
    schedule J unless the following following conditions applied:
    condition applied: 85 percent of (1) if 85 percent of the debtor's
    the debtor's reported monthly reported monthly mortgage
    mortgage payment, multiplied by payment, multiplied by 60, was
    60, was more than 110 percent of more than 110 percent of the
    total                                   the total outstanding
    mortgage outstanding mortgage debt shown
    debt shown on schedule D.h  In on schedule D,h then determined
    such cases, determined debtor's debtor's monthly mortgage
    monthly mortgage payment by payment by dividing 110 percent
    dividing 110 percent of the total of the total outstanding
    mortgage                                    outstanding mortgage
    debt by 60. debt by 60; or (2) if the debtor's income after
    allowable living expenses (excluding debt payments) was
    insufficient to pay the entire mortgage payment, then used all
    available income remaining after allowable expenses (excluding
    debt payments). For all debtors, the outstanding mortgage debt, as
    shown on schedule D, was increased by 10 percent to include
    estimated interest costs.i Transportation expenses Page 43
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity Data used or calculation made
    Ernst & Young                         Ernst & Young
    Creighton /ABI (March 1998)                         (March 1999)
    (March 1999) Monthly vehicle ownership        Used secured debt
    payment as           Same                          Used secured
    debt payment as allowance                        ownership
    allowance, with
    ownership allowance when exception of leased vehicles.
    secured debt payment was at Motor vehicle debt for all vehicles
    least as much as maximum IRS on which secured debt was owed
    allowance for household of same was totaled, 10 percent added for
    size and number of vehicles as estimated interest costs
    debtor's. Motor vehicle debt for all (equivalent to 9 percent for
    2                                       vehicles on which secured
    debt years), and the resulting total
    was owed was totaled, 24 percent amortized over 60 months to
    added for estimated interest costs determine monthly vehicle
    (equivalent to 9 percent for 5 secured debt payment. Thus, if
    years), and the resulting total there was no secured debt, there
    amortized over 60 months to was no ownership allowance. In
    determine monthly vehicle the absence of consistent
    secured debt payment. The information on schedule G,j debt
    debtor was allowed the total for leased vehicles was treated as
    monthly vehicle secured debt secured debt, unsecured priority
    payment or the maximum debt, or unsecured nonpriority
    applicable IRS ownership debt, depending on how the lease
    allowance (for one or two cars, costs were listed on the debtors'
    based on household size), schedules. For example, if listed
    whichever was higher. Used as secured debt or unsecured
    same method as Ernst & Young priority debt, amount would have
    for determining allowance for been amortized over 60 months
    leased vehicles, with one to determine monthly payment. If
    exception. If vehicle was listed on vehicle was listed on schedule
    B,k                                   schedule B, but not D (that
    is, but not D (that is, there was no
    there was no secured debt shown secured debt shown for the
    for the vehicle), the vehicle was vehicle), no ownership allowance
    considered to be debt-free and was included.
    treated like all other debt-free vehicles. However, no ownership
    allowance was included for leased vehicles if the lease was listed
    only on schedule G. For debt-free vehicles, debtors were given the
    maximum IRS ownership allowance. Ownership allowance was based on
    the number of vehicles debtors' reported on schedules B or D.
    Except for estimating secured debt payments, debtors with
    household size of one were allowed no more than one ownership
    allowance; households of two or more were allowed no more than two
    ownership allowances. Page 44
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity Data used or calculation made
    Ernst & Young                     Ernst & Young
    Creighton /ABI (March 1998)                      (March 1999)
    (March 1999) Monthly vehicle operating        Based on IRS
    standards, which          Same                             Same
    for households of one and allowance                        are
    assigned by city or county of
    households of two or more with residence. If debtor's city of
    no more than two vehicles. residence (as reported on the
    However, limited households of debtor's bankruptcy petition) had
    two or more to two operating its own IRS allowance, used
    allowances, regardless of the allowance for that city; otherwise,
    number of vehicles listed on used allowance for IRS region in
    schedules B or D. which debtor's county of residence was located.
    Operating allowance assigned based on debtor's reported number of
    vehicles.l  Debtors with household size of one were limited to one
    vehicle operating allowance. Households of two or more were
    assigned operating allowances for the larger of the number of
    vehicles listed on schedules B or D. Monthly public transportation
    Based on IRS standards. For            Same
    Same allowance                        debtors who listed no
    vehicles on schedules B or D, gave debtor one IRS  vehicle
    operating allowance for households with no vehicle.m Other living
    expenses            Used IRS national standard,            Same
    Same based on household's gross monthly income and family size,
    for housekeeping supplies, apparel and services, personal products
    and services, food, and miscellaneous items. Other necessary
    expenses         Deducted from monthly gross            Same
    Used the same deductions that income (as determined by Ernst &
    were used in the Ernst & Young Young) the following expenses as
    March 1998 report, except reported on debtors' schedules I
    disallowed debt payments and J: payroll deductions (payroll
    withheld from the paycheck, taxes, Social Security, nonhealth
    transfers into savings plan, insurance, union dues); taxes
    nonmandatory pension neither deducted from wages nor
    contributions, all payments for included in home mortgage
    dependents not at home (except payments;n alimony, charitable
    alimony and child support), and contributions, child care, other
    tuition payments. payments to dependents not living at home;
    health insurance and medical and dental expenses. Business
    expenses                Not allowed.
    Debtors allowed business         All business expenses listed on
    expenses as reported on          schedule J were allowed (whether
    schedule J-but only if debtor    or not they were supported by a
    reported business income on      supplemental detail list).  In
    schedule I.                      addition, work uniforms listed on
    schedule I were allowed. Page 45
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity Data used or calculation made
    Ernst & Young                         Ernst & Young
    Creighton /ABI (March 1998)                          (March 1999)
    (March 1999) Determination of total debts owed Home mortgage debt
    Total outstanding mortgage debt          Same
    Total outstanding home mortgage as shown on schedule D was
    debt as shown on schedule D. increased by 10 percent to include
    estimated interest costs (e.g., $100,000 was converted to
    $110,000). Other secured debt               Total secured debts
    (other than          Same                         Total secured
    debts (other than mortgage on principal residence)
    mortgage on principal residence) as shown on schedule D. Total
    as shown on schedule D. increased by 10 percent to include
    estimated interest costs (e.g., $30,000 was converted to
    $33,000).o Unsecured priority debts         Total of all debts as
    shown on           Same                         Total of all debts
    shown on schedule Ep (except for student
    schedule E (except for student loans);10 percent added to any
    loans) and the nonpriority portion back taxes listed on the
    schedule.                                    of debts for which
    only a part of The total value of all student
    the total value was listed on loans not entitled to priority
    status                                 schedule E as entitled to
    priority that were listed on schedule E
    status (such as some tax were deducted and added to the
    liabilities). total of debts listed on schedule F.q Unsecured
    nonpriority debts      Total of all debts as shown on
    Same                         Total of all debts as shown on
    schedule F, plus the value of all
    schedule F plus the value of the student loans deducted from the
    debts listed on schedule E that total debts shown on schedule E.
    were not entitled to priority status (such as student loans, or a
    portion of some tax liabilities). Determination of debtors'
    capacity to repay unsecured nonpriority debts Home mortgage debt
    Assumed debtor would maintain            Same
    Assumed debtor would maintain monthly mortgage payments as
    monthly mortgage payments as listed on schedule J, except
    listed on schedule J, except where mortgage would be paid off
    where mortgage would be paid off in less than 60 months or
    debtor's                                    in less than 60
    months.  In such income after allowable living
    cases, determined debtor's expenses was insufficient to
    monthly mortgage payment by make full mortgage payment. In
    dividing 110 percent of the total cases where mortgage debt
    outstanding mortgage debt by 60 would be paid off in less than 60
    months. months, determined debtor's monthly mortgage payment by
    dividing 110 percent of the total outstanding mortgage debt by 60
    months. Page 46
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity Data used or calculation made
    Ernst & Young                       Ernst & Young
    Creighton /ABI (March 1998)                         (March 1999)
    (March 1999) Other secured debt                Assumed total
    debts, as adjusted Same
    Assumed all nonprimary for interest, would be paid over 60
    residence real estate debts of months. Total outstanding
    less than $20,000 and all non-real nonmortgage secured debts were
    estate secured debts, as adjusted increased by 10 percent
    for interest, would be paid over (equivalent to 9 percent interest
    60 months. Nonprimary residence for 24 months) to include
    real estate debts of less than estimated interest, and the
    $20,000 and all non-real estate resulting total amortized over 60
    secured debts were grossed up months.
    by 24 percent (equivalent to 9 percent interest rate for 60
    months) and the resulting total amortized over 60 months. For
    debts of $20,000 or more secured by real property other than the
    debtor's primary residence, monthly payments were determined by
    amortizing the outstanding debt shown on schedule D over 15 years
    (or 180 months) at an interest rate of 9 percent per year.
    Unsecured priority debts          Assumed total debts (as
    Same                                 Same, but no interest
    included for adjusted) paid over 60 months.
    any debts in this category. Back taxes increased by 10 percent
    (equivalent to 9 percent interest for 24 months) to include
    estimated interest. Second income screen, if used, Debtor had
    monthly net income of None. H.R. 833 includes no
    Same as Ernst & Young March for determining debtors' capacity more
    than $50, after allowable         such screen. Next step is to
    1998 report. to repay unsecured nonpriority    living expenses
    (including any         determine debtor's debt debts
    monthly mortgage payments) and repayment capacity. repayment over
    60 months of all nonmortgage secured debt and unsecured priority
    debt. Test used for repayment of        Debtors who passed initial
    and         Likely debtors were those who Same as Ernst & Young
    March unsecured nonpriority debt        second income screen and
    could passed initial income screen                 1998 report.
    also repay at least 20 percent of      and who had sufficient
    income their unsecured nonpriority debt       after allowable
    living expenses over 60 months.                        (including
    any monthly mortgage payments) to repay over 60 months all their
    nonmortgage secured debt, all their unsecured priority debt, and
    at least $5,000 or 25 percent of total unsecured nonpriority debts
    (whichever was less). Treatment of debtor attorney fees and
    chapter 13 trustee fees Page 47
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity Data used or calculation made
    Ernst & Young                               Ernst & Young
    Creighton /ABI (March 1998)                                (March
    1999)                           (March 1999) Debtor attorney fees
    Debtor attorney fees not included Used data from same report as
    Used data from report that in analysis.
