United States General Accounting Office

GAO Report to Congressional Requesters

February 1998 PERSONAL

BANKRUPTCY

The Credit Research

Center Report on

Debtors’ Ability To Pay

GAO/GGD-98-47

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-278972 

February 9, 1998

The Honorable Charles E. Grassley, Chairman

The Honorable Richard J. Durbin

Ranking Minority Member

Subcommittee on Administrative Oversight

 and the Courts

Committee on the Judiciary

United States Senate

This report provides information on the results of our review of the Credit

Research Center (the Center) report on personal bankruptcies. The Center

report addressed 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 the report’s research

methodology and formula for estimating the income that debtors have

available to pay debts.

Background Debtors who file personal bankruptcy petitions usually file under chapters

7 or 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.1

 Debtors who file under chapter 13 submit a

repayment plan, which must be confirmed by the bankruptcy court, for

paying all or a portion of their debts over a 3-year period unless for cause

the court approves a period not to exceed 5 years. The Center report was

based on data from 3,7982

 personal bankruptcy petitions filed principally

in May and June 1996 in 13 of the more than 180 bankruptcy court

locations. The petitions included 2,441 chapter 7 and 1,357 chapter 13

petitions.

The researchers collected a wide variety of information about debtors’

income, expenditures, and debts from the schedules the debtors filed with

their bankruptcy petitions. Because the debtors’ schedules used in the

report must be obtained from the case files at each court location,

obtaining the data used for the Center report represented a considerable

investment of Center time and money. The data are not available from the

automated databases maintained by the federal judiciary or the Executive

Office of U.S. Trustees, the two principal sources of automated data on

bankruptcy cases.

1

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.

2

This is the number of petitions the Center’s report said were usable for analysis.

Page 1 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

On the basis of the Center report’s assumptions and the formula used to

determine income available for repayment of nonpriority, nonhousing

debt,3

 the report estimated that about 50 percent of the chapter 13 debtors

in the 13 locations combined would have sufficient income, after living

expenses, to repay all of their nonpriority, nonhousing debt over a 5-year

period; and an additional 19 percent could pay 60 percent or more over the

same period. The report estimated that 5 percent of the chapter 7 debtors

in the 13 locations combined could repay all of their nonpriority,

nonhousing debt over 5 years; 10 percent could repay at least 78 percent,

and 25 percent could repay at least 30 percent.4

 The Center report also

estimated that about 11 percent of chapter 13 debtors and about

56 percent of chapter 7 debtors were expected to have no income

available to repay nonhousing debts.

Results in Brief Overall, the Center report represents a useful first step in analyzing the

ability of bankruptcy debtors to pay their debts. Because there is little

empirical basis on which to assess the accuracy of the data used in the

report’s analysis, and because the data provided by the authors showed

considerable variation among the 13 locations used for analysis, the

report’s general findings must be interpreted with caution. Our review of

the Center report suggests that additional research and clarification would

be needed to confirm the accuracy of the report’s conclusions regarding

the proportion of debtors who may have the ability to repay at least a

portion of their nonpriority, nonhousing debts.

We found five areas of concern with the Center report that could affect

interpretation of the report’s conclusions: (1) the report’s assumptions

about the information debtors provide at the time of filing bankruptcy

regarding their income, expenses, and debts and the stability of their

income and expenses over a 5-year period were not validated; (2) the

report did not clearly define the universe of debts for which it estimated

debtors’ ability to pay; (3) payments on nonhousing debts that debtors

stated they intended to reaffirm—voluntarily agree to repay—were not

included in debtor expenses in determining the net income debtors had

3

The Center report assumed that debtors would repay their home mortgage debt and “priority debts.”

As discussed later, the report defined priority debt as “unsecured priority debt.” The report did not

clearly define unsecured priority debts nor explain why the report’s analysis assumed that debtors

would repay their unsecured priority debts.

4

The 10 percent and 30 percent figures were cumulative. That is, the 10 percent figure included all

debtors the report estimated would be able to pay 78 percent or more, and the 25 percent figure

included all debtors the report estimated would be able to pay 30 percent or more of their nonhousing

debt.

Page 2 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

available to pay their nonpriority, nonhousing debts; (4) the report

presented results based on data from all 13 locations combined and

provided little discussion of the considerable variation among the 13

locations used in the analysis; and (5) a scientific, random sampling

methodology was not used to select the 13 bankruptcy locations or the

bankruptcy petitions used in the analysis.

First, the report’s analysis and conclusions about the income debtors had

available for repayment of nonpriority, nonhousing debt rest on two

fundamental assumptions: (1) the debtors’ schedules of current estimated

income, current estimated monthly expenditures, and debts, generally

filed at the same time as the bankruptcy petitions,5

 were accurate; (2) the

debtors’ current estimated income and living expenses, as reported in

those schedules, could be used to satisfactorily forecast their income and

living expenses for a 5 year debt repayment period. These assumptions

have been the subject of considerable debate, and the researchers did not

test their validity.

With regard to the accuracy of the data in the debtors’ initial schedules,

the National Bankruptcy Review Commission’s October 1997 report6

 noted

that there has been no empirical study of the accuracy of the financial data

initially reported by bankruptcy debtors, and it recommended random

audits of such data. The Center report acknowledged that there were

inherent uncertainties in using the data from debtors’ schedules of income

and expenses, but it stated that the assumptions used in the analysis

regarding debtors’ net income available to repay nonpriority, nonhousing

debts were conservative and may actually understate net income.

With regard to the 5-year stability in debtors’ income and expenses, the

data reported in the debtors’ initial schedules represent a snapshot in time,

and there is some empirical evidence that these data may not necessarily

provide a reliable foundation for forecasting debtors’ income and

expenses for a 5-year period. A 1994 study by the Administrative Office of

the U.S. Courts (AOUSC)7

 found that only about 36 percent of debtors who

voluntarily entered a 3 to 5 year bankruptcy debt repayment plan under

chapter 13 were able to successfully complete their repayment plans and

5

Federal bankruptcy rule 1007 provides that, among other things, schedules and statements other than

the statement of intention shall be filed with the bankruptcy petition 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.

6

Bankruptcy: The Next Twenty Years, October 20, 1997.

