Personal Bankruptcy: Methodological Similarities and Differences in Three
Reports on Debtors' Ability to Pay (Testimony, 03/17/99,
GAO/T-GGD-99-58).

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

GAO noted that: (1) the Credit Center report estimated that 30 percent
of the chapter 7 debtors in its sample could pay at least 21 percent of
their nonhousing, nonpriority debt, after deducting their mortgage debt
payments and living expenses (exclusive of debt payments); (2) Ernst &
Young and ABI estimated that 15 percent and 3.6 percent, respectively,
of the debtors in their individual samples had sufficient income, after
deducting allowable living expenses, to pay all of their nonhousing
secured debts, all of their unsecured priority debts, and at least 20
percent of their unsecured nonpriority debts; (3) the reports have some
characteristics in common, such as the use of debtor-prepared income,
expense and debt schedules, the assumption that the debtor's income
would remain stable over a 5-year repayment period, and the assumption
that all debtors who entered a 5-year repayment plan would successfully
complete the plans--an assumption that historical experience suggests is
unlikely; (4) however, the reports have some methodological differences,
including different: (a) groupings of the types of debts that could be
repaid; (b) gross income thresholds used to identify those debtors whose
repayment capacity was analyzed; (c) assumptions about debtors'
allowable living expenses; (d) treatment of student loans that debtors
had categorized as unsecured priority debts; and (e) assumptions about
administrative expenses; and (5) these methodological differences
contributed to the reports' different estimates of debtors' repayment
capacity.

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

 REPORTNUM:  T-GGD-99-58
     TITLE:  Personal Bankruptcy: Methodological Similarities and 
             Differences in Three Reports on Debtors' Ability to Pay
      DATE:  03/17/99
   SUBJECT:  Bankruptcy
             Personal liability (legal)
             Debt collection
             Income statistics
             Debt
             Statistical methods
             Financial analysis
             Comparative analysis
             Loan defaults

             
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gg99058t Personal Bankruptcy Methodological Similarities and
Differences in Three Reports on Debtors' Ability to Pay

Statement of Richard M. Stana, Associate Director Administration
of Justice Issues General Government Division

United States General Accounting Office

GAO Testimony Before the Subcommittee on Commercial and

Administrative Law, Committee on the Judiciary, House of
Representatives

For Release on Delivery Expected at 10: 00 a. m., EST on Wednesday
March 17, 1999




GAO/T-GGD-99-58

  GAO/T-GGD-99-58

Summary Personal Bankruptcy: Methodological Similarities and
Differences in Three Reports on Debtors' Ability to Pay

Page 1 GAO/T-GGD-99-58 Personal Bankruptcy

Those who file for personal bankruptcy generally file under
chapters 7 or 13 of the bankruptcy code. Those who file under
chapter 7 generally seek discharge of their eligible debts. Those
who file under chapter 13 submit a repayment plan, which must be
confirmed by the bankruptcy court, to pay all or part of their
debts over a period not to exceed 3 or 5 years. Personal
bankruptcy filings have set new records in each of the last 3
years, although there is little agreement on the causes for such
high 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 some
of their debts and the amount of debt such debtors could repay.

Three reports by the Credit Research Center (October 1997), Ernst
& Young (March 1998), and Creighton University/ American
Bankruptcy Institute (March 1999) have examined different samples
of debtors who filed for bankruptcy under chapter 7 and estimated
the percentage of such debtors who could repay a substantial
portion of their debts. The Credit Center estimated that 30
percent of the chapter 7 debtors in its sample could repay at
least 21 percent of their nonhousing, nonpriority debts, such as
car loans and credit card debts, over a 5- year period. The Ernst
& Young and ABI reports estimated that 15 percent and 3.6 percent,
respectively, of the chapter 7 debtors in their individual samples
could repay (1) all of their nonhousing secured debts (such as
auto loans), (2) all of their unsecured priority debts (such as
certain taxes), and (3) at least 20 percent of their unsecured
nonpriority debts (such as credit card debt) over a 5- year
period.