    ABI. Report found that chapter          showed that chapter 13
    debtors 13 incurred average fee of              had average unpaid
    attorney fee $1,281 in chapter 13 cases.             of $800 at
    filing. Added total of Treated as an unsecured priority $800 to
    debtor expenses and debt the difference between this amortized it
    over 60 months. average fee and the amount the The $800 was
    assumed to debtor indicated on the                 cover chapter
    13 attorney fees bankruptcy petition that he or          paid
    through the plan plus the she had paid the attorney prior
    chapter 13 trustee fee applied to to filing the bankruptcy
    petition.      these attorney debt payments. If no data in
    schedule on amount already paid to an attorney, used $800 as
    unpaid amount and amortized it over 60 months. Chapter 13 trustee
    administrative None in calculation of debtor's            Needs-
    based test did not                Applied a 5.6 percent feer to
    expenses                          debt repayment capacity. The
    incorporate trustee fees. Total         unsecured priority debts,
    debt repayment calculation was             debt repayment
    estimates are            unsecured nonpriority debts, independent
    of any trustee fees.           net of trustee fees, and based
    and secured debt (other than on three different assumptions:
    home mortgages and (1) Trustee would receive 5.6
    nonprimary residence real percent of all debt payments by estate
    claims of $20,000 or the "can-pay" debtors identified
    more). by the needs-based test, excluding debtor payments on
    mortgage debt in excess of $20,000 (estimate of $249 million in
    trustee fees paid). (2) Excluding all debtors who could repay 100
    percent of their debts-secured nonmortgage, unsecured priority,
    and unsecured nonpriority (estimate of $138 million in trustee
    fees paid). (3) Trustee would receive 5.6 percent of debtors'
    payments on unsecured debts-unsecured priority and unsecured
    nonpriority (estimate of $93 million in trustee fees paid). a
    Schedule I--Current Income of Individual Debtor(s). The schedule
    includes such categories as monthly gross wages, salary, and
    commission; payroll deductions; and income from nonwage sources,
    such as interest and dividends, alimony, and Social Security. For
    joint filers, the debtor must show the monthly gross income of
    both the debtor and his or her spouse. Line one of this form
    indicates that the information to be provided is an "estimate of
    average monthly income." b Used Census Bureau table H-11 for
    national median income by household size.  In this table, median
    income rises for households between one and four persons, peaks at
    households of four, and declines for households of more than four
    persons. The Census Bureau defines a household as all people
    occupying a housing unit. c Used Census Bureau table F-8 for
    families with two or more members. In table F-8, median income
    rises for families between two and four persons, peaks at families
    of four, and declines for families of more than four persons. The
    Census Bureau defines a family as a group of two or more people
    related by birth, marriage, or adoption who reside together.  A
    household, in contrast, includes related family members and all
    unrelated people, such as foster children, who share the housing
    unit. Page 48
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity d Used Census Bureau table H-12 (one-
    earner households) for households of one. e IRS Collection
    Financial Standards for 1997. f Homeowners' property taxes and
    insurance, as shown on Schedule J, were included whether they were
    (1) listed as included in the monthly mortgage payment, (2) listed
    separately on Schedule J, or (3) both, in which case the expenses
    were potentially counted twice. To the extent this occurred, it
    would have increased debtors' allowable expenses and decreased
    their debt repayment capacity. g Schedule J--Current Expenditures
    of Individual Debtor(s). The schedule includes such expenses as
    housing, utilities, food, clothing, medical and dental expenses,
    transportation, charitable contributions, insurance, taxes (not
    deducted from wages or included in home mortgage payments),
    alimony, and child support.  The instructions for this form note:
    "Complete this schedule by estimating the average monthly expenses
    of the debtor and debtor's family.  Pro rate any payments made bi-
    weekly, quarterly, semi-annually, or annually to show monthly
    rate." h Schedule D--Creditors Holding Secured Claims. iAccording
    to Ernst & Young, this adjustment is equivalent to the remaining
    cumulative interest on outstanding principle for an 8 percent, 30-
    year mortgage with a maturity of 2 to 3 years. j Schedule G--
    Executory Contracts and Unexpired Leases. Contracts for leased
    motor vehicles would be properly listed on this schedule, but
    debtors were not consistent with regard to the schedule on which
    vehicle lease costs were noted. According to Ernst & Young, they
    reviewed a "quality" sample of 193 debtor petitions. Of these 193
    petitions, 9 percent included vehicle leases on schedule G; 5
    percent also listed leases as secured debt on schedule D, and 2
    percent listed leases as unsecured nonpriority debt on schedule F.
    Of these 193 debtors, 6 percent identified leased vehicles on
    Schedule B. k Schedule B--Personal Property.  The instructions for
    this schedule note: "Do not include interests in executory
    contracts and unexpired leases on this schedule. List them in
    Schedule G--Executory Contracts and Unexpired Leases." l The
    debtor's number of vehicles was determined by taking the larger of
    (1) vehicles identified on schedule B (Personal Property) or (2)
    the number of secured debts identified on Schedule D (Creditors
    Holding Secured Claims) as vehicle debt. Ernst & Young and
    Creighton/ABI excluded any leased vehicles listed on Schedule G
    for debtors who did not also identify at least one vehicle on
    schedules B or D. m The IRS public transportation allowance is the
    vehicle operating allowance for households with no cars. Ernst &
    Young and Creighton/ABI used this allowance for debtors who did
    not list any vehicles on their financial schedules. n Back taxes
    may have been listed on both schedule J and schedule E (Creditors
    Holding secured Priority Claims). According to Ernst & Young, it
    was not always possible to determine from the schedules when this
    occurred.  To the extent this occurred, back taxes would be listed
    (and counted) twice--as a monthly expense on schedule J and as an
    unsecured priority debt on schedule E. oAccording to Ernst &
    Young, the 10 percent future accrued interest on nonmortage
    secured debt was the ratio of the remaining cumulative interest to
    outstanding principal for a 9 percent, 4-year automobile loan with
    2 years to maturity. p Schedule E--Creditors Holding Unsecured
    Priority Claims. This schedule includes such claims as alimony,
    child support, and back taxes. q Schedule F--Creditors Holding
    Unsecured Nonpriority Claims. This schedule includes credit card
    debts, other unsecured personal loans, and student loans. rThe
    1995 national average chapter 13 trustee fee computed as a
    percentage of disbursements as provided to Creighton/ABI by EOUST.
    Source: GAO analysis of Ernst & Young and Creighton/ABI reports
    and additional information provided by the authors of the Ernst &
    Young and Creighton/ABI reports. The Creighton/ABI sample was
    drawn from a different population than the Sampling Differences
    population from which the sample in the two Ernst & Young reports
    was drawn. The differences in the populations make it difficult to
    compare the Creighton/ABI estimates with those of the March 1998
    Ernst & Young report, which is based on substantially the same
    proposed legislation as Page 49
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity that used by Creighton/ABI. The
    principal difference-and a significant one-is that the version of
    H.R. 3150 used in the Creighton/ABI report included a higher
    median household income test than did the version of H.R. 3150
    used in the 1998 Ernst & Young repoert. The Ernst & Young reports
    were based on a national probability sample of about 2,200 drawn
    from all chapter 7 bankruptcy cases filed nationwide during
    calendar year 1997. The cases were selected randomly from the
    petitions filed in all federal bankruptcy districts largely in
    proportion to each district's total chapter 7 filings.
    Consequently, the results of the Ernst & Young reports can be
    generalized to all chapter 7 petitions filed nationwide in
    calendar year 1997. The Creighton/ABI study used chapter 7 cases
    from seven judgmentally selected bankruptcy districts.2 The
    districts used in the study were originally chosen for a different
    purpose-a study of debtors' reaffirmations of their debts. A
    debtor who files for bankruptcy may generally voluntarily choose
    to reaffirm-or agree to pay-one or more debts. As mentioned
    previously, the sample was originally chosen for a study of debtor
    reaffirmation practices in bankruptcy proceedings, including the
    effect of different permissible reaffirmation practices on
    debtors' decisions to reaffirm some of their debts.3 The report
    states that petitions from these districts had to meet the
    following four qualifications before being eligible for selection
    into the study sample: *  the petition must have been filed in
    calendar year 1995; *  the petition must have been filed as or
    converted to a chapter 7 case; *  the petition must have been
    filed by an individual or a married couple (a nonbusiness filing);
    and *  the case file had to include most schedules. 2 These
    districts were the Northern District of California, the District
    of Colorado, the Northern District of Georgia, the District of
    Massachusetts, the District of Nebraska, the Middle District of
    North Carolina, and the Western District of Wisconsin. 3 According
    to the Creighton/ABI report's authors, the seven districts were
    selected to obtain data from districts with relatively high and
    low proportions of chapter 13 filings; districts in which debtors
    who wished to reaffirm debts were required to file a written
    reaffirmation agreement with the bankruptcy court; and districts
    in which debtors could reaffirm debts by agreeing to continue
    their contractual payments (e.g., auto loan payments) without
    filing a reaffirmation agreement with the bankruptcy court. Page
    50
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity The authors randomly selected filings
    in each district that met these qualifications. The report states
    that the results were weighted to reflect the number of
    nonbusiness chapter 7 cases filed in 1995 in each district;
    however, the results should have been weighted to reflect the
    number of cases filed as or converted to chapter 7 cases. The
    authors of the Creighton/ABI report provided us with data, not
    included in the report, that indicated that 35 of the 1,041 cases
    in the report's sample were filed initially under another chapter
    (mostly chapter 13), but were closed as chapter 7 cases. Depending
    on the districts where the cases were filed, weighted adjustments
    that account for their presence in the population could have
    affected the report's results. However, we were unable to
    determine the effect of this error. We provided updated
    unpublished data to the report's authors, and they reweighted
    their estimates. The results of the reweighting show minimal
    effect on the report's estimates. The reweighting changed the
    weighted estimates by less than 0.1 percent. The report's results
    can be projected to the population of total chapter 7 filings for
    these seven bankruptcy districts. However, it cannot be used to
    make projections to the national population of chapter 7 cases
    filed in 1995. Consequently, neither extrapolation of the
    Creighton/ABI results to the nation nor comparison with the
    results of Ernst & Young's March 1998 report is supported by the
    methods used. Although the Creighton/ABI report's authors
    acknowledge that the two reports were based on different sample
    designs, they nevertheless portrayed the results of their study as
    comparable with those of the Ernst & Young report. For example,
    Part III of their report contains a detailed description of the
    projected net gain nationwide in the amount of money unsecured
    creditors would collect based primarily on the assumptions in
    their study compared with the net gain amount estimated in Ernst &
    Young's March 1998 report. Nevertheless, the Creighton/ABI sample
    provides useful information for policymakers. For example, its
    results show that, for its seven districts, the median household
    income and median unsecured nonpriority debts of its "can't pay"
    debtors are similar to those in the Ernst & Young and EOUST
    samples. The analyses of the two Ernst & Young reports and the
    Creighton/ABI Proposed Legislation Used    report were based on
    the "needs-based" bankruptcy provisions in different in the Three
    Reports         versions of proposed federal bankruptcy
    legislation. In analyzing debtor repayment capacity, each report
    attempted to apply the "needs-based" provisions of the proposed
    legislation used in the analysis as they interpreted those
    provisions. Thus, a number of differences in the reports' Page 51
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity methodologies reflect the different
    proposed legislative provisions used as the basis for the
    analysis. The 1998 Ernst & Young report was based on the
    provisions of H.R. 3150 as introduced in the House of
    Representatives. The Creighton/ABI report was based on the
    provisions of H.R. 3150 as passed by the House in June 1998. The
    1999 Ernst & Young report was based on the provisions of H.R. 833
    as introduced in February 1999.4 Each report relied on annual
    gross median household income data as Similarities and Differences
    reported by the U.S. Census Bureau to select debtors for further
    analysis in Determination of                of their repayment
    capacity. Each debtor's annual gross household income Debtors'
    Median Income             was compared with the annual gross
    median household income for a household of comparable size-one
    person, two persons, and so forth. However, in making this
    comparison, the reports used different national median income
    thresholds from the Census Bureau and data for different calendar
    years (1993 and 1996). These differences reflect the different
    median income tests in the different proposed legislation used in
    each report's analysis and the different years from which each
    report's sample was drawn. The Census Bureau reports median
    household income in different ways. It reports annual gross median
    income for one-person households and for households with one
    earner. The median income for households with one earner is
    higher. The Census Bureau also reports annual gross median income
    for households of two or more and for family households of two or
    more. Households are defined as all persons, related and
    unrelated, occupying a housing unit. Family households are defined
    as all persons related by birth, marriage, or adoption who reside
    together. Generally, annual gross median incomes for family
    households exceed those of nonfamily households. Thus, the table
    chosen for comparison can affect whether a debtor's income is
    determined to be above or below the national median for a
    household of comparable size. The 1998 Ernst & Young report used
    the lowest annual gross median household incomes for households of
    one and households of four or more for two reasons. First, it used
    Census Bureau tables that generally had lower median household
    incomes than the tables used in the other two reports. Second,
    based on its interpretation of H.R. 3150 as introduced, the 1998
    Ernst & Young report selected for more detailed repayment analysis
    all debtors whose household incomes were more than 75 percent of
    the national median household income. In the other two reports,
    debtors were 4 H.R. 833 is identical to the conference report
    provisions of the Bankruptcy Reform Act of 1998, H.R. 3150, which
    passed the House but not the Senate in the 105th Congress. Page 52
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity subject to further repayment analysis
    if their household incomes were at least 100 percent of the annual
    gross median household income for households of the same size.