7

Bankruptcy Statistical Trends: Chapter 13 Dispositions, October 1994.

Page 3 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

obtained discharges.8 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. This suggests that the Center report’s second

assumption—that debtors’ income and expenses would remain unchanged

for a 5-year period—may be optimistic (at least for a portion of debtors)

and that further research may be necessary to validate this assumption.

Second, the report did not clearly define the universe of nonhousing debts

for which it estimated debtors’ ability to pay. There is some evidence in

the Center report that the intent of the analysis was to estimate debtors’

ability to pay their eligible dischargeable nonhousing debts—secured and

unsecured. However, this is not explicitly stated. The Center report

defined the net income that debtors had available to pay nonhousing debts

as the debtor’s net annual take-home pay less (1) annual living expenses

(as defined in the report) and (2) annual payments toward “unsecured

priority debt.”9

 The report stated that its analysis assumed that all

unsecured priority debt would be paid in full over a 5 year repayment

period. The report also noted that the two most common unsecured

priority debts that debtors listed were back taxes and past-due child

support. These are debts that are generally nondischargeable in

bankruptcy proceedings.10 However, the categories of debts listed on the

schedule of unsecured priority debts filed by the debtor11 can, in some

cases, include both debts that are dischargeable and debts that are

8

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 the Executive Office of U.S. Trustees said such

chapter 13 discharges were rare.

9

The distinction between priority and nonpriority unsecured debt in chapter 7 cases is most evident in

those chapter 7 bankruptcy cases in which money from the sale of a debtor’s nonexempt assets is

available for distribution to creditors. Such chapter 7 “asset” cases are a very small proportion of total

chapter 7 personal bankruptcy cases. In such asset cases, the proceeds from the sale of the nonexempt

assets are distributed to creditors in a statutorily defined order—unsecured priority and unsecured

nonpriority. In no-asset chapter 7 cases, the debtor’s eligible dischargeable unsecured debts—priority

and nonpriority—that have not been reaffirmed are usually discharged (with limited exceptions).

10By 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.

11Schedule E “Creditors Holding Unsecured Priority Claims.”

Page 4 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

generally nondischargeable.12 The Center report did not state whether the

report’s assumption about the repayment of unsecured priority debts

included dischargeable as well as nondischargeable debts. Moreover, not

all debts that are generally nondischargeable would be appropriately listed

in the debtor’s schedule of unsecured priority debts. To the extent that the

Center report understated nondischargeable debts, it would have

overstated the net income that debtors would have available to pay

dischargeable debts. Conversely, to the extent that the report overstated

nondischargeable debts, it would have understated debtors’ net income

available to pay dischargeable debts. In addition, to the extent that the

report assumed that all dischargeable unsecured priority debts would be

paid, it would have created a disparity in the report’s treatment of

nonhousing dischargeable debts.

Third, the Center report did not include in debtors’ expenses the payments

required to repay the nonhousing debts that debtors stated it was their

intention to reaffirm.13 In each of the report’s 13 locations, debtors stated

their intention to reaffirm, or repay, at least some of their nonhousing

debts. For 12 of the 13 locations in the Center report (Dallas reaffirmation

data were incomplete), the average amount of secured nonhousing debt

that debtors indicated they intended to reaffirm ranged from $1,362 per

debtor in Los Angeles to $6,706 per debtor in Memphis.14 To the extent

that debtors in the Center report reaffirmed nonhousing debts and

maintained payments on those debts, these debtors would have less

estimated income to pay their eligible dischargeable debts that were not

reaffirmed.

Fourth, the Center report presented results based on data from all 13

locations combined. However, the data provided to us by the report’s

authors, but not included in the report, showed wide variation among the

report’s 13 locations in debtors’ estimated ability to pay. In the 12

locations for which the Center said its reaffirmation data were complete,

the data also showed wide variation in the percentage of debtors who

stated their intention to reaffirm at least some nonhousing debts and the

12As a practical matter, with the exception of alimony, child support, and taxes—debts that are

generally nondischargeable in chapter 7 cases—the priority of unsecured claims set forth in section

507(a) of the bankruptcy code (and listed on Schedule E) does not play a very meaningful role in

no-asset chapter 7 cases. This is because the eligible dischargeable debts on Schedule E, if applicable,

are usually discharged in no-asset chapter 7 cases.

13A reaffirmation of a debt is a formal agreement whereby the debtor agrees to remain personally liable

for a debt, despite the bankruptcy discharge being granted by the bankruptcy court.

14In no location did debtors state their intention to reaffirm more than 1 percent of their unsecured

nonhousing debt.

Page 5 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

average amount of nonhousing debt to be reaffirmed. These variations

may in part reflect the influence of varying local bankruptcy practices.

Given these variations, we believe it is appropriate to be cautious in

making general statements about the debtors across all 13 locations.

Finally, the Center’s researchers selected the 13 bankruptcy locations and

3,798 personal bankruptcy petitions without using scientific random

sampling techniques. As a result, the national estimates presented in the

report are not based on representative probability sampling methods. In

addition, standard statistical methods, such as the calculation of statistical

error rates, cannot be used to evaluate the likely accuracy of the results in

the Center report. Consequently, the methods used in the Center’s analysis

do not provide a sound basis for generalizing the Center report’s findings

to the annual 1996 filings in each of the 13 locations nor to the national

population of personal bankruptcy filings.

Study’s Fundamental

Assumptions Were

Not Validated

The Center report’s analysis was based on data from the initial schedules

of current estimated monthly income, current estimated average monthly

expenditures, and debts that debtors submitted at the time they filed for

bankruptcy. There are two reasons to question whether broad conclusions

about debtors’ ability to pay nonhousing debt can be made on the basis of

the debtors’ statements of estimated income and estimated expenses at

the time of filing for bankruptcy:

• The accuracy of the data in the debtors’ initial schedules is unknown, and

no empirical study has been done to assess their accuracy. Moreover,

debtors may generally amend these schedules as a matter of course at any

time prior to final disposition of the debtors’ bankruptcy cases.

The Center report assumed that debtors’ income and living expenses, as

reported in those schedules, could be used to satisfactorily forecast

debtors’ income and living expenses for a 5 year debt repayment period.