The reports have some characteristics in common. Each used for its
analysis the data on income, expenses, and debts that debtors file
with their bankruptcy petitions. Although these are the only data
available for analyzing debtors' repayment capacity, the
reliability and accuracy of these data are unknown. Each report's
estimates also assumed that a debtor's income would be stable over
the 5- year repayment period and that all debtors who entered a 5-
year repayment plan would successfully complete their plans.

Differences in the three reports' methodologies contributed to
each report's different estimate of the percentage of chapter 7
debtors who could potentially repay a substantial portion of their
debts and the percentage of those debts that could be repaid over
5- year repayment period. These differences include different (1)
groupings of the types of debts that could be repaid, (2) gross
income thresholds to identify those

Summary Personal Bankruptcy: Methodological Similarities and
Differences in Three Reports on Debtors' Ability to Pay

Page 2 GAO/T-GGD-99-58 Personal Bankruptcy

debtors whose repayment capacity was analyzed, (3) assumptions
about debtors' allowable living expenses, (4) treatment of student
loans that debtors had categorized as unsecured priority debts;
(5) assumptions about the administrative expenses that would
accompany a debtor repayment plan. It is also possible that
differences in the sampling methods and time periods each report
used to select the debtors for analysis could have contributed to
the different results.

Statement Personal Bankruptcy: Methodological Similarities and
Differences in Three Reports on Debtors' Ability to Pay

Page 3 GAO/T-GGD-99-58 Personal Bankruptcy

Mr. Chairman and Members of the Subcommittee: I am pleased to be
here today to share our observations on the principal
methodological similarities and differences of three reports on
bankruptcy debtors' ability to pay their debts. These reports
endeavor to address an important public policy issue whether some
proportion of debtors who file for personal bankruptcy have
sufficient income, after expenses, to pay a substantial portion of
their debts.

The three reports were issued by the Credit Research Center
(Credit Center), 1 Ernst & Young, 2 and Creighton University/
American Bankruptcy Institute (ABI). 3 Last year we reported on
our analyses of the Credit Center and Ernst & Young reports. 4 It
is important to emphasize that our review of the ABI study is
still underway. Consequently, it is too early for us to discuss
the results of our analysis of the ABI report. Our objective in
reviewing each of these reports has been the same to assess the
strengths and limitations, if any, of the report's assumptions and
methodology for determining debtors' ability to pay and the amount
of debt that debtors could potentially repay. We have used the
same criteria to review each report.

The Credit Center report estimated that 30 percent of the chapter
7 debtors in its sample could pay at least 21 percent of their
nonhousing, nonpriority debt, after deducting their mortgage debt
payments and living expenses (exclusive of debt payments). Ernst &
Young and ABI estimated that 15 percent and 3.6 percent,
respectively, of the debtors in their individual samples had
sufficient income, after deducting allowable living expenses, to
pay all of their nonhousing secured debts, all of their unsecured
priority debts, and at least 20 percent of their unsecured
nonpriority debts. The reports have some characteristics in
common, such as the use of debtor- prepared income, expense and
debt schedules, the assumption that the debtor's income would
remain stable over a 5- year repayment period, and the assumption
that all debtors who entered a 5-

1 John M. Barron, Ph. D., and Michael E. Staten, Ph. D., Personal
Bankruptcy: A Report on Petitioners' Ability to Pay (October 7,
1997). 2 Ernst & Young, LLP, Chapter 7 Bankruptcy Petitioners'
Ability to Repay: The National Perspective, 1997 (March 11, 1998).
3 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 (March 8, 1999). 4 Personal Bankruptcy: The
Credit Research Center Report on Debtors' Ability to Pay (GAO/
GGD- 9847, Feb. 9, 1998) and Personal Bankruptcy: The Credit
Research Center and Ernst & Young Reports on Debtors' Ability to
Pay (GAO/T-GGD-98-79, March 12, 1998).

Statement Personal Bankruptcy: Methodological Similarities and
Differences in Three Reports on Debtors' Ability to Pay

Page 4 GAO/T-GGD-99-58 Personal Bankruptcy

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

The remainder of my statement discusses in greater detail the
similarities and differences in the findings and methodologies of
the three reports. A summary of these similarities and differences
is found in attachment I.