    This higher standard was based on the median household income
    standards specified in the proposed legislation used in the other
    two reports' analyses. An example, which assumes that all the
    reports used 1997 Census Bureau income data, illustrates the
    differences. The median annual gross income for a household of one
    in 1997-the measure used in the 1998 Ernst & Young report--was
    $18,762. In contrast, the 1997 annual gross median income for a
    household with one earner-the measure used in the other two
    reports-was $29,780. To pass the median income test, the 1998
    Ernst & Young report required a one-person household to have
    income in excess of $14,072 (more than 75 percent of $18,762).
    However, to pass the median income test in the other three
    reports, the same debtor would have had to have income of at least
    $29,780-100 percent of the higher median-or more than double the
    amount required in the 1998 Ernst & Young report (based on 1997
    Census Bureau data). The median incomes used for households of two
    to four persons were similar in all three reports, although the
    national medians used in the 1998 Ernst & Young report were higher
    for households of two and three persons. However, the incomes
    diverged again for families of more than four. In all the Census
    Bureau tables, median household income peaks at families of four
    and declines for families of five or more. The 1998 Ernst & Young
    report used the incomes reported in the Census tables for
    households of more than four. Thus, as family size increased above
    four, the median income used in the analysis declined. For family
    households of four or more, the Creighton/ABI report used the
    median income for a family of four. For family households of more
    than four, the 1999 Ernst & Young report used the median income
    for a family household of four, plus $583 annually for each
    additional household member over four. Each of these methods
    reflected the proposed legislation used in each report. Had each
    report used the 1997 Census Bureau tables, the median income used
    for a family of six would have been $34,849 (1998 Ernst & Young),
    $53,350 (Creighton/ABI), or $54,516 (1999 Ernst & Young). The
    impact of these different median income thresholds was reflected
    in each report's "pass rate"--the percentage of debtors who passed
    each report's median income threshold test. The pass rates
    reported were 47 percent (1998 Ernst & Young), 24.2 percent
    (Creighton/ABI), and 19 percent (1999 Ernst & Young). However,
    only the different pass rates in the two Ernst & Young reports
    reflect solely the effect of using different Page 53
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity median income thresholds. Both reports
    were based on the same sample of debtors and used 1996 Census data
    on annual gross median household incomes. The different pass rates
    for the Creighton/ABI report and the EOUST report may reflect not
    only the different median income thresholds used, but also (1)
    differences in the annual household incomes of the sample of
    debtors each report used for analysis and (2) use of median
    household incomes for different years, 1993 and 1997,
    respectively. However, Ernst & Young reported to us that had their
    1998 report used the same median income thresholds as those used
    by Creighton/ABI, the percentage of "can-pay" debtors in their
    1998 report would have been 10 percent rather than 15 percent. The
    Ernst & Young and Creighton/ABI reports based their determination
    of Similarities and Differences debtors' allowable living expenses
    on the IRS Collection Financial in Determination of
    Standards. The IRS uses these standards to determine a taxpayer's
    ability Debtors' Allowable Living          to pay a delinquent tax
    liability. The EOUST report did not use the IRS Expenses
    standards in its assessment of debtors' allowable living expenses,
    concluding that they were cumbersome and difficult to apply
    consistently across debtors. The IRS has established specified
    dollar allowances for housing and utility expenses; transportation
    expenses; and food, clothing and other expenses. However, the IRS
    has not established specific dollar allowances for "other
    necessary expenses," such as taxes, health care, court-ordered
    payments (e.g., child support or alimony), child care, and
    dependent care. Since there are no specific dollar standards, the
    IRS determines whether individual expenses in this category are
    reasonable and necessary on a case-by-case basis. The IRS guidance
    notes that some of these "other necessary expenses," such as
    taxes, health care, and court-ordered payments, are "usually
    considered to be necessary." However, the taxpayer may be required
    to substantiate the amounts and justify expenses for other expense
    items, such as child care, dependent care, and life insurance. As
    previously noted, the Ernst & Young reports and the Creighton/ABI
    report each used the needs-based provisions of different proposed
    bankruptcy reform bills. Each of the proposed bills provided that
    the debtors would be allowed the IRS allowances for the national
    and local necessary expense standards (housing and utilities;
    transportation; and food, clothing, and other expenses), and other
    necessary expenses. However, none of the proposed bills used as
    the basis for analyses in the three reports specified how the
    discretionary allowances for "other necessary expenses" were to be
    determined. Page 54
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity There are also other provisions of the
    IRS collection standards that are not mentioned in the bills. For
    example, the IRS standards permit a taxpayer 1 year in which to
    modify or eliminate excessive necessary or unallowable conditional
    expenses, if the tax liability cannot be paid within 3 years. The
    "needs-based" provisions of the proposed legislation used in the
    Ernst & Young and Creighton/ABI reports provided that debtors'
    monthly debt repayment expenses were to include whatever amounts
    were necessary to pay monthly mortgage payments, to pay in full
    over 5 years all nonhousing secured debts (such as auto loans),
    and all unsecured priority debts (such as child support and
    certain back taxes) as scheduled by the debtors on their financial
    schedules. Thus, by implication, debtors were to be permitted
    expenses in excess of the IRS allowances where necessary to repay
    debt. Consequently, for example, if a debtor's total monthly
    vehicle debt payments exceeded the applicable IRS transportation
    ownership allowance, the higher debt payment would be used as the
    ownership allowance. The Ernst & Young and Creighton/ABI reports
    divided debtors' living expenses into several categories,
    including housing and utility expenses (separately for
    nonhomeowners and homeowners), transportation expenses, other
    living expenses, other necessary expenses, and business expenses.