However, the report did not include empirical evidence to support this

assumption. There is some empirical evidence that this assumption may

not be appropriate, at least for a portion of debtors who file for

bankruptcy.

Page 6 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

Accuracy of Data on

Debtors’ Schedules of

Income, Expenses, and

Debts Not Known

The Center report relied on debtors’ self-reported data on current

estimated income, current estimated expenditures, and debts at the time

of filing and assumed that these data were accurate. Although the data in

the various schedules are the only such information available at the time a

debtor files for bankruptcy, the National Bankruptcy Review Commission

report noted that “no study has yet been done to test the accuracy of the

data as initially reported by debtors,” and it recommended random audits

of debtors’ initial schedules. The effect of any inaccuracies in these

schedules could be that the debtor’s actual net income is overstated or

understated.

The schedules that debtors complete on their current average monthly

income15 and current average monthly expenditures16 indicate that debtors

should estimate their income and expenditures. The data that debtors

report in these schedules represent a snapshot in time, and debtors may

generally amend their schedules at any time prior to final disposition of

their bankruptcy cases. Such amendments were not included in the

Center’s analysis. Amendments may be made for a variety of reasons, but

there are no readily available empirical data on how frequently schedules

are actually amended and the effect of such amendments on the income,

expenditures, and debts that debtors report on their initial schedules.

Assumption That Debtors’

Reported Income and

Expenses Could Be Used

to Satisfactorily Forecast

Income and Expenses for 5

Years

The Center report’s analysis assumed that the debtor’s income and

expenses, as reported on the schedules filed with the bankruptcy petition,

could be used to satisfactorily forecast his or her income and expenses

during the course of a 5 year debt repayment period. In other words, the

Center report assumed that a debtor’s reported income and expenses

would remain uninterrupted and unchanged over the 5 years. This

assumption is critical to the report’s estimate of the percentage of

nonhousing debt that debtors could repay over 5 years. However, the

Center report provided no empirical support for this assumption.

A couple of factors raise questions about the validity of this assumption.

First, the Center report provided evidence of instability in debtor income

in the year preceding the debtor’s bankruptcy filing. About 77 percent of

the 2,441 chapter 7 debtors and about 85 percent of the 1,357 chapter 13

15Schedule I “Current Income of Individual Debtor(s).” The schedule includes such categories as

monthly gross wages, salary, and commissions; payroll deductions; and income from nonwage

sources, such as interest and dividends, alimony, and Social Security.

16Schedule J “Current Expenditures of Individual Debtor(s).” The schedule includes such expenditure

categories as housing, utilities, food, laundry, medical and dental, insurance, and transportation.

Page 7 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

debtors in the Center’s analysis reported having some wage income at the

time of filing. However, about 68 percent of the chapter 7 debtors and

about 50 percent of the chapter 13 debtors in the Center’s report also

reported they had experienced a reduction in income during the 12 months

prior to filing bankruptcy. As the Center report noted, it is not surprising

that those who file for bankruptcy have suffered a loss of income prior to

filing.

Second, there is also some evidence that debtors may experience

fluctuating income or expenses in the 5 years following the filing of their

bankruptcy petitions. The findings of a 1994 report by AOUSC suggest that

at least a portion of debtors could be expected to experience deterioration

in their financial circumstances during the 5 years after filing for

bankruptcy. AOUSC reviewed the outcomes of 953,180 chapter 13 cases filed

between calendar years 1980 and 1988 and terminated by September 30,

1993.17 AOUSC found that debtors received a discharge in only about

36 percent of all chapter 13 cases terminated.18 A chapter 13 discharge is

generally granted when a debtor successfully completes a court-approved

repayment plan. A hardship discharge may be granted to chapter 13

debtors who fail to complete the plan payments due to circumstances for

which the debtor should not justly be held accountable.19 AOUSC found that

in about 14 percent of all chapter 13 cases terminated, the debtors were

unable to maintain their payments; prior to termination, their cases were

converted to chapter 7 liquidation, in which all eligible debts were

discharged.20 The typical case that converted to chapter 7 did so about 2

years after the case was filed. AOUSC also found that about 49 percent of all

chapter 13 cases terminated were dismissed, but data were not available

17As of September 30, 1993, almost 97 percent of the 985,212 chapter 13 cases filed between calendar

years 1980 and 1988 had been terminated. According to data in the AOUSC report, each year during

this period nonbusiness debtors accounted for at least 91 percent of all chapter 13 petitions filed.

However, AOUSC’s report on case results did not distinguish between business and nonbusiness

chapter 13 debtors, and it is possible that the results for nonbusiness debtors could have differed from

that of business debtors.

18The percentage of cases for which debtors received a discharge remained relatively stable at between

34 percent and 37 percent of all cases terminated from 1982 to 1987. Although the percentage of

terminated cases that resulted in discharges dropped to 31 percent in 1988, AOUSC noted that the

percentage would have been expected to increase as more 1988 cases were closed.

19AOUSC did not report data on the number of chapter 13 hardship discharges.

20The percent of chapter 13 cases that converted to chapter 7 was relatively stable at between 13 and

16 percent for cases filed each year between 1980 and 1988.

Page 8 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

on the reasons for the dismissals.21 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 schedules

alone.

Center Report Did Not

Clearly Define the

Universe of

Nonhousing Debts for

Which It Estimated

Debtors’ Ability to Pay

There is some evidence in the Center report that the intent of the analysis

was to estimate debtors’ ability to pay their eligible dischargeable

nonhousing debts—secured and unsecured. However, this is not explicitly

stated, and the Center report did not clearly define the universe of

nonhousing debts for which it estimated debtors’ ability to pay. The Center

report defined the net income that debtors had available to pay

nonhousing debts as the debtor’s net annual take-home pay less (1) living

expenses (as defined in the report) and (2) payments toward “unsecured

priority debt.”22 As examples of such debts, the report mentioned back

taxes and past-due child support. These are examples of debts that are

generally nondischargeable in bankruptcy proceedings.

Debtors report unsecured priority debts on Schedule E.23 However, the

debts to be listed in Schedule E can, in some cases, include both debts that

are dischargeable and debts that are generally nondischargeable.