Debtors who file for personal bankruptcy 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 their eligible dischargeable debts. 6 Debtors who file under
chapter 7 may voluntarily reaffirm that is, voluntarily agree to
repay any of their eligible dischargeable debts. Debtors who file
under chapter 13 submit a repayment plan, which must be confirmed
by the bankruptcy court, for paying all or a portion of their
debts over a period not to exceed 3 years unless for cause the
court approved a period not to exceed 5 years.

Personal bankruptcy filings have set new records in each of the
past 3 years, although there is little agreement on the causes for
such high bankruptcy filings in a period of relatively low
unemployment, low inflation, and steady economic growth. Nor is
there agreement on (1) the number of debtors who seek relief
through the bankruptcy process who have the ability to pay at
least some of their debts and (2) the amount of debt such debtors
could repay.

5 A 1994 report by the Administrative Office of the U. S. Courts
reviewed the outcome of 953, 180 chapter 13 cases filed between
calendar years 1980 and 1988 and terminated by September 30, 1993.
AOUSC found that debtors received a discharge in about 36 percent
of the terminated cases. A chapter 13 discharge is generally
granted when a debtor successfully completes a court- approved
repayment plan

6 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. By statute, some
types of debts and obligations, such as alimony, child support,
some student loans, and certain taxes cannot generally be
discharged in bankruptcy proceedings. The debtor remains
financially responsible for nondischargeable debts after the close
of his or her bankruptcy case. Background

Statement Personal Bankruptcy: Methodological Similarities and
Differences in Three Reports on Debtors' Ability to Pay

Page 5 GAO/T-GGD-99-58 Personal Bankruptcy

Several bills have been introduced in the 105 th and 106 th
Congresses that would implement some form of needs- based
bankruptcy. Each of these bills includes provisions for
determining when a debtor could be required to file under chapter
13, rather than chapter 7. Currently, the debtor generally
determines whether to file under chapter 7 or 13. Generally, these
bills would establish a needs- based test, whose specific
provisions vary among the bills. H. R. 3150, the bill used in the
Ernst & Young and ABI analyses, would require a debtor whose gross
monthly income met a specified income threshold to file under
chapter 13 if the debtor's net monthly income after allowable
expenses was more than $50 and would be sufficient to pay 20
percent of the debtor's unsecured nonpriority debt over a 5- year
period. Debtors who did not meet these criteria would be permitted
to file 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 or automobile loans; (2)
unsecured priority debt, such as child support, alimony, and
certain taxes; and (3) unsecured nonpriority debt, such as credit
card debts. In analyzing debtors' ability to pay, the three
reports have focused principally on the percentage of total
unsecured nonpriority debt that debtors could potentially repay.

The Credit Center, Ernst & Young, and ABI reports have each
attempted to estimate (1) how many debtors who filed under chapter
7 may have had sufficient income, after expenses, to repay a
substantial portion of their debts, and (2) what proportion of
their debts could potentially be repaid.

Each of the reports used to some degree data from the financial
schedules that debtors file with their bankruptcy petitions.
Although these schedules are the only source of the detailed data
needed for an analysis of debtors' repayment capacity, the data in
the schedules are of unknown accuracy and reliability. There are
no empirical studies of the accuracy and reliability of the data
debtors' report in their financial schedules, and the National
Bankruptcy Review Commission's report recommended that these
schedules be randomly audited. 7

To develop its estimate of the total amount of debt that could be
repaid over a 5- year period, each report assumed that all debtors
would successfully complete a 5- year repayment plan. Each report
also assumed that each debtor's gross income, as reported in the
debtor's financial

7 Bankruptcy: The Next Twenty Years (October 20, 1997). Shared
Characteristics

of the Three Reports

Statement Personal Bankruptcy: Methodological Similarities and
Differences in Three Reports on Debtors' Ability to Pay

Page 6 GAO/T-GGD-99-58 Personal Bankruptcy

schedules, would remain unchanged over the 5- year repayment
period. Historically, only about one- third of chapter 13 debtors
have successfully completed their repayment plans, suggesting that
for two- thirds of debtors something changed between the time the
plans were confirmed by the bankruptcy court and the time the
actual repayment plan was to be successfully completed.