    While the three reports used the IRS expense standards for
    determining allowable living expenses in most of these categories,
    there were differences in how some of these standards were
    interpreted. The biggest difference was in how the two Ernst &
    Young reports and the Creighton/ABI report interpreted the
    standards to determine the transportation allowance. Housing and
    Utility Expenses    The IRS standards include a single housing and
    utilities allowance for homeowners and renters, regardless of
    existing mortgage or rental payments. An allowance is set for each
    county in the United States. Within each county, there are three
    levels, according to family size-two persons or fewer, three
    persons, and four persons or more. The allowances are derived from
    Census Bureau and Bureau of Labor Statistic (BLS) data. All three
    reports used these standards for nonhomeowners (by county of
    residence), but none of the three reports used these standards for
    homeowners. To determine housing and utility expenses for
    homeowners, the Ernst and Young reports generally used the total
    of the full mortgage payment, home maintenance expenses,
    utilities, property taxes, and homeowner insurance Page 55
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity amount as reported on schedule J.5 If
    the debtor indicated on schedule J that property taxes and
    insurance were included in the home mortgage payment, but also
    listed these expenses separately on the schedule, Ernst & Young
    would have counted these expenses twice. To the extent this
    occurred, the Ernst & Young analysis would have overstated
    debtors' homeowner expenses. The Creighton/ABI report also used
    the homeowner expenses listed on schedule J to determine a
    homeowner's housing and utility allowance. However, property taxes
    and homeowner insurance, if listed separately on schedule J, were
    included as expenses only where the schedule indicated that such
    expenses were not included in the mortgage payment. Thus, where
    property taxes and homeowner insurance were listed on schedule J
    twice-as included in the mortgage payment and as separate expenses
    elsewhere on the schedule--Creighton/ABI would have used lower
    homeowner expenses than Ernst & Young. The three reports made
    adjustments to homeowner housing and utility expenses if certain
    conditions applied. In both Ernst & Young reports, adjustments
    were made to the full monthly mortgage payment listed on schedule
    J if 85 percent of the reported monthly mortgage payment,
    multiplied by 60 months, was more than 110 percent of the total
    outstanding mortgage debt shown on schedule D6 or if the debtor's
    income after allowable living expenses (excluding debt payments)
    was insufficient to pay the entire mortgage payment. The
    Creighton/ABI report made adjustments to the reported full monthly
    mortgage payment if the first condition listed above was found,
    but did not apply the second condition. According to Ernst & Young
    and Creighton/ABI, the number of debtors in their samples affected
    by either of these conditions was very small. Transportation
    Expenses    The IRS transportation allowance is divided into two
    categories- ownership costs and operating costs, which includes an
    allowance for debtors with no vehicles. The IRS ownership
    allowance is a single national standard7 for payments on leased or
    purchased vehicles-currently $372 for the first car and $294 for
    the second car, with a maximum of two cars allowed.8 IRS revised
    the ownership allowance in 1998 to base it on Federal Reserve
    Board of Governors' data on the 5-year average ownership 5
    Schedule J-Current Expenditures of Individual Debtor(s). 6
    Schedule D-Creditors Holding Secured Claims. 7 In its description
    of the Collection Financial Standards, IRS notes that the
    "ownership cost portion of the transportation standard, although
    it applies nationwide, is still considered part of the local
    standards." 8 The current IRS collection financial standard
    allowances used in our examples became applicable on October 15,
    1998. Page 56
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity or leasing costs for new and used
    cars. Because they are based on IRS standards prior to 1998, none
    of the three reports used the current standard. The prior IRS
    standard was based on the monthly cost of a 5- year lease or
    purchase of a vehicle at 8.5 percent, assuming a price of $17,000
    for the first car and $10,000 for the second car. According to the
    IRS, the "ownership costs provide maximum allowances for up to two
    automobiles if allowed as a necessary expense." The operating
    portion of the IRS standard is derived from BLS data. The
    operating allowance varies by census region and metropolitan
    statistical area. The current allowance for Boston, Massachusetts,
    for example, is $220 (no vehicles), $274 (one vehicle), or $328
    (two vehicles). IRS regulations describe the application of the
    ownership and operating allowances as follows: "If a taxpayer has
    a car payment, the allowable ownership cost added to the allowable
    operating cost equals the allowable transportation expense. If a
    taxpayer has no car payment, or no car, only the operating cost
    portion of the transportation standard is used to come up with the
    allowable expense." Ernst & Young and Creighton/ABI used different
    methods to assign the ownership portion of the transportation
    allowance. There were essentially two differences---secured
    vehicle debt payments that were less than the applicable IRS
    maximum ownership allowance and ownership allowances for debt-free
    vehicles. The similarities and differences in the Ernst & Young
    and Creighton/ABI methods of determining debtor transportation
    ownership allowances are shown in table I.2. Although in some
    cases Creighton/ABI provided a higher ownership allowance than the
    IRS standards or Ernst & Young, we found no evidence that the
    Ernst & Young reports or the Creighton/ABI report doubled-counted
    any portion of the transportation ownership allowance. Page 57
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity Table I.2: How the IRS, Ernst & Young,
    and Creighton/ABI Would Have Determined the Transportation
    Ownership Allowance for Hypothetical Debtors in Boston,
    Massachusetts, Using the Current IRS Collection Financial
    Standards Allowances Monthly allowance for each of 60 months
    Vehicle debt at filing    IRS collection by household size
    standards                     Ernst & Young
    Creighton/ABI Ownership allowance
    Ownership allowance Add remainder of
    Add remainder of Ownership Secured debt             maximum IRS
    Secured debt            maximum IRS allowance       paymenta
    allowance, if any            Total         paymenta
    allowance, if any         Total Household of any
    $0              $0                  $0         $0
    $0                        $0               $0 size with no
    vehicles Household of any size with one vehicle $0
    0               00 0                   0                     372
    372 $30,000                               372               500
    0        500                500                         0
    500 $20,000                               333               333
    0        333                333                        39
    372 Household of two or more with two or more vehicles $0
    0               00 0                   0                     666
    666 $30,000                               500               500
    0        500                500                       166
    666 $20,000                               333               333
    0        333                333                       333
    666 Household of any size with one leased vehicle and no other
    vehicles Amount of unexpired        Monthly lease
    83                    0         83                 83
    289          372 lease listed as            payment of no secured
    debt of           more than $372 $5,000 on schedule Db for the
    remainder of the lease. Leased vehicle listed      Monthly lease
    00 0                   0                     372          372 on
    schedule Bc  only.      payment of no more than $372 for remainder
    of the lease aFor purposes of focusing on the conceptual
    differences in the methods used to determine the ownership
    allowances, the table's allowance for secured debt repayment does
    not include any interest costs. Both Ernst & Young and
    Creighton/ABI added estimated interest to the amount of the
    outstanding secured debt on vehicle loans, then amortized the
    total over 60 months. bSchedule D-Creditors Holding Secured
    Claims. This example assumes that only the total amount of the
    unexpired lease is shown as secured debt on schedule D. cSchedule
    B--Personal Property. This example assumes that the leased vehicle
    would be shown only on schedule B, which would also include debt-
    free vehicles. Ernst & Young stated that its review of 193 cases
    in its sample found that about 2 percent of chapter 7 debtors
    listed vehicles on schedule B only. Source: GAO analysis of Ernst
    & Young and Creighton/ABI reports and additional information
    provided by the reports' authors. Page 58
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity Based on its interpretation of H.R.
    3150 and H.R. 833, Ernst & Young in effect did not use the IRS
    ownership allowances. It totaled all secured vehicle debt, added
    10 percent for interest (equivalent to 9 percent for 2 years), and
    amortized the resulting total over 60 months. The resulting
    monthly amount was used as the ownership allowance, whether it was
    more or less than the applicable IRS ownership allowance.
    Creighton/ABI totaled all vehicle debt, added 24 percent for
    interest (equivalent to 9 percent for 5 years), and amortized the
    resulting total over 60 months. Creighton/ABI used the resulting
    monthly vehicle debt payment as the ownership allowance if it was
    equal to or more than the maximum IRS ownership allowance for a
    household of the same size and number of vehicles as the debtor's.
    If the monthly secured debt payment was less than the maximum IRS
    ownership allowance for a household of the same size and number of
    vehicles as the debtor's, Creighton/ABI added the difference to
    the debtor's transportation expenses. For example, the maximum IRS
    ownership allowance for a one-vehicle household is $372 a month.
    If a debtor in a one-vehicle household had a monthly payment for
    secured vehicle debt of $333, Creighton/ABI would have allowed an
    additional monthly allowance of $39 (see table I.2). The other
    principal difference was the ownership allowance for debt-free
    vehicles. Because there were no secured debt payments for debt-
    free vehicles, Ernst & Young did not include an ownership
    allowance for such cars. Creighton/ABI included the IRS ownership
    allowance for debt-free cars-one allowance for one-person
    households, one allowance for households of two or more persons
    with one vehicle, and two allowances for households of two or more
    persons with two or more vehicles. The Creighton/ABI report
    explained that its approach to the ownership allowance was based
    on the fact that the proposed "needs-based" provisions penalize
    debtors with little or no secured vehicle debt. Debtors with older
    cars with little or no debt are allowed minimal or no ownership
    allowance under the IRS standards. The Creighton/ABI report noted
    that most of the cars in its sample were at least 5 model years
    old when the debtor filed for bankruptcy, and that debtors owed
    secured debt on 82 cars that were 10 or more years old. They
    observed that it was likely that such cars would need either major
    repairs or replacement during a 5-year debt repayment period, and
    that limiting the ownership allowance to secured debt payment made
    no provisions for this probability. To the extent that, during
    their 5-year repayment plans, debtors faced major vehicle repairs
    or had to replace their vehicles, the Creighton/ABI method may
    provide a somewhat more realistic measure of the actual return to
    unsecured nonpriority creditors. However, to the extent these
    expenses do not occur Page 59
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    Debtors' Repayment Capacity during the 5-years, the Creighton/ABI
    method would understate the amount of income debtors would have
    available for payments on unsecured nonpriority debt. The IRS
    standards include an ownership allowance for leased vehicles. The
    Ernst & Young and Creighton/ABI reports generally treated costs
    for leased vehicles similarly. Neither report used the information
    from schedule G,9 where unexpired leases should be listed. The
    needed data on the amount remaining to be paid on unexpired leases
    were rarely listed on this schedule. Instead, each report treated
    leased vehicles as secured debt, unsecured priority debt, or
    unsecured nonpriority debt, depending on how the lease costs were
    listed on the debtors' schedules.10 If the cost of a leased
    vehicle was listed on schedule D,11 Ernst & Young and
    Creighton/ABI treated the cost as any other nonhousing secured
    debt-the amount of the debt was increased by the amount of
    estimated interest costs and amortized over 60 months. The one
    difference occurred when the leased vehicle was listed on schedule
    B12 only. In such cases, Creighton/ABI would have included an IRS
    ownership allowance for the vehicle (based on household size and
    the number of other vehicles reported). Ernst & Young would not
    have included an ownership allowance in such cases since there was
    no secured debt, and Ernst & Young used amortized secured debt as
    the ownership allowance. Because accurate data on the amount
    remaining to be paid on unexpired leases were not available from
    the debtors' schedules, Creighton/ABI and Ernst & Young simply
    used the amount of leased debt as listed on schedules D, E, or F.
    The amount listed may or may not have been the actual amount
    remaining to be paid on the unexpired lease. In some cases,
    debtors may have listed only the monthly lease payment on their
    schedules. Thus, it is not clear that either Ernst & Young or
    Creighton/ABI was able to accurately capture the amount of
    unexpired leases and the 9 Schedule G-Executory Contracts and
    Unexpired Leases. 10 According to Ernst & Young, they reviewed a
    "quality" sample of 193 debtor petitions-about 10 percent of their
    total sample. Of these 193 debtors, 9 percent included vehicle
    leases on schedule G, 5 percent also listed leases as secured debt
    on schedule D, and 2 percent listed leases as unsecured
    nonpriority debt on schedule F. Of these 193 debtors, 6 percent
    identified leased vehicles on schedule B. 11 Schedule D-Creditors
    Holding Secured Claims. This schedule should include any creditor
    claims that are secured by a lien. 12 Schedule B-Personal
    Property. The instructions for this schedule specifically note:
    "Do not include interests in executory contracts and unexpired
    leases on this schedule." Page 60
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    Debtors' Repayment Capacity appropriate amount of monthly payments
    for those debtors who were leasing vehicles at the time they filed
    for bankruptcy. Crieghton/ABI's and Ernst & Young's methods of
    assigning vehicle operating allowances were different for
    households of two or more persons with more than two vehicles.