Moreover, not all nondischargeable debts can be found in Schedule E.24

For example, certain student loans, debts arising out of drunk driving,

criminal restitution, and criminal court fines are not dischargeable in

bankruptcy, but such obligations would be appropriately listed as

21Chapter 13 cases may be dismissed for a variety of reasons, including failure to pay the case filing

fee, the debtor’s failure to attend the required meeting with the chapter 13 trustee and the debtor’s

creditors, failure to file a plan in a timely manner, denial of confirmation of a repayment plan, failure to

begin making plan payments, or material default by the debtor with respect to a term of a confirmed

plan.

22The distinction between priority and nonpriority unsecured debt in chapter 7 cases is most evident in

those chapter 7 bankruptcy cases in which money from the sale of a debtor’s nonexempt assets is

available for distribution to creditors. Such chapter 7 “asset” cases are a very small proportion of total

chapter 7 personal bankruptcy cases. In such asset cases, the proceeds from the sale of the nonexempt

assets are distributed to creditors in a statutorily defined order—unsecured priority and unsecured

nonpriority. In no-asset chapter 7 cases, the debtor’s eligible dischargeable unsecured debts—priority

or nonpriority—that have not been reaffirmed are usually discharged (with limited exceptions).

23Schedule E “Creditors Holding Unsecured Priority Claims.”

24The Center report apparently did include in debtors’ living expenses any reported alimony payments

debtors listed in Schedule J. Alimony payments are also generally nondischargeable debts. It should be

noted that under the bankruptcy code, nondischargeable child support, alimony, and taxes must be

paid in full in chapter 13 repayment plans. These obligations would appropriately be listed on Schedule

E. The Center report assumed that unsecured priority debts would be paid in full over a 5-year period

in either chapter 7 or chapter 13 bankruptcies.

Page 9 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

“unsecured nonpriority debt” on Schedule F.25 The Center report included

student loans in unsecured nonpriority debt. However, it is not clear if

these student loans represented only loans that were eligible for discharge.

Thus, the Center report may not have identified all generally

nondischargeable debts for which the debtor would still be responsible

following the close of his or her bankruptcy case.26

To the extent that the Center report understated nondischargeable debts,

it would have overstated the net income that debtors would have available

to pay dischargeable nonhousing debts. Conversely, to the extent that the

report overstated nondischargeable debts, it would have understated

debtors’ net income available to pay dischargeable debts. In addition, to

the extent that the report assumed that dischargeable unsecured priority

debts would be paid, it would have created a disparity in the report’s

treatment of dischargeable nonhousing debts.

Center Report’s

Determination of

Debtors’ Net Income

to Pay Nonhousing

Debt Excluded

Payments on

Nonhousing Debts

That Were to Be

Reaffirmed

A portion of personal bankruptcy debtors voluntarily agree to reaffirm, or

repay, some of their dischargeable debts by entering into a reaffirmation

agreement to remain personally liable for reaffirmed debts.27 According to

the Executive Office of the U.S. Trustees, debtors tend to reaffirm secured

debt, such as a home mortgage or car loan. By reaffirming these debts and

keeping current on the payments, the debtors retain possession of the

property secured by the debt. To the extent that debtors maintain their

payments on reaffirmed debt, it would reduce the amount of income

debtors have to pay eligible dischargeable debts that were not reaffirmed.

The Center report included in debtors’ living expenses the full value of any

home mortgage payments the debtors listed in Schedule J. To the extent

that the listed home mortgage payments actually represent the full

payments required for home mortgage debt, the Center report assumed

that debtors had reaffirmed their housing debt. However, the Center

report did not deduct from debtors’ income the value of the payments

required to pay the nonhousing debts that debtors stated it was their

25Schedule F “Creditors Holding Unsecured Nonpriority Claims.”

26It is possible that the Center report understated total nonhousing debts that are dischargeable. Based

on our review of data provided by the authors of the Center report, it appeared that the Center report

did not include data from Schedule G “Executory Contracts and Unexpired Leases” or Schedule H

“Codebtors.” For the purposes of identifying debtors’ total nonhousing debts that were eligible for

discharge, perhaps the most relevant data from these schedules would be information on debtors’

obligations for unexpired leases on real or personal property, such as automobile leases.

27The reaffirmation agreement must meet certain statutory requirements.

Page 10 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

intention to reaffirm.28 Data provided by the authors of the Center report

showed that for 12 of the 13 locations in the report (Dallas reaffirmation

data were incomplete), secured nonhousing debt accounted for virtually

all the average nonhousing debt that debtors intended to reaffirm. The

average percent of total unsecured debt that debtors indicated they

intended to reaffirm did not exceed 1 percent in any of the 12 locations.29

The effect of deducting from chapter 7 debtors’ income the payments

required to repay reaffirmed secured nonhousing debts would be expected

to vary across the 13 locations in the Center report because of the wide

variation in intended reaffirmations by location. Using data provided by

the authors of the Center report, we show in table 1 the percentage of

chapter 7 debtors in each of the report’s 13 locations who stated their

intent to reaffirm at least some of their secured nonhousing debts, the

average percent of total secured nonhousing debt to be reaffirmed, and the

average total dollar amount of secured nonhousing debts to be reaffirmed.

The percentage of chapter 7 debtors who, according to the Center’s data,

stated their intent to reaffirm at least some of their secured nonhousing

debt ranged from about 23 percent in Los Angeles to about 73 percent in

Indianapolis. The data also showed considerable differences for those

locations within the same state. About 23 percent of chapter 7 debtors in

Los Angeles reported their intent to reaffirm at least some secured

nonhousing debt compared to about 42 percent in San Diego. The average

percentage of secured nonhousing debt that chapter 7 debtors stated they

intended to reaffirm ranged from about 23 percent in Los Angeles to about

61 percent in Memphis. The average amount of total debt to be reaffirmed

ranged from about $1,362 per debtor in Los Angeles to $6,706 per debtor in

Memphis. The averages for any specific location may be based on wide

variation in the amount of debt that individual debtors stated it was their

intent to reaffirm.

28The Center’s data on intended reaffirmations are based on information from the form, “Individual

Debtor’s Statement of Intention.” The debts that are ultimately reaffirmed may differ from those

included in this statement of intention.