The three reports focus on the potential debt that debtors could
repay should more debtors be required to file under chapter 13.
However, should the number of debtors who file under chapter 13
increase, there would also be additional costs for bankruptcy
judges and administrative support requirements that would be borne
by the government. This is because bankruptcy judges would be
involved in debtor screening to a greater extent than they are now
and chapter 13 cases require more judicial time than chapter 7
cases do. None of the reports estimated these additional costs,
although the ABI report acknowledges that such additional costs
could accompany means- testing of bankruptcy debtors. In addition,
the Religious Liberty and Charitable Donation Protection Act of
1998 8 permits chapter 13 bankruptcy debtors to include certain
charitable deductions of up to 15 percent of their annual gross
income in their allowable living expenses. The implementation of
this statute could affect the estimates in each of the three
reports. The potential effect could be to reduce (1) the number of
bankruptcy debtors who could be required under the needsbased
tests to file under chapter 13 or (2) the amount of debt repaid to
unsecured nonpriority creditors by those debtors who are required
to file under chapter 13. The act was enacted after the Credit
Center and Ernst & Young issued their reports. The ABI report
noted the act could effect the results of debtor means- testing,
but did not attempt to apply the act to its sample of debtors.

The reports differed in the types of debts that they estimated
debtors could repay, their sampling methods, the calendar period
from which each report's sample cases were selected, and the
assumptions used to estimate debtors' allowable living expenses
and debt repayments. The ABI report classified student loans
differently than the other two reports. We have not analyzed the
impact these differences may have had on each report's findings
and conclusions.

8 P. L. 105- 183 (1998). Methodological

Differences Among the Three Reports

Statement Personal Bankruptcy: Methodological Similarities and
Differences in Three Reports on Debtors' Ability to Pay

Page 7 GAO/T-GGD-99-58 Personal Bankruptcy

The Credit Center report estimated the percentage of chapter 7
debtors who could repay a percentage of their nonhousing,
nonpriority debt. These debts included secured nonhousing debt and
unsecured nonprority debt. The Credit Center estimated that 30
percent of the chapter 7 debtors in its sample could repay at
least 21 percent of their nonhousing, nonpriority debts, after
deducting from their gross monthly income monthly mortgage
payments and monthly living expenses.

The Ernst & Young and ABI reports estimated the proportion of
debtors who had sufficient income, after living expenses, to repay
over a 5- year repayment period:

 all of their nonhousing secured debt, such as automobile loans
(debtors' payments on home mortgage debt were included in the
debtors' living expenses);

 all of their secured priority debts, such as back taxes, alimony,
and child support (child support and alimony payments were assumed
to continue for the full 5- year payment period unless otherwise
noted in the debtors' financial schedules); and

 at least 20 percent of their unsecured nonpriority debts. The
Ernst & Young and ABI reports estimated that 15 percent and 3. 6
percent, respectively, of the chapter 7 debtors in their
individual samples met all of these criteria.

Each of the reports used somewhat different sampling methods, and
the bankruptcy filings included in their analyses cover different
districts and different calendar periods. The Credit Center
selected 2,441 chapter 7 cases filed primarily at the beginning of
the month in a single, large urban location in each of 13
judgmentally selected bankruptcy districts. 9 The cases were
generally selected during the first few days of a one or two month
period in 1996. Ernst & Young's analysis was based on a national
random sample of 2,142 calendar year 1997 chapter 7 case filings
as reported in VISA's bankruptcy notification service. VISA
collects copies of the bankruptcy petitions filed in the
bankruptcy courts. Ernst & Young's analysis included chapter 7
bankruptcy filings from each of the 90 bankruptcy districts. 10
The ABI report is based on 1,041 randomly selected

9 This is the number of cases filings used in the analysis. The
Credit Center also included an analysis of 1, 357 chapter 13 case
filings, and compared the repayment capacity of the debtors who
filed under chapter 7 and 13.