    Under the IRS collection financial standards, IRS' normal practice
    is to limit vehicle operating allowances to one for households of
    one and two for households of two or more, unless the taxpayer can
    demonstrate that any additional vehicles are necessary for
    producing income. However, debtors are not required to provide on
    their financial schedules information on whether any or all of
    their vehicles are necessary for producing income. Both Ernst &
    Young and Creighton/ABI determined the number of debtor vehicles
    by using the larger of the number of vehicles shown on schedules B
    or D. If a debtor reported no vehicles on either schedule, both
    Ernst & Young and Creighton/ABI assigned one "no car" operating
    allowance. In addition, both Ernst & Young and Creighton/ABI
    followed the general IRS practice of limiting households of one to
    one operating allowance. For households of two or more,
    Crieghton/ABI also followed the general IRS practice of limiting
    such households to a maximum of two operating allowances. However,
    Ernst & Young placed no limit on the number of operating
    allowances for households of two or more. It included operating
    allowances for the larger of the number of cars listed on
    schedules B or D. Other Living Expenses       The IRS collection
    standards use a national standard for other living expenses.
    Included in other living expenses are housekeeping supplies,
    apparel and services, personal products and services, food, and
    miscellaneous items.  Although the IRS has established allowances
    for each of the individual categories of expenses, the standard
    provides a single total amount to each household based on income
    and size. For example, the current allowance for a four-person
    household with total monthly gross income between $2,500 and
    $3,329 would be $912.13 The allowances for all categories except
    miscellaneous are based on the BLS consumer expenditure survey and
    are to be updated annually as new data become available. The IRS
    has set miscellaneous expenses at $100 for the first person in the
    household and $25 for each additional person. Other Necessary
    Expenses    The IRS has no established national or local standards
    for these expenses. IRS regulations note that the amounts must be
    necessary and reasonable in 13 The individual components of this
    total allowance would be food, $465; housekeeping supplies, $48;
    apparel and services, $176; personal care products and services,
    $48; and miscellaneous, $175. Page 61
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity amount, and that the IRS employee
    responsible for the case determines whether these two criteria
    have been met. The three reports used many of the same deductions
    from monthly gross income to make allowances for other necessary
    expenses. The Ernst & Young reports subtracted payroll deductions
    such as payroll taxes, Social Security, nonhealth insurance, and
    union dues; taxes neither deducted from wages nor included in home
    mortgage payments; alimony; charitable contributions; child care;
    other payments to dependents not living at home; and health
    insurance and medical and dental expenses. The Creighton/ABI
    report used the same deductions with some exceptions. The
    Creighton/ABI report did not allow deductions from monthly gross
    income for debt payments withheld from the paycheck, transfers
    into a savings plan, nonmandatory pension contributions, all
    payments for dependents not at home (except alimony and child
    support), and tuition payments. Business Expenses        The three
    reports determined business expenses differently. While the March
    1998 Ernst & Young study did not allow business expenses, the
    March 1999 study allowed business expenses as reported on schedule
    J,14 but only if business income was reported on schedule I.15 The
    Creighton/ABI study allowed all business expenses that were listed
    on schedule J, in addition to expenses for work uniforms listed on
    schedule I. According to Ernst & Young, their database did not
    include information on uniforms because it did not itemize
    miscellaneous expenses reported on the schedules. The March 1998
    Ernst & Young report did not include any allowance for Differences
    in Debtor    debtor attorney fees or the costs of administering a
    chapter 13 repayment Attorney Fees and        plan. The
    Creighton/ABI report and the March 1999 Ernst & Young report
    Administrative Costs     based their attorney fee estimates on the
    same 1996 study, which found that the average total debtor
    attorney fee in chapter 13 cases was $1,281, of which $428 was
    paid up front and the balance paid through the plan (subject to
    the trustee's percentage fee). Based on this study, the
    Creighton/ABI report assumed that debtor attorney fees would add a
    total of about $800, or about $13 per month over 60 months, to the
    debtor's monthly expenses. The March 1999 Ernst & Young report
    assumed that 14 Schedule J-Current Expenditures of Individual
    Debtor(s).  The schedule includes such expenses as housing,
    utilities, food, clothing, medical and dental expenses,
    transportation, charitable contributions, insurance, taxes (not
    deducted from wages or included in home mortgage payments),
    alimony, and child support.  In completing the schedule, debtors
    are to estimate their average monthly expenses in each category.
    15 Schedule I-Current Income of Individual Debtor(s). The schedule
    includes such categories as monthly gross wages, salary,
    commissions, and income from nonwage sources. Page 62
    GAO/GGD-99-103 Personal Bankruptcy Appendix I Methodological
    Similarities and Differences in Three Reports on Bankruptcy
    Debtors' Repayment Capacity debtors who were required to file
    under chapter 13 would incur an average attorney fee of $1,281.
    The report treated as an unsecured nonpriority debt any difference
    between this total and the amount the debtor indicated on the
    bankruptcy petition as already paid to his or her attorney. If the
    debtor schedules included no information on the amount of the
    attorney fee already paid, Ernst & Young assumed that the
    remaining fee would be $800 and amortized this amount over 60
    months. The March 1999 Ernst & Young report and the Creighton/ABI
    report both included estimates of chapter 13 administrative
    expenses.  Each report assumed that administrative expenses could
    consume about 5.6 percent of debtor debt payments under a chapter
    13 plan-the 1995 average chapter 13 trustee fees as a percentage
    of disbursements to creditors. However, each report applied this
    percentage somewhat differently. The Ernst & Young report included
    three different estimates of these costs, based on three different
    assumptions (see table I.1).  The Creighton/ABI report assumed
    that administrative expenses would be 5.6 percent of debtor
    payments on unsecured priority debts, unsecured nonpriority debts,
    and most secured debts. The report assumed that debtors would pay
    creditors directly for their home mortgages and any other real
    estate claims of $20,000 or more, thus avoiding the trustee fee on
    such payments. Page 63
    GAO/GGD-99-103 Personal Bankruptcy Appendix II Description of
    Methodology Used in the Report by the Executive Office for the
    U.S. Trustees The methodology of the report by the Executive
    Office for the U.S. Trustees (EOUST) was substantially different
    from the methodologies used in the Ernst & Young and Creighton/ABI
    reports. The EOUST report differed from the other reports in the
    proposed legislative provisions used in its analysis, its
    determination of debtor allowable living expenses, and its method
    of determining the income that debtors had available for debt
    repayment. The EOUST report's sample, methodology, and its
    differences from the other three reports are discussed in this
    appendix. The EOUST report was based on a sample of chapter 7 no-
    asset cases1 EOUST Debtor Sample closed during the first 6 months
    of 1998 in the 84 bankruptcy districts with U.S. Trustees.2 All of
    the cases in the sample had been designated by the panel trustee
    as no-asset cases, and almost all of these cases had been filed in
    late 1997 or early 1998. The number of sample cases in each
    district was proportional to each district's share of the national
    total of chapter 7 cases filed in calendar year 1997. The sample
    used in the analysis included a total of 1,955 cases. Statistical
    probability sampling methods were not used to select the cases.
    Instead, after determining the number of cases needed from each
    district, EOUST requested that the Trustees for the districts send
    them the districts' sample quotas from among their most recently
    closed cases. Because the sample procedure for selecting filings
    within districts was not random, the characteristics of the
    filings selected may be influenced by the judgmental selection of
    the sample cases by the Trustees. Therefore, technically, standard
    statistical methods are not applicable for making inferences from
    these results to the population of no-asset chapter 7 cases from
    these 84 bankruptcy districts closed during this period. However,
    treating such a sample as if it were a random sample may sometimes
    be reasonable from a practical point of view. EOUST, based on its
    subject matter expertise, asserts that these cases are as random
    as those it would have obtained from a statistical random sample
    of filings from each Trustee's office. We have has no basis to
    judge the accuracy of that assertion. 1 No-asset cases are those
    cases in which the debtor has no nonexempt assets that can be
    liquidated and the proceeds used to make payments to creditors.
    In bankruptcy, the debtor is permitted to retain certain exempt
    assets. 2 There are 90 bankruptcy districts. The sample did not
    include cases from the six bankruptcy districts in Alabama and
    North Carolina that do not have U.S. Trustees.  These six
    districts are served by bankruptcy administrators who are under
    the supervision of the federal judiciary. According to EOUST,
    about 2.4 percent of the chapter 7 cases closed in the first half
    of 1998 were in the districts excluded from the EOUST sample. U.S.
    Trustees, who serve the remaining 84 bankruptcy districts, are
    under the supervision of the Executive Office for U.S. Trustees,
    which is an agency of the Department of Justice. Page 64
    GAO/GGD-99-103 Personal Bankruptcy Appendix II Description of
    Methodology Used in the Report by the Executive Office for the
    U.S. Trustees The EOUST report was based on data from debtors'
    financial schedules Description of the            (including any
    amended schedules). There are two principal differences EOUST
    Report's                between the EOUST report and the other
    three reports we reviewed. First, the EOUST report did not use the
    IRS financial collection standards to Methodology
    determine debtors' allowable living expenses. Second, the EOUSC
    report assumed that debtors would pay their unsecured priority
    debts and unsecured nonpriority debts from that portion of their
    total gross income that was above the national annual median
    income for a household of comparable size. The report assumed that
    debtors would make any mortgage payments and pay all nonhousing
    secured debts from that portion of their total annual gross income
    that was at or below the national median. The report also used
    "needs-based" provisions from two separate pieces of proposed
    legislation-H.R. 3150 as it passed the House on June 10, 1998, and
    S.1301 as reported by the Senate Judiciary Committee. However, as
    discussed later, this appeared to have less impact on the report's
    estimates than the other two differences. The following section
    describes the EOUST report's method of estimating the percentage
    of "can-pay" debtors in its sample and the total amount of
    unsecured nonpriority debt these debtors could potentially repay.
    The report determined each debtor's gross annual income by
    multiplying Step 1: Determine Debtor's    total monthly gross
    income, as reported on schedule I, by 12 months. In Gross Income
    determining a debtor's total gross monthly income, as shown on
    schedule I, the EOUST report included any reported earnings from a
    spouse, whether the debtor filed individually or jointly with a
    spouse. Such income was included under the assumption that this
    total income was available to the household for expenses and debt
    payment. Spousal income was also used because the report's purpose
    was to include the upper range of whatever was included in the
    House (H.R. 3150) or Senate (S.1301) bills. The Senate bill
    required that the analysis of a debtor's repayment capacity
    include income from all sources. The House bill required that
    spousal income be considered only when the debtor filed jointly.