29Based on data provided by the authors of the Center report, among the 12 locations for which

complete reaffirmation data were available, the average dollar value of the unsecured nonhousing debt

that debtors stated they intended to reaffirm did not exceed about $300. Given that the statement of

intent form principally focuses on property that the debtor intends to surrender or retain, it is not

surprising that debtors listed little unsecured debt on their statement of intention.

Page 11 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

Table 1: Credit Research Center Data on the Average Percent of Chapter 7 Debtors Who Stated an Intent to Reaffirm at

Least Some Secured Nonhousing Debt, the Average Percent of Total Secured Nonhousing Debt to Be Reaffirmed, and the

Average Dollar Amount of Secured Nonhousing Debt to Be Reaffirmed, by Court Location

Chapter 7 debtors’ voluntary reaffirmation of secured nonhousing debts

Court location

Percent of debtors who stated

an intent to reaffirm at least

some secured nonhousing debt

Average percent of total

secured nonhousing debt to be

reaffirmed

Average dollar amount of

secured nonhousing debt to be

reaffirmed

Atlanta, GA 70.2% 58.8% $5,936

Chicago, IL 62.1 54.4 4,263

Houston, TX 57.4 46.7 5,353

Hartford, CT 37.8 36.1 1,799

Indianapolis, IN 72.6 59.2 4,655

Kansas City, MO 46.5 37.8 3,613

Los Angeles, CA 22.6 22.6 1,362

San Diego, CA 42.3 38.9 1,535

Memphis, TN 65.2 61.2 6,706

Phoenix, AZ 66.4 49.1 4,680

Pittsburgh, PA 52.3 42.4 5,897

Tampa, FL 54.3 46.0 5,217

aAccording to the Credit Research Center, the Dallas data provided to us on debtors’ statements

of intent were incomplete because the Center did not have all the statements of intent at that time.

Therefore, Dallas data were excluded from this table.

Source: GAO analysis of Credit Research Center data.

Locations in the

Report Varied in

Indicators of Ability to

Pay

The Center report presented data that combined results from all 13

locations on debtors’ available income to pay nonhousing debt. Because

the Center report focused on the results from all 13 locations combined, it

included little discussion of the considerable variations among the 13

locations used in the study. As previously discussed, Center data not

included in the report showed a wide variation across the 12 locations

with complete data for chapter 7 debtors’ intended reaffirmations of

secured nonhousing debt. Specifically, as shown in table 1, the percentage

of chapter 7 debtors reaffirming at least some secured nonhousing debt

ranged from about 23 percent to 73 percent, and the average amount of

total debt to be reaffirmed ranged from about $1,362 to $6,706. Data

provided by the report’s authors showed that the percentage of chapter 7

debtors with at least some income available to pay nonpriority,

nonhousing debt ranged from about 32 percent in San Diego to about

67 percent in Dallas.

Page 12 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

Other studies have also concluded that there is considerable variation

among bankruptcy districts. The National Bankruptcy Review Commission

found, for example, that chapter 13 practices “differ dramatically from

state to state, district to district, and even from judge to judge in the same

district.” The Commission report noted that divergent local interpretations

of the chapter 13 system create a situation in which expert legal advice is

necessary to develop, confirm, modify, and complete a chapter 13 plan;

and debtors in very similar circumstances encounter extremely different

chapter 13 systems across the nation.

The AOUSC report on chapter 13 cases discussed earlier found considerable

variation in case results among all bankruptcy districts and among the 13

districts included in the Center report.30 As shown in table 2, the

percentage of terminated chapter 13 cases that resulted in the discharge of

a successful repayment plan ranged from about 15 percent in Central

California (which includes Los Angeles) to about 40 percent in Western

Missouri (which includes Kansas City). The percentage of chapter 13 cases

that were converted to chapter 7 liquidation prior to termination ranged

from about 8 percent in Western Tennessee (which includes Memphis) to

about 43 percent in Western Pennsylvania (which includes Pittsburgh).

30AOUSC’s data do not correspond directly to the locations included in the Center report. AOUSC’s

analysis included all cases filed or terminated in each district. Due to resource constraints, the Center

selected petitions from 1 location in each of the 13 districts included in its analysis. For example, the

Central District of California includes bankruptcy court locations in Los Angeles, San Bernardino,

Santa Barbara, Santa Ana, and Woodland Hills. The Center selected petitions from Los Angeles but not

the other locations.

Page 13 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

Table 2: Type of Disposition for All

Chapter 13 Cases Filed Between

Calendar Years 1980 and 1988 and

Terminated by September 30, 1993, in

the Districts From Which the Petitions

Used in the Credit Research Center

Report Were Selected

Percent of terminated cases that were:

District (Center

location)

Total

terminated Dismissed Discharged

Converted

to chapter 7 Other

GA, Northern 

(Atlanta) 41,897 55.3 34.8 9.8 0.1

IL, Northern

(Chicago) 59,088 47.6 38.6 13.6 0.2

TX, Northern

(Dallas) 15,657 60.2 21.4 17.4 1.0

TX, Southern

(Houston) 22,378 60.3 19.6 19.7 0.4

CT (Hartford) 2,106 42.2 31.3 25.0 1.5

IN, Southern

(Indianapolis) 3,309 32.1 33.2 29.7 5.1

MO, Western

(Kansas City) 5,017 39.3 39.6 20.2 0.9

CA, Central

(Los Angeles) 72,769 77.0 14.5 8.2 0.3

CA, Southern

(San Diego) 19,953 59.7 32.4 7.8 0.1

TN, Western

(Memphis) 46,348 61.5 30.7 7.5 0.3

AZ (Phoenix) 6,393 40.0 32.8 24.7 2.6

PA, Western

(Pittsburgh) 2,883 31.9 22.9 42.9 2.3

FL, Middle

(Tampa) 4,728 45.7 24.9 25.2 4.3

Note: Cities in parentheses are court locations within each district from which petitions were

drawn for the Credit Research Center report.

Source: 1994 AOUSC study of chapter 13 dispositions.

These variations among bankruptcy districts—for percentage of debtors

with at least some income to pay debts, for reaffirmations, and for the final

disposition of chapter 13 cases—suggest that one should be cautious in

generalizing about debtors across all 13 locations in the Center’s report.