10 The number of cases selected in each district was proportional
to each district's share of total national chapter 7 nonbusiness
bankruptcy filings in 1997. Differences in the Types of

Debts Each Report Estimated Could Be Repaid

Sampling Differences

Statement Personal Bankruptcy: Methodological Similarities and
Differences in Three Reports on Debtors' Ability to Pay

Page 8 GAO/T-GGD-99-58 Personal Bankruptcy

chapter 7 case filings from calendar year 1995 in 7 judgmentally
selected districts. The Credit Center and ABI reports have one
district Northern Georgia in common.

It is possible that there are differences in each sample's debtor
characteristics that could affect each report's estimate of debtor
repayment capacity. The differences could result from the
different time periods and the different sampling methods for
selecting districts and filers within each district. Such
differences, should they exist, could have affected each report's
estimate of the percentage of chapter 7 debtors who could
potentially repay a substantial portion of their debts and how
much they could repay.

Both the Credit Center and Ernst & Young reports assumed that
debtors would incur no additional debt during the 5- year
repayment period. The ABI report assumed that debtors could
potentially incur expenses for major repairs or replacement of
automobiles during the course of the 5year repayment plan, but
that they would incur no other additional debt.

The Credit Center report was completed before H. R. 3150 was
introduced, and its repayment capacity analysis was not based on
any specific proposed legislation. The Credit Center report
analyzed the repayment capacity of all the chapter 7 debtors in
its sample, regardless of their annual gross income.

The Ernst & Young and ABI report used the needs- based provisions
of different versions of H. R. 3150 as the basis for their
analysis of debtor repayment capacity. H. R. 3150 passed the House
in June 1998. Under the provisions of H. R. 3150 as introduced and
as it passed the House, debtors must pass three tests to be
required to file under chapter 13:

 debtors must have monthly gross income that exceeds a set
percentage of the national median income for households of
comparable size (debtors below this threshold are presumed to be
eligible to file under chapter 7);

 debtors must have income of more than $50 per month after
allowable living expenses and payments on secured and unsecured
priority debts; and,

 debtors could repay at least 20 percent of their unsecured
nonpriority debts over a 5- year period if they used this
remaining income for such payments.

In their respective analyses, Ernst & Young used the provisions of
H. R. 3150 as introduced and ABI used the provisions of H. R. 3150
as it was Differences in Assumptions

Used to Estimate Repayment Capacity

Statement Personal Bankruptcy: Methodological Similarities and
Differences in Three Reports on Debtors' Ability to Pay

Page 9 GAO/T-GGD-99-58 Personal Bankruptcy

passed by the House of Representatives. The principal effect of
using the two different versions of H. R. 3150 was that each
report used a different threshold of gross annual income to screen
debtors for further repayment analysis. In the Ernst & Young
analysis, debtors whose gross annual income was 75 percent or less
of the national median income for a household of comparable size
were deemed eligible for chapter 7. Debtors whose gross annual
income was more than 75 percent of the national median household
income were subject to further analysis of their repayment
capacity. In the ABI report's analysis, debtors whose gross annual
income was at least 100 percent of the national median income for
households of comparable were subject to further repayment
analysis.

The three reports used different estimates of debtors' allowable
living expenses. The Credit Center report established its own
criteria for debtors' living expenses. Basically, the Credit
Center's analysis used the debtor's living expenses as reported on
the debtor's schedule of estimated monthly living expenses. The
Ernst & Young and ABI reports used the Internal Revenue Service's
(IRS) Financial Collection Standards, as specified in H. R. 3150.
However, Ernst & Young and ABI interpreted them somewhat
differently. The principal difference was for transportation
expenses. Ernst & Young did not include an automobile ownership
allowance for debtors who leased cars or whose cars were debt-
free. ABI included an ownership allowance for leased cars and for
debtors with debt- free cars. The ABI report noted that this
difference in allowable transportation expenses accounted for a
substantial part of the difference between the ABI and Ernst &
Young estimates of the percentage of chapter 7 debtors who could
potentially repay at least 20 percent of their unsecured
nonpriority debt.