    In the other three reports, spousal income was included in the
    debtor's gross income only if the debtor filed jointly. Much like
    the Ernst & Young and Creighton/ABI reports, the EOUST report Step
    2: Screen Debtors for    screened debtors to determine whether
    their gross annual household Median Household Income       income
    was above 100 percent of the national median income for a
    household of comparable size as defined in H.R. 3150 and S.1301.
    The report used whichever median income standard was higher for
    each debtor household. For households of four or fewer, the median
    income test used was the same as that used by 1999 Ernst & Young
    and Creighton/ABI reports. For households of one, the report used
    the median Page 65
    GAO/GGD-99-103 Personal Bankruptcy Appendix II Description of
    Methodology Used in the Report by the Executive Office for the
    U.S. Trustees income for one-earner households (Census Bureau
    table H-12). For households of two or more, the report used median
    family household income from Census Bureau table F-8. In this
    table, median family income peaks at family households of four and
    declines for families of more than four. For families of five or
    more, the report used the median income for a family household of
    four plus $583 monthly for each additional family member-the
    median income standard used in S. 1301. The differences in the
    household income standards used in each report are shown in table
    2 of this report. The EOUST report eliminated from further
    analysis all debtors whose total Step 3: Eliminate From the
    gross annual income was less than or equal to the median income
    for a Analysis Any Debtors With         household of the same size
    (using the previously discussed criteria). It was Annual Gross
    Incomes              assumed that these debtors would be eligible
    to file for chapter 7, if they Below the Median
    chose to do so. This step is similar to that used by both the 1998
    Ernst & Young and Creighton/ABI reports. Threshold Of the 1,955
    bankruptcy debtors in the sample, 347 had gross annual household
    incomes above the national median for a household of comparable
    size. A small number of those debtors with gross annual incomes
    above the Step 4: Deduct Business           national median
    reported business receipts as gross income on schedule I. Expenses
    From Gross               However, according to the EOUST report's
    authors, it was not always Income Above the National
    possible to tell from the schedule how much of the debtor's gross
    income Median                            was obtained from self-
    employment. If the debtor listed business expenses on schedule J,3
    these expenses were deducted from the debtor's reported total
    gross income. Creighton/ABI also permitted business expenses
    listed on schedule J. However, Ernst & Young permitted such
    expenses only if the debtor also showed business income on
    schedule I. For all 347 debtors with annual household incomes
    above the national Step 5: Deduct Taxes From         median, the
    report estimated the debtor's net disposable income, after Gross
    Debtor Income Above taxes, on that portion of the debtor's total
    annual gross income that was the National Median
    above the national median. To do this, the report multiplied the
    amount of annual gross income above the national median by 65
    percent. For example, if a debtor had gross annual income of
    $40,000 and the appropriate national median income was $30,000,
    the debtor had $10,000 in gross income that exceeded the national
    median for a household of the debtor's size. The report would have
    assumed that $3,500 of this $10,000 3 The appropriate line from
    schedule J is entitled, "Regular expenses from operation of
    business, profession, or farm (attached detailed statement)." Page
    66
    GAO/GGD-99-103 Personal Bankruptcy Appendix II Description of
    Methodology Used in the Report by the Executive Office for the
    U.S. Trustees would be used for taxes, leaving the debtor net
    disposable income of $6,500. The debtor's net annual income above
    the national median was converted Step 6: Convert Remaining
    to monthly income. Thus, a debtor who had $6,500 in net annual
    income Annual Gross Income to            above the national median
    would be deemed to have $541.66 in monthly Monthly Income, Then
    income above the median. The report then deducted the following
    Include Additional Selected expenses, as appropriate, from the net
    monthly income that was above the national median: Deductions *
    tax liabilities shown on schedule J,4 *  child support and alimony
    payments shown on schedule J, and *  one-sixtieth of total
    priority debt on schedule E (with no interest). Thus, a debtor
    with net monthly income of $541.66, and total deductible expenses
    (as determined in the report) of $300, would have $241.66 monthly
    to devote to unsecured nonpriority debt repayment. As a result of
    the calculations in steps 4, 5, and 6, 47 debtors no longer had
    Step 7: Eliminate Second          income above the national
    median. The remainder of the analysis focused Set of Debtors From
    on those remaining 300 debtors who had any positive net annual
    income Analysis; Estimate Debt           above the national
    median. Repayment Capacity                The report estimated the
    total amount of unsecured nonpriority debt that these 300 debtors
    could repay using four different assumptions. Debtors would use
    100 percent, 75 percent, 50 percent, or 25 percent of the income
    available for payment of unsecured nonpriority debt to pay their
    unsecured nonpriority debts. In our example, the debtor would use
    100 percent, 75 percent, 50 percent, or 25 percent of the $241.66
    in net monthly income available for the payment of unsecured
    nonpriority debt. If the "can-pay" debtors used 100 percent of
    their available net income to pay unsecured nonpriority debt for 5
    years, the report estimated that creditors could receive a total
    of about $3.76 billion over 5 years. However, should this prove
    optimistic, and not all "can-pay" debtors were able to devote 100
    percent of their net income to unsecured debt payment for 5 years,
    the report also provided a sensitivity analysis using three less
    favorable assumptions about the amount of available net income
    that would be used for debt repayment over 5 years. For the
    remaining assumptions, the report estimated that using 75 percent,
    50 percent, or 25 percent of available net income over 5 years to
    pay unsecured nonpriority debt would yield $3.22 billion, $2.49
    billion, or $1.40 billion, respectively. 4 Schedule J-Current
    Expenditures of Individual Debtor(s). Page 67
    GAO/GGD-99-103 Personal Bankruptcy Appendix II Description of
    Methodology Used in the Report by the Executive Office for the
    U.S. Trustees These debt repayment estimates assume that (1)
    debtors' income and expenses would remain unchanged over a 5-year
    repayment period; (2) all debtors would complete their 5-year
    repayment plans; and (3) there would be no cost to administering
    the repayment plans. However, each of the three lower estimates of
    total debt repayment provide an estimate of what could happen if
    the net effect of changes in these assumptions were to reduce
    debtor unsecured nonpriority debt repayment capacity by 25
    percent, 50 percent, or 75 percent. The report notes that the
    actual amount of debt paid to creditors--secured and unsecured--
    would depend upon a number of variables, including the number of
    debtors who completed their repayment plans without modification
    and the amount of trustee fees and other administrative expenses
    incurred to administer the repayment plans.  The report stated
    that it was likely that many of these debtors would experience
    some type of change, such as job loss or divorce, that would
    affect their repayment capacity and their ability to complete
    their repayment plans. The report also noted that it was not clear
    how the IRS collection standards should be applied and that using
    the standards would be cumbersome, "conducive to gaming," and
    could add to bankruptcy litigation as creditors and debtors sought
    to clarify the application of the standards. As a result of all
    these factors, the report noted that the final return to unsecured
    nonpriority creditors was likely to be less than $1 billion
    annually. Page 68
    GAO/GGD-99-103 Personal Bankruptcy Appendix III Comments From
    Ernst & Young Note:  GAO comments supplementing those in the
    report text appear at the end of this appendix. See comment 1. See
    comment 2. Page 69    GAO/GGD-99-103 Personal Bankruptcy Appendix
    III Comments From Ernst & Young See comment 3. See comment 4. Page
    70                        GAO/GGD-99-103 Personal Bankruptcy
    Appendix III Comments From Ernst & Young See comment 5. Page 71
    GAO/GGD-99-103 Personal Bankruptcy Appendix III Comments From
    Ernst & Young See comment 6. Page 72
    GAO/GGD-99-103 Personal Bankruptcy Appendix III Comments From
    Ernst & Young The following are GAO's comments on specific issues
    included in the letter dated, June 2, 1999, from Thomas Neubig,
    National Director, Policy Economics and Quantitative Analysis,
    Ernst & Young. Other issues discussed in the letter have been
    included in the report text. 1. Ernst & Young made several
    observations regarding our comparison of GAO Comments    the four
    reports and our discussion of the variables that could affect the
    estimates in each report. First, Ernst & Young stated that our
    draft report did not sufficiently highlight the similarities in
    the four reports, in particular that all four reports found that
    "tens of thousands of above- median income Chapter 7 bankruptcy
    filers could repay a significant portion of their debts under
    needs-based proposals." Second, Ernst & Young stated that our
    conclusion that the percentage of "can-pay" debtors and the amount
    of debt they could repay were dependent on a number of variables
    was not helpful to policymakers. It was noted that it would be
    more helpful to policymakers if we had identified the "reasonable"
    impact of the proposed needs-based legislation as drafted, rather
    than state that nothing could be known with certainty. Ernst &
    Young noted that estimates based on how the proposed law would
    have applied in the past, or future estimates based on reasonable
    assumptions, are more useful than waiting to validate every
    assumption. With regard to the first comment, our report clearly
    states that each of the reports found that some portion of chapter
    7 debtors in their samples- ranging from 3.6 percent to 15
    percent-met all relevant means-testing criteria, including the
    potential ability to repay a specific minimum amount of their
    unsecured nonpriority debts. (see Results in Brief and table 3).
    We also note that there is some similarity in the median household
    incomes and median unsecured nonpriority debts of those debtors
    whom each report determined were "can't pay" and "can pay" debtors
    (table 5). However, our report also notes that both the
    Creighton/ABI and EOUST reports specifically asserted that the
    formula used to determine the amount of debt that "can-pay"
    debtors could potentially repay was unrealistic and that the
    actual return to unsecured creditors under needs- based bankruptcy
    would be less than the formula indicated. With regard to our
    emphasis on the variables that could affect the estimates in these
    four reports, we believe it is important that policymakers be
    provided information that can help them to understand and
    interpret the point estimates in these four reports. Whether there
    are "tens of thousands" of "can-pay" debtors and what amount of
    debt such Page 73                                        GAO/GGD-
    99-103 Personal Bankruptcy Appendix III Comments From Ernst &
    Young debtors could potentially repay are questions the answers to
    which are critically dependent upon the assumptions used to
    develop the answers. "Can-pay" debtors were defined in the
    proposed legislation used in the four reports' analyses as those
    debtors who (1) met a specific household income test and (2) could
    potentially repay a specific minimum amount of their unsecured
    nonpriority debt over 5 years. To determine whether the debtor
    could repay this minimum amount of unsecured nonpriority debt,
    each report used two assumptions based upon the means-testing
    criteria specified in proposed needs-based legislation: (1) the
    debtor's income and allowable living expenses would remain stable
    for the 5-year repayment period and (2) 100 percent of "can-pay"
    debtors would complete their 5- year repayment plans. Based on
    these criteria, the reports calculated whether the debtor's net
    monthly income available for payment of unsecured nonpriority debt
    multiplied by 60 months would be sufficient to pay the minimum
    total amount of unsecured nonpriority debt specified in the needs-
    based legislation used in the report's analysis. If so, the debtor
    was classified as a "can-pay" debtor. This same 60-month total was
    the basis for estimating the total amount of unsecured nonpriority
    debt each "can-pay" debtor could potentially repay. The fact that
    these assumptions were specified in proposed legislation for use
    in identifying "can-pay" debtors did not automatically validate
    them as empirically based or realistic. There is no empirical
    basis for assuming that debtors financial circumstances would
    remain unchanged during the course of a 5-year repayment period,
    that none of the repayment plans would need to be modified during
    that 5-year period, and that 100 percent of debtors would complete
    their repayment plans (modified or not). No one knows how many
    "can-pay" debtors will be able to complete their 5- year repayment
    plans on the terms under which bankruptcy court initially
    confirmed the plans. However, even if the completion rate were
    higher than the 36 percent for the 953,180 debtors studied by the
    Administrative Office of the U.S. Courts (AOUSC), it is unlikely
    to be 100 percent. For those debtors who are unable to complete
    their repayment plans, the return to creditors is likely to be
    less than estimated in the Ernst & Young and Creighton/ABI
    reports, and less than the largest estimate in the EOUST report.