Page 14 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

The Method of

Selecting Locations

and Petitions Does

Not Support

Generalization of the

Report’s Results

The Center’s researchers selected the 13 bankruptcy locations and 3,798

personal bankruptcy petitions without using scientific random sampling

techniques. As a result, the national estimates presented in the report’s

conclusions were not based on representative probability sampling

methods. In addition, standard statistical methods cannot be used to

evaluate the likely accuracy of the Center report’s results. Consequently,

the methods used in the Center’s analysis do not provide a sound basis for

generalizing the Center report’s findings to the annual 1996 filings in each

of the 13 locations nor to the national population of personal bankruptcy

filings.

Locations Judgmentally

Selected

The 13 court locations used in the report were judgmentally selected from

large urban areas with a Credit Counseling Center31 and large bankruptcy

caseloads. The locations were also chosen to include variations in other

characteristics, such as the growth in bankruptcy filings, the split between

chapter 7 and chapter 13 filings, and state-specific asset exemption levels

for chapter 7. Indeed, the Center report showed that the courts that were

included differed considerably in the total number of filings, the

proportion that were chapter 7 and chapter 13 personal bankruptcy filings,

and the change in the total number of filings from 1995 to 1996. Neither the

court locations nor petitions were chosen with the objective of identifying

the range of debts—lowest to highest—that bankruptcy debtors could

repay.

The total number of personal bankruptcy petitions filed in 1996 varied

greatly among the 13 court locations. To account for this fact, the Center

report stated that the sample was weighted so that the report’s weighted

estimates that combined information from all locations represented the

total filings from these 13 court locations. This means that the Center

report’s estimates were strongly affected by those court locations that had

the highest number of personal bankruptcy petitions filed in 1996. For

example, about 41 percent of all 1996 chapter 7 filings in the 13 court

locations were from Chicago and Los Angeles. The 17 percent of the

sampled chapter 7 filings from Chicago and Los Angeles were therefore

inflated to correctly represent the relative size of the Chicago and Los

Angeles locations among the 13 locations. All of the Center report’s

weighted estimates, including those labeled as national estimates, were

weighted to represent only these 13 locations.

31According to the report’s authors, locations with Credit Counseling Centers were chosen because the

report we reviewed was part of a larger research effort. One purpose of this larger effort was to

compare debtors who did and did not use credit counseling in these 13 locations.

Page 15 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

The Center report’s authors provided us with data, not included in the

report, that indicated that the predicted abilities of those who filed for

chapter 7 personal bankruptcy to repay debts varied considerably among

the 13 court locations (see table 3). For example, the percent of chapter 7

debtors whom the report determined had some income available to repay

debt ranged from a low of about 32 percent in San Diego to a high of about

67 percent in Dallas. The considerable variation among locations indicates

that the repayment rate at other locations, and for the nation as a whole,

could differ from the combined, weighted estimate for these 13 locations.

Table 3: Percent of Chapter 7 Debtors

in Each Court Location Whom the

Credit Center Determined to Have

Positive Net Income That Could Be

Applied to the Payment of Nonhousing

Debt

Court location

Percent of chapter 7 debtors with positive net income

available to pay nonpriority, nonhousing debts

Atlanta, GA 52.7

Chicago, IL. 49.8

Dallas, TX 67.1

Houston, TX 60.2

Hartford, CT 52.2

Indianapolis, IN 43.1

Kansas City, MO 56.9

Los Angeles, CA 32.9

San Diego, CA 31.7

Memphis, TN 50.0

Phoenix, AZ 50.4

Pittsburgh, PA 34.0

Tampa, FL 36.8

Source: Credit Research Center data.

The Center report’s authors stated that its results cannot be generalized to

all personal bankruptcy petitions filed nationally because the sample was

not designed for this purpose. Consequently, the national estimates

presented in the conclusion of the Center report are not supported by the

report’s study methods.

Petitions Not Randomly

Selected Among Months of

the Year or Days of the

Month

The Center report states that the sampling procedures used to select

petitions from the 13 court locations resulted in a sample that was

representative of all petitions filed in those locations. From our review of

available information on the report’s sample design, we have determined

that statistical probability sampling methods were not used to select the

Page 16 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

petitions filed within each court location. The Center’s petitions were

gathered from several months and generally included the petitions filed in

the first few days of the months of May and June (eight locations); June

only (three locations); or July only (one location) of 1996. In the remaining

location, the petitions were selected by the clerk of the bankruptcy court

during April, May, and June 1996. Because the sample procedure for

selecting filings within bankruptcy court locations was not random, the

characteristics of the petitions drawn may be systematically influenced by

variation in the types of filings that can occur (1) in different months

throughout the year and (2) for days within the month. Consequently,

standard statistical sampling methods cannot be used to determine

whether the results in the Center report were likely to be representative of

all bankruptcy filings in each of the 13 court locations.

The Center report evaluated the possibility that the petitions from May to

July that were included in the analysis might differ from those filed during

other months of the year by examining supplementary data for other

seasons from Indianapolis. On the basis of the Indianapolis analysis, the

authors conclude that “a concern that seasonal differences in petitions

could lead to an overstatement of the ability to repay debt across all

petitions filed during 1996 is unwarranted.” The Center report provided no

basis for judging whether the lack of monthly variation in Indianapolis

could be expected in all 13 court locations.

The petitions within each court location were not selected from filings

over complete monthly periods and, therefore, could be affected by

variations in the characteristics of petitions filed at different times of the

month. In a few court locations, because of especially high filing volumes,

the sample quotas were reached in the first day or two of the month. For

example, our analysis of the Center’s data showed that about 95 percent of

the petitions selected in Dallas and Houston, Texas, were filed by the third

day of the month. At both of these locations, the petitions drawn had been

filed prior to the first Tuesday of the month, the date on which mortgages

are foreclosed in Texas. Thus, the petitions used from these two locations

may have included a disproportionate number of debtors who sought to

avoid mortgage foreclosures under chapter 13. The income and expenses

for such filers may vary from those of debtors who filed in these locations

later in the month. The report’s authors told us that they planned to

sample additional petitions in Dallas and Houston to examine this

possibility.