ABI also deducted from the debtors' total unsecured priority debt
the value of any student loans and added the value of these loans
to debtors total unsecured nonpriority debt. To the extent this
was done, it had the effect of freeing debtor income to pay
unsecured nonpriority debt.

Finally, the ABI report assumed that administrative expenses, such
as the trustee fee, would consume about 5.6 percent of debtors'
nonhousing payments to creditors under a 5- year repayment plan.
The Credit Center and Ernst & Young reports assumed that none of
the debtors' payments would be used for administrative expenses,
but that 100 percent of debtors' payments would be used to pay
creditors.

In summary, each of the three reports provide a different
perspective on bankruptcy debtors' ability to pay their debts.
Each has added to our knowledge and understanding of the potential
impact of means- testing on Differences in Assumptions

About Debtors' Allowable Living Expenses

Statement Personal Bankruptcy: Methodological Similarities and
Differences in Three Reports on Debtors' Ability to Pay

Page 10 GAO/T-GGD-99-58 Personal Bankruptcy

the number of debtors who would be required to file under chapter
13 and the amount of debt that such debtors could potentially
repay. However, the assumptions and data used in these reports
lead to different estimates of debtors' repayment capacity and
require the reader to use caution in interpreting and comparing
the results of each report. The actual number of chapter 7 debtors
who could repay at least a portion of their nonhousing debt could
be more or less than the estimates in these studies. Similarly,
the amount of debt these debtors could potentially repay could
also be more or less than the reports estimated.

We agree that there are likely some debtors who file for
bankruptcy under chapter 7 who have the financial ability to repay
at least a portion of their debt, and that those who are able to
repay their debts should do so. But we believe that more research
is needed to verify and refine the estimates of debtors' repayment
capacity to better inform policymakers.

Mr. Chairman, this concludes my prepared statement. I would be
pleased to answer any questions that you or other Members of the
Subcommittee may have.

Page 11 GAO/T-GGD-99-58 Personal Bankruptcy

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

Page 12 GAO/T-GGD-99-58 Personal Bankruptcy

Specific Aspects of Report Credit Research Center (October 1997)
Ernst & Young

(March 1998) Creighton University/ American

Bankruptcy Institute (March 1999)

Estimated percent of chapter 7 debtors who could repay substantial
portion of their debts 30 percent a 15 percent 3.6 percent

Estimated amount of debt that could be repaid over 5- year
repayment period 21 percent of nonhousing,

nonpriority debts. All nonhousing secured debt, all

unsecured priority debt, 20 percent of unsecured nonpriority debt.
Same as Ernst & Young. Proposed legislation used as basis for
assessment of repayment capacity No specific proposed legislation.
H. R. 3150 as introduced.

H. R. 3150 as passed by the House of Representatives, June 10,
1998.

Key overall assumptions

Stability of debtors' income and expenses

Debtors' income and living expenses remain unchanged over 5- year
repayment period. Same as Center report.

Debtors' income stable for 5- year period, but assumed some
expenses may change. Percentage of chapter 13 plans successfully
completed 100% 100% 100%

Trustee and other administrative expenses for chapter 13 repayment
plans. None None

5.6% of annual debtor nonhousing debt payments over 5- year
period, not including debtor attorney fee.

Debtor sample

Selection of bankruptcy districts included in sample

Sample drawn from single location in each of 13 judgmentally
selected bankruptcy districts.

National sample that included nonbusiness chapter 7 filings from
all 90 bankruptcy districts.

Sample drawn from 7 judgmentally selected bankruptcy districts.

Calendar period from which sample was drawn.

Generally, May or June of 1996, but months varied among the 13
districts. Calendar year 1997. Calendar year 1995.

Selection of debtors included in final sample used for analysis

Nonrandomly selected sample of nonbusiness chapter 7 and chapter
13 filings filed primarily in the first few days of 1 or 2 months
in 1996 in each district. (Total of 2,441 chapter 7 and 1,357
chapter 13 filings.) May include cases that were dismissed and in
which debtors received no discharge of their debts.