    2. Ernst & Young stated that its analyses were the only ones to
    apply the proposed legislation (H.R. 3150 and H.R. 833) as
    written. Ernst & Young suggested that we should have used
    "adherence to the legislative language as a criterion for
    evaluating the reasonableness of the reports' methodology." Ernst
    & Young principally bases its assertion on the fact Page 74
    GAO/GGD-99-103 Personal Bankruptcy Appendix III Comments From
    Ernst & Young that its interpretation of the IRS transportation
    ownership allowance more closely followed the IRS Collection
    Financial Standards than did the Creighton/ABI interpretation. We
    clearly described the methodologies of each report, noted where
    they differed, and discussed the impact of those differences on
    each report's estimates. The difference in the Ernst & Young and
    Creighton/ABI interpretation of the IRS transportation allowances
    are fully discussed in our report, including appendix I. We would
    only note here that Creighton/ABI, not Ernst & Young, more closely
    followed IRS practice with regard to the assignment of vehicle
    operating allowances for households of two or more persons with
    more than two vehicles. Moreover, all of the reports used some
    methods and assumptions that were not specifically required by
    proposed needs-based legislation. For example, neither H.R. 3150
    nor H.R. 833, the bills used in Ernst & Young's March 1998 and
    March 1999 reports, specified any method of imputing the interest
    on secured claims. Ernst & Young used a lower imputed interest
    rate for secured debts (9 percent over 2 years) than did
    Creighton/ABI (9 percent over 5 years). Compared to
    Creighton/ABI's method, Ernst & Young's method would have resulted
    in lower payments on secured outstanding debts of the same amount.
    Consequently, the effect of Ernst & Young's method would have been
    to include more income than did Creighton/ABI for the payment of
    unsecured nonpriority debts. The two Ernst & Young reports offered
    no explanation for why both used a 2-year rather than 5-year
    period of interest when secured debts were amortized over 5 years
    in determining debtors' repayment capacity. Further, the proposed
    legislation did not require that the formula used to identify
    "can-pay" debtors consider the potential net return to creditors
    after administrative costs were deducted from debtors' payments to
    creditors. Yet this is an important policy consideration. Both the
    Creighton/ABI report and the second Ernst & Young report included
    an estimate of the total cost of administrative fees, such as
    debtor attorney and chapter 13 trustee fees. Payments to creditors
    would be reduced by the amount of such fees. The Ernst & Young
    report included estimates using three sets of assumptions. This
    type of sensitivity analysis would also have been useful in
    conjunction with the two Ernst & Young reports' discussion of
    their estimates of "can-pay" debtors and the amount of debt such
    debtors could potentially repay over 5 years. Finally, Ernst &
    Young did not mention a provision of H.R. 833 that could have
    affected its estimates of "can-pay" debtors and the amount of Page
    75                                     GAO/GGD-99-103 Personal
    Bankruptcy Appendix III Comments From Ernst & Young unsecured
    nonpriority debt they could repay. Under H.R. 833, the amount of
    the creditor's secured claim for personal property purchased
    within 5 years of filing for bankruptcy would generally be not
    less than the total remaining amount to be paid, including
    interest, under the terms of the loan contract. Under current
    bankruptcy law, the amount of the secured creditor's allowed claim
    is generally the market value of the property, which may be more
    or less than the total amount of principal owed under the loan
    contract. If it is less, the secured creditor has two claims-(1) a
    secured claim for the market value of the collateral and (2) an
    unsecured nonpriority claim for the deficiency between the market
    value of the collateral and the debt owed on the collateral. Ernst
    & Young did not mention in its March 1999 report whether any of
    the debtors in its sample would have been affected by this
    provision of H.R. 833. To the extent that the amount of secured
    nonhousing debt listed by any affected debtors did not include the
    unpaid interest owed under the terms of the contract, Ernst &
    Young would have understated the amount of the secured claims for
    such debtors, understated secured debt payments and thus
    overstated the amount of income available for payment of unsecured
    nonpriority debts. 3. Ernst & Young offered a critique of the
    Creighton/ABI method of determining debtors' transportation
    ownership allowance. We believe our report fully discusses this
    issue, clearly demonstrating where the Creighton/ABI report's
    transportation ownership allowances would have varied from the
    amount that IRS would have provided under its Collection Financial
    Standards. 4. Ernst & Young also observed that the Creighton/ABI
    sample is a nonrandom sample whose results cannot be projected
    nationally. Moreover, the sample could have a very large margin of
    error that could well encompass Ernst & Young's estimate that 10
    percent of chapter 7 debtors were "can-pay" debtors. Our report
    clearly states that the Creighton/ABI sample cannot be used for
    national projections. However, the Creighton/ABI sample is a
    statistically valid random sample for the seven districts used in
    its analysis. The results of that sample can be projected to the
    population of 1995 chapter 7 filings in those seven districts. We
    calculated that the estimates for the seven districts in the
    Creighton/ABI sample are subject to an error margin of about 1.8
    percentage points. Page 76
    GAO/GGD-99-103 Personal Bankruptcy Appendix III Comments From
    Ernst & Young 5. Ernst & Young provided new data on a sample of
    chapter 13 cases filed in 1997 and compared these data with those
    for its sample of chapter 7 debtors who would be required to file
    under chapter 13. Ernst & Young stated that these new data,
    combined with provisions in the proposed "needs-based"
    legislation, make it reasonable to expect that the percentage of
    debtors who would complete a required 5-year repayment plan was
    likely to be "significantly higher" than the 36 percent rate shown
    in available historical data. The data presented by Ernst & Young
    in its comments had not been previously provided to us or
    available publicly. Therefore, we have had no opportunity to
    review the analysis and data on which Ernst & Young's statements
    are based. However, we do have two observations on the analysis
    presented. First, current bankruptcy law provides that chapter 13
    repayment plans will be for 3 years unless for cause the
    bankruptcy court approves a period not to exceed 5 years. The
    repayment estimates in the four reports were based on a repayment
    period of 5 years, 2 years longer than provided for in current
    bankruptcy law unless extended for cause. This provides 2
    additional years in which debtors could experience a change in
    their financial circumstances that could affect their ability to
    complete their repayment plans. Second, the Ernst & Young data do
    not alter our basic point-that the percent of "can-pay" debtors
    who complete their 5-year repayment plans is unlikely to be 100
    percent. Ernst & Young noted that many current chapter 13 filers
    use chapter 13 as a temporary means of protecting their homes from
    creditors and then drop out of chapter 13 after their homes are no
    longer in danger. In our report, we stated that about 49 percent
    of chapter 13 cases filed between 1980 and 1998 were dismissed.
    Such cases would include those debtors who temporarily filed under
    chapter 13 to protect their homes from foreclosure. It is not
    clear that the proposed needs-based legislation would necessarily
    increase or decrease the number of such chapter 13 cases. In
    addition, the AOUSC report we cited found that the district with
    the highest completion rate-57 percent---permitted debtors to
    repay a very low percentage of their outstanding debt, as little
    as 5 percent. This is substantially less than the percentage
    required in any of the proposed needs-based legislation used in
    the four reports we reviewed. Page 77
    GAO/GGD-99-103 Personal Bankruptcy Appendix III Comments From
    Ernst & Young We agree with Ernst & Young that the characteristics
    of the "can-pay" debtors required to file under chapter 13 may be
    different than those cited in the AOUSC study of chapter 13
    debtors, or of those who currently file chapter 13 voluntarily. In
    addition, as we stated in our report, it is possible that the
    percentage of debtors who complete their required chapter 13
    repayment plans under needs-based bankruptcy could increase.
    However, even if one assumes, for the reasons Ernst & Young
    states, that under needs-based bankruptcy the percentage of
    debtors who complete their chapter 13 plans were double to 72
    percent-twice the rate found in the AOUSC study-28 percent of
    debtors would not complete their plans. For that 28 percent of
    debtors, creditors would receive less than Ernst & Young's reports
    estimated. The amount of the reduced return to creditors would
    depend upon when within the 5-year period the court determined the
    debtor could not complete the plan and the amount of debt
    remaining to be repaid under the debtor's repayment plan. For
    those debtors who do complete their plans, creditors could receive
    more or less than these four reports estimated. For those debtors
    whose financial circumstances improve during the 5-year plan,
    creditors could receive more. For those debtors whose financial
    circumstances deteriorate, creditors could receive less. However,
    it is important to emphasize that there is no empirical reason to
    base repayment estimates on the assumption that 100 percent of
    those required to file under chapter 13 in a needs-based
    bankruptcy system would complete their repayment plans. 6. In the
    conclusion to its comments, Ernst & Young states that other
    organizations, such as the Congressional Budget Office, make
    reasonable estimates about the expected impact of proposed
    legislation using reasonable assumptions and available data. Ernst
    & Young concluded that its reports provided Congress with
    important information about the expected impact of the proposed
    legislation. As we have stated in our report, we recognize that
    using the data from the bankruptcy debtors' financial schedules,
    despite such problems as inconsistently reported data, was
    necessary for each report's analysis. The debtors' schedules are
    the only publicly available source of data about debtors income,
    expenses, and debts. However, it is equally important to clearly
    state the limitations of the data used and the implications of the
    assumptions used. We believe that each of the four reports
    provided Congress with important information about the potential
    impact of proposed "needs-based" legislation. The Ernst & Young
    reports arguably provided an overall "best- case" estimate of the
    results of needs-based consumer bankruptcy, if Page 78
    GAO/GGD-99-103 Personal Bankruptcy Appendix III Comments From
    Ernst & Young enacted. The Creighton/ABI report provided a lower
    estimate, principally because of its interpretation of the IRS
    transportation ownership allowance. In discussing the rationale
    for its approach, the report highlighted one of the potential
    problems that could reduce the amount of unsecured nonpriority
    debt that would be repaid under needs-based bankruptcy. For
    example, the older the debtors' cars when they enter chapter 13,
    the more likely it is that those cars will either need major
    repairs or replacing (albeit not necessarily with a new car).