Page 17 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

Scope and

Methodology

The comments and observations in our report are based on a review of the

final version of the Center report, dated October 6, 1997;32 some additional

information we requested from the report’s authors; data and analyses

provided by the Federal Judicial Center (FJC) on bankruptcy filings in the

13 locations used in the Center report; telephone interviews with

bankruptcy judges and trustees; and our experience in research design and

evaluation. On November 13, 1997, we met with Professor Michael Staten,

coauthor of the report, to discuss our questions and observations about

the report. Following this meeting, Professor Staten and his coauthor,

Professor John Barron, provided additional information about the report’s

methodology and some additional data that we requested. We received the

last of these data on December 23, 1997. The authors declined to provide a

copy of the automated database used for their analysis, citing their interest

in retaining its proprietary value.

The team that reviewed the report included economists from our Office of

Chief Economist and 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

principally between October 1997 and January 1998 in Washington, D.C.

Comments From

Study Authors

Professors Michael E. Staten and John M. Barron, authors of the Center’s

report, provided written comments on a draft of this report. (See app. I.)

The authors discussed each of the report’s five areas of concern that,

together, led to our conclusion that additional research and clarification

would be needed to confirm the accuracy of the Center’s report’s

conclusions regarding the proportion of debtors who may have the ability

to repay at least a portion of their nonpriority, nonhousing debts and the

amount of debt such debtors could repay. In discussing the five areas of

concern, the authors agreed with some concerns but believed that other

concerns were either overstated or unwarranted.

Their specific comments on the concerns raised in this report are

discussed and evaluated at the end of appendix I. We focus here on the

authors’ major comments and our evaluation of those comments.

Basically, the authors disagreed with us over the implications of the

concerns we raised. They believe that the sample of bankruptcy cases they

examined was large enough and was taken from a sufficiently varied

32John M. Barron, Ph.D., and Michael E. Staten, Ph.D., Personal Bankruptcy: A Report on Petitioners’

Ability-to-Pay, October 6, 1997. Earlier reports of the research findings were included in testimony

before the National Bankruptcy Review Commission on December 17, 1996, and January 23, 1997, and

before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts, April 11, 1997.

Page 18 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

cross-section of cities and courts to (1) reveal a significant number of

chapter 7 petitioners with some capacity to repay their debts and

(2) suggest a need for policymakers to reexamine whether the current

bankruptcy statutes should be changed. They also believe that determining

debtors’ ability to pay their eligible dischargeable nonhousing debts, which

the Center report did not do, was an interesting but unimportant side

issue. Although they agreed that it would be difficult to use their results to

estimate with any precision the repayment ability of chapter 7 debtors

outside of their sample, they believed that their sample results, regardless

of the concerns we found, strongly suggest a widespread substantial

repayment capacity. They provided additional data and analysis, not

included in the Center’s report, on reaffirmations of secured nonhousing

debt to further support their conclusions.

We continue to believe that the concerns we found strongly suggest that

additional research and clarification are needed to determine the accuracy

of the Center report’s conclusions regarding the proportion of debtors

who may have the ability to repay at least a portion of their nonhousing

debts and the amount of debt they could potentially repay. We note in this

regard that the Credit Research Center is currently conducting additional

research with its bankruptcy database, and the accounting firm of Ernst &

Young is conducting a study to address the concerns we raise in this

report. The Center commented that the study clearly indicates a

widespread and “substantial” repayment capacity across all 13 locations in

the study. We agree that the data and indicators used by the Center

showed that the percentage of debtors in each location with at least some

positive net income available for debt repayment was not so small as to be

negligible. However, the assumptions, data, and sampling procedures used

in the Center report raise questions concerning the accuracy and

usefulness of the report’s estimates and require the reader to use caution

in interpreting the types of firm conclusions found in the Center report.

For example, the Center’s estimate of the percentage of debtors who have

at least some capacity to pay included all debtors whose monthly net

income after expenses was greater than zero, whether that amount was $1

or $1,000. We were not able to conclude, as the Center did, that there is a

“substantial” repayment capacity in every city because (1) we do not have

a basis for determining how much repayment capacity should be

considered substantial; and (2) we cannot conclude that the petitioners’

net income, as derived from data in their initial schedules, can be accepted

as an accurate estimate of debtors’ net income available for debt

repayment for the following 5 years.

Page 19 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

Several factors suggest to us that those debtors with at least some capacity

to pay would not be able to repay as much debt as the Center report

assumed. For example, historically only about one-third of chapter 13

debtors have 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. To the extent that debtors are unable to

maintain their debt repayments for the full 5-year period assumed in the

report, the amount of debt repaid would be less than that assumed in the

report. In addition, the Center’s estimates of repayment capacity do not

include any provision for the administrative costs of administering a

repayment plan. In fiscal year 1996, 14 percent of the payments from

chapter 13 debtors was used to pay administrative and legal costs.

The Center report provided an estimate of the potential repayment

capacity of debtors who have filed for bankruptcy to pay their nonpriority,

nonhousing debts. We do not agree with the Center that identifying the

universe of dischargeable debts that a debtor may have the capacity to

repay is an interesting, but unimportant, side issue in assessing a debtor’s

ability to repay his or her nonhousing debts. It is the debtor’s total eligible

dischargeable debts that represent the potential loss to creditors if the

bankruptcy court grants the debtor a discharge of all his or her eligible

dischargeable debts. The Center report did not attempt to identify this

universe of debts in its analysis. Creditors are not at risk in the bankruptcy

process for debts that are nondischargeable or debts that the debtor

reaffirms. Similarly, creditors are not at risk through the bankruptcy

process for the dischargeable debts of those debtors whose bankruptcy

cases are dismissed. With few exceptions, these debtors remain personally

responsible for all their debts. The relevant universe of debtors who pose a

risk of nonpayment to creditors through bankruptcy are those who

complete the bankruptcy process and receive a discharge of all or part of

their eligible dischargeable debts. The Center report did not attempt to

estimate the capacity to pay of this universe of debtors. Instead, the

Center’s assessment of capacity to pay included those debtors who may

have received a discharge plus those debtors whose cases were dismissed

and did not receive a discharge. Consequently, the Center report’s

universe of debtors included debtors who remained responsible for their

eligible dischargeable debts because their cases were dismissed.

The Center agrees that the Center report’s findings were not based on data

from a nationally representative scientific, random sample. The Center

comments that the researchers did not intend to obtain a nationally

Page 20 GAO/GGD-98-47 Personal Bankruptcy
B-278972 

representative sample and that much useful information can come from

samples that are not nationally representative. Although decisions with

nationwide implications could be based on evidence from selected

locations, we believe that the assumptions, data, and methods used in the

Center report require that its conclusions—which, in some cases, are

stated as broad national estimates—be interpreted with caution.

The additional data provided in the comment letter are helpful; but, as

discussed in our comments at the end of appendix I, we did not have the

database used for these analyses to verify the results. More importantly,

these new data do not resolve many of the concerns we raise in this

report. For example, the weighting methodology used to develop the

weighted estimates presented in the new tables is the same methodology

used for the Center report’s other estimates and is subject to the same

limitations we discussed in our report. As with the Center’s other

estimates, the assumptions used in the new analyses assumed that

100 percent of debtors’ discretionary income and 100 percent of the

proceeds from the sale of the debtors’ nonexempt assets would be used to

repay debt. In practice, administrative costs would reduce the amount

paid to creditors.

Thus, notwithstanding the comments and additional information provided

by the Center report’s authors, we continue to believe that more research

would be needed to verify and refine the Center report’s estimates of

debtors’ repayment capacity to better inform policymakers.

We are providing copies of this report to the Chairman and Ranking

Minority Member of the Senate and House Committees on the Judiciary;

the Chairman and Ranking Minority Member of the Subcommittee on

Commercial and Administrative Law, House Committee on the Judiciary;

and to the authors of the Credit Research Center report. We will also make

copies available to others upon request.

If you have any questions, please call me at 512-8777.

Richard M. Stana

Associate Director

Administration of Justice Issues

Page 21 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 22 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Page 23 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

See comment 1.

See comment 2.

Page 24 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

See comment 3.

See comment 4.

Page 25 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

See comment 5.

See comment 6.

Page 26 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

See comment 7.

See comment 8.

Page 27 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Page 28 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

See comment 9.

See comment 10.

Page 29 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Page 30 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Page 31 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Page 32 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Page 33 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Page 34 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Page 35 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Page 36 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

The following are GAO’s comments on specific issues included in the letter

dated January 21, 1998, from Professor Michael Staten, on behalf of

himself and his coauthor, Professor John Barron. Other issues discussed in

the letter have been included in the report text.

GAO Comments 1. The authors agreed that there is a need to validate debtors’ income,

expenses, and debts in developing assumptions of future income and

expenses but stated that a researcher currently has no recourse but to

accept what the debtor advises the court under oath at the time the

petition is filed. We understand that researchers must use the best

available data and that, currently, verifiable data on debtors’ income and

expenses during bankruptcy have not been developed. However, our

intent was to indicate that the Center report should have discussed how

the use of data from debtors’ initial schedules could affect the Center

report’s results and, thus, how those results should be used. In this case, it

seems the researchers could have used more recent data, at least for some

debtors, because debtors may amend their initial schedules at any time

prior to the final disposition of their bankruptcy cases. Such amendments

could alter the estimated income, estimated expenditures, and debts that

debtors reported on their initial schedules. We recognize that obtaining

these amended schedules would have required additional time and

resources. However, we believe that the importance of these data to the

overall conclusions in the Center’s report would justify such an effort.

The authors also said that to the extent there is a bias in the debtors’ initial

schedules, it would be expected that the debtors would understate their

capacity to repay debt. Although this may seem logical at first glance, it is

important to note that there are no empirical data on the accuracy of the

data reported in debtors’ initial schedules. Nor is there any empirical basis

for assuming that debtors would consistently attempt to understate their

capacity to pay their debts. In fact, there is no empirical basis for assessing

whether debtors generally overstate or understate their capacity to repay

on their initial schedules or the general amount of the overstatement or

understatement. There may be several reasons why some debtors would

actually overstate their capacity to pay. For example, some people may

simply not want to admit how serious their financial situation has become

in order to protect certain assets. Also, mistakes could be made in the

schedules used in the Center’s analysis, which are not easily interpreted by

debtors who might proceed without legal or financial assistance. For

example, in Los Angeles, a location whose data contributed significantly to

the Center’s final weighted estimates, Center data showed that about

Page 37 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

one-third of debtors reported they had no lawyer. Through mistakes in

filling out the schedules, debtors could report information that would have

the effect of either overstating or understating their capacity to pay their

debts.

2. The Center stated that its calculations provided a benchmark of debtors’

ability to pay that could easily accommodate whatever assumptions about

possible income changes the reader wished to make. It also agreed with us

that incorporating a cushion into a chapter 13 repayment plan to guard

against income interruptions or unexpected expenses seemed to be a

prudent step.

We agree that the Center report provided a baseline estimate of debtors’

ability to pay that would change as the report’s basic assumption—that

debtors’ income and expenses would remain unaltered for 5

years—changes. However, the Center provided no estimates based on

alternative assumptions of repayment capacity, and without the Center’s

database, it is not possible for anyone to estimate the effect of such

alternative assumptions on the Center report’s estimates of debtors’

potential repayment capacity. 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 in the Center study. For example, the

assumption that debtors’ reported income and expenditures would remain

unchanged for 5 years had the effect of providing optimistic estimates of

debtors’ repayment capacity in two ways: (1) it did not allow for situations

where the debtors’ income decreases or expenses increase, thus

discretionary income available to pay debt was assumed to remain

unchanged for 5 years; and (2) 100 percent of this discretionary income

was assumed to be used for 5 years to repay debt, when in fact a portion of

the debtors’ discretionary income would be used to pay the expenses of

administering the debtors’ repayment plans.

There is some additional evidence that the Center’s assumption that

debtors’ income and expenses would remain unchanged for 5 years may

be optimistic. For example, the AOUSC report discussed on page 8 of our

report showed that only about 36 percent of chapter 13 debtors completed

their repayment plans. The reasons for this low completion rate are

unknown, but it illustrates the high level of discrepancy between the

amount that debtors could potentially repay, based on the data and

assumptions used in the Center report, and what has actually occurred

over a 10-year period. In addition, in virtually all cases, creditors do not

Page 38 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

receive 100 percent of debtors’ payments under chapter 13 repayment

plans. Fiscal year