Random sample from all nonbusiness chapter 7 filings during the
year. Analysis included 2,142 chapter 7 cases, adjusted to exclude
estimated percentage of cases dismissed.

Random sample of cases closed as nonbusiness chapter 7 that were
filed in 1995, including some cases filed under other chapters.
(Total of 1,041 filings.) Excluded cases dismissed because debtor
did not file all required schedules.

Determination of debtor's gross annual income

Calculation of debtor's gross monthly income

Basically, gross monthly income as reported on debtor's schedule
of estimated monthly income. Same. Same.

Gross income threshold used for further repayment capacity
analysis. Examined repayment capacity of

all debtors in sample. Analysis of repayment capacity

limited to those debtors whose reported gross annual income was
greater than 75 percent of national median income as defined in H.
R. 3150 as introduced.

Analysis of repayment capacity limited to those debtors whose
reported gross annual income was at least100 percent of national
median income as defined in H. R. 3150 as it passed the House of
Representatives, June 10,1998.

Attachment I Page 13 GAO/T-GGD-99-58 Personal Bankruptcy

Specific Aspects of Report Credit Research Center (October 1997)
Ernst & Young

(March 1998) Creighton University/ American

Bankruptcy Institute (March 1999) Calculation of debtor's
allowable monthly living expenses b

Housing c Housing expenses as listed by

debtor on schedule of estimated monthly expenses.

IRS allowance, which could be exceeded if necessary to pay monthly
mortgage. Same as Ernst & Young

Food and clothing allowance Expenses as listed on debtor's

schedule of estimated monthly expenses. d IRS allowance. Same as
Ernst & Young

Transportation Expenses as listed on debtor's

schedule of estimated monthly expenses

IRS operating allowance, plus monthly payments necessary to pay
existing automobile debt in full over 60 months. No ownership
allowance for leased cars.

IRS operating allowance, plus monthly payments necessary to pay
existing automobile debt in full over 60 months, or the ownership
allowance for up to 2 debt- free cars. Ownership allowance for
leased cars in some circumstances.

Other necessary expenses Basically expenses as listed on

debtor's schedule of estimated monthly expenses

IRS has no fixed dollar amount. Generally included debtor expenses
as listed on debtor's schedule for estimated monthly expenses not
covered in other categories. Generally, same as Ernst &

Young.

Categorization of debts

Secured debts As listed on debtor schedules Same Same. Unsecured
priority debts As listed on debtor schedules. Same

As listed on debtor schedules with one exception. Total value of
all student loans listed was deducted from total.

Unsecured nonpriority debts As listed on debtor schedules Same As
listed on debtor schedules

with one exception. Added total value of student loans listed to
unsecured priority debt total. a The Center Report noted that 30
percent of chapter 7 debtors could repay at least 21 percent of
their

unsecured nonpriority debts. b Both the Ernst & Young and ABI
reports used the Internal Revenue Service Collection Financial

Standards for determining debtors' allowable living expenses. c
Includes monthly rent, mortgage payments, utilities, property
taxes, homeowner's or renter's

insurance, maintenance and repairs, and homeowner dues and
condominium fees. IRS standards are adjusted for cost of living at
the county level. d Except for housing, the Credit Center report
did not group a debtor's monthly living expenses by

category. Rather it determined total monthly allowable expenses,
using the expenses listed on the debtor's schedule of estimated
monthly expenses, with some adjustments, such as deducting monthly
contributions to nonretirement savings. e The IRS transportation
allowance includes a uniform national standard for ownership
expense and

local standards (adjusted for cost- of- living) for operating
expenses. A public transportation expense is included if the
debtor does not own or lease a car.

Source: GAO analysis of the Credit Center, Ernst & Young, and ABI
reports.

Page 14 GAO/T-GGD-99-58 Personal Bankruptcy

Page 15 GAO/T-GGD-99-58 Personal Bankruptcy

Page 16 GAO/T-GGD-99-58 Personal Bankruptcy

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