    Moreover, the Creighton/ABI report's description of the "can-pay"
    debtors in its sample puts a "personal face" on needs-based
    bankruptcy, providing a partial picture of the variety of debtors
    who could be affected by needs-based bankruptcy. The EOUST report
    showed that a much simpler approach to identifying "can-pay"
    debtors would result in about the same percentage of "can-pay"
    debtors as the more complex method used by Ernst & Young and
    Creighton/ABI. Page 79
    GAO/GGD-99-103 Personal Bankruptcy Appendix IV Comments From the
    Authors of the Creighton/ABI Report Note:  GAO comments
    supplementing those in the report text appear at the end of this
    appendix. Page 80    GAO/GGD-99-103 Personal Bankruptcy Appendix
    IV Comments From the Authors of the Creighton/ABI Report Page 81
    GAO/GGD-99-103 Personal Bankruptcy Appendix IV Comments From the
    Authors of the Creighton/ABI Report See comment 1. Page 82
    GAO/GGD-99-103 Personal Bankruptcy Appendix IV Comments From the
    Authors of the Creighton/ABI Report See comment 2. Page 83
    GAO/GGD-99-103 Personal Bankruptcy Appendix IV Comments From the
    Authors of the Creighton/ABI Report See comment 3. Page 84
    GAO/GGD-99-103 Personal Bankruptcy Appendix IV Comments From the
    Authors of the Creighton/ABI Report See comment 4. See comment 5.
    Page 85                                          GAO/GGD-99-103
    Personal Bankruptcy Appendix IV Comments From the Authors of the
    Creighton/ABI Report The following are GAO's comments on specific
    issues included in the letter dated May 28, 1999, from Professors
    Marianne Culhane and Michaela White, authors of the Creighton/ABI
    report. Other issues discussed in the letter have been included in
    the report text. 1. The authors stated that, although theirs was
    not a national sample, it GAO Comments    nevertheless was
    randomly drawn within the seven districts used in the sample.
    Moreover, the sample included districts across the country, from
    rural and urban areas and from low-cost and high-cost areas. In
    addition, the sample provided a more complete picture of the
    debtors within each district used because it included a larger
    number of debtors from each district than did Ernst & Young's
    sample. We agree that the Creighton/ABI sample is a random sample
    whose results can be generalized to the population of chapter 7
    cases in the seven districts used in its analysis. The districts
    in its sample are diverse and were initially chosen by the
    Creighton/ABI's authors in part because of that diversity.
    Although the Creighton/ABI sample may include more cases within
    each district in its sample than did Ernst & Young `s sample, both
    reports focused on the estimates for the entire population in
    their respective samples. 2.  The authors stated that they
    reweighted their results based on data that we provided on
    converted chapter 7 cases. The results of this reweighting had
    minimal effect on the report's estimates. As we indicated in our
    draft report, we were uncertain about the impact of using only
    total cases filed initially under chapter 7 in each district as
    the basis for weighting the Creighton/ABI report's weighted
    estimates. The Creighton/ABI sample also included some cases that
    had been filed under chapter 13 but converted to and closed under
    chapter 7. We provided the authors of the report with updated
    unpublished data on the total number of cases in each district
    that had been filed in 1995 under chapter 7 and had been converted
    to chapter 7 from chapter 13. Based on these data, the authors
    reweighted their estimates. The new Creighton/ABI analysis
    provided to us shows that the revised weighting had minimal effect
    on its estimates. The reweighting did not change any of the
    report's weighted estimates by as much as 0.1 percent. 3. The
    authors state that Ernst & Young's interest calculations on
    secured debt are incorrect as a matter of law and practice,
    substantially overstating debtors' capacity to repay their
    unsecured nonpriority debts. Page 86
    GAO/GGD-99-103 Personal Bankruptcy Appendix IV Comments From the
    Authors of the Creighton/ABI Report The Ernst & Young method of
    calculating interest on secured debts (9 percent for 2 years)
    would have resulted in lower monthly payments on the same amount
    of outstanding secured debt than would Creighton/ABI's method of
    calculating such interest (9 percent for 5 years). The effect of
    the Ernst & Young method, compared with the Creighton/ABI method,
    is to decrease secured debt payments and, thus, increase the
    amount available for payment to unsecured nonpriority creditors.
    However, whether the Ernst & Young's method of imputing interest
    on secured claims was incorrect depends upon the assumptions made
    about the repayment of secured debt. Under current bankruptcy law,
    the amount of the creditor's allowed secured claim is the market
    value of the collateral securing the claim. The market value of
    the collateral may be more or less than the amount of the secured
    outstanding debt. Also, under current bankruptcy law, the secured
    creditor is entitled to the present value of the secured claim.
    Interest is usually added to the market value of the secured claim
    to determine its present value. As the authors of the
    Creighton/ABI study noted in their comments, the amount of the
    interest paid on secured claims depends on the length of the
    repayment period. Generally, the longer the repayment period, the
    greater the imputed interest on secured claims. In determining
    this interest on secured claims, Ernst & Young and Creighton/ABI
    differed principally because they used different repayment periods
    for computing interest on secured nonhousing claims. The
    Creighton/ABI report assumed that secured nonhousing claims would
    be repaid over 60 months, and computed interest for this entire
    period. Given that the needs-based "can-pay" formula amortizes
    secured claims over 60 months, it is not unreasonable to assume
    that such debts, including interest, would be repaid over 60
    months. If secured claims payments were spread over 60 months-that
    is, the entire repayment plan period--then Creighton/ABI's method
    is the appropriate one for imputing interest on secured claims.
    However, if it were assumed the secured claims would be paid in
    less than 60 months, then it would be appropriate to compute
    interest for a shorter period. Essentially, the Ernst & Young
    method assumed that most secured debts would be paid in 24 months.
    This may or may not be true under needs-based bankruptcy. However,
    if it were true, the Ernst & Young method would be appropriate and
    correct. 4. The Creighton/ABI authors state that reasonable people
    can differ over the interpretation of H.R. 3150 and how the IRS
    expense allowances were to be interpreted within the context of
    the bill.  The bill directed the use of the IRS allowances
    "excluding payments of debts." Ernst & Young Page 87
    GAO/GGD-99-103 Personal Bankruptcy Appendix IV Comments From the
    Authors of the Creighton/ABI Report interpreted this to mean that
    secured vehicle debt payments were to be used as the ownership
    allowance. Because vehicle lease payments are not secured debt,
    the Ernst & Young method provided no allowance for vehicle lease
    payments. Creighton/ABI gave the debtor the IRS ownership
    allowance, less the amount of secured vehicle debt payments. Our
    report states that the IRS ownership allowance is used by IRS as a
    "cap." The allowance includes monthly loan or lease payments for
    no more than two purchased or leased vehicles. As we noted in our
    report, the Creighton/ABI interpretation provided a higher
    transportation ownership allowance than IRS would permit or Ernst
    & Young permitted for debtors with debt-free vehicles or whose
    secured vehicle debt payments were less than the maximum
    applicable IRS allowance. The determination of actual lease
    payments was problematical for Ernst & Young and Creighton/ABI
    because the data in Schedule G (unexpired leases) were not
    generally useful for determining the amount remaining to be paid
    on the vehicle lease. As we discussed in our report, neither
    Creighton/ABI nor Ernst & Young found the data on leased vehicles
    in their samples to be particularly consistent. Ernst & Young did
    not include a transportation ownership allowance for vehicle lease
    payments unless they were listed as secured debt. If the lease
    payments, or the amount remaining to be paid on the lease, were
    listed as unsecured priority or unsecured nonpriority debt, no
    ownership allowance was included. We agree that it is possible
    that adjustments may need to be made in the 5- year repayment
    plans of debtors who incur substantial major vehicle repairs or
    are required to replace a vehicle. To the extent this occurs, the
    actual amount the debtor repaid to creditors could be less than
    anticipated at the beginning of the repayment plan, or in the
    "can-pay" formula as interpreted by Ernst & Young. On the other
    hand, to the extent this need does not arise, the Creighton/ABI
    method of determining transportation ownership allowances would
    understate the amount of income that would be available for debt
    repayment. 5. The authors stated that there are questions about
    the Ernst & Young database that we did not address in our report.
    These include the high percentage of asset cases in the chapter 7
    debtor sample, the fact that the sample was not strictly
    proportional to the chapter 7 filings in each district, and that
    Ernst & Young excluded what appears to be a high number of sample
    cases from its analysis. Page 88
    GAO/GGD-99-103 Personal Bankruptcy Appendix IV Comments From the
    Authors of the Creighton/ABI Report Ernst & Young's report did not
    discuss whether the asset cases in its sample had a higher
    proportion of "can-pay" debtors than did the no-asset cases in its
    sample. To be statistically valid, a sample need not be designed
    so that sample sizes are strictly proportional to the sizes of
    known subgroups within the population from which the sample was
    drawn. However, if a sample design is intentionally
    disproportionate to the size of known subgroups, projections to
    the population from which the sample was drawn must be
    appropriately weighted. It appears that Ernst & Young did such
    reweighting. Although the number of cases excluded from the
    analysis was higher than Creighton/ABI experienced, it is not
    necessarily an unusually high number of cases to exclude. Page 89
    GAO/GGD-99-103 Personal Bankruptcy Appendix V Comments From the
    Executive Office for U.S. Trustees Page 90          GAO/GGD-99-103
    Personal Bankruptcy Appendix VI GAO Contacts and Staff
    Acknowledgments Richard M. Stana, (202) 512-8816 GAO Contacts
    William Jenkins, Jr. (202) 512-8757 In addition to those named
    above, David Alexander, Anne Rhodes-Kline, Acknowledgements
    Sidney Schwartz, Wendy Ahmed, and Geoffrey Hamilton made key
    contributions to this report. Page 91
    GAO/GGD-99-103 Personal Bankruptcy Page 92    GAO/GGD-99-103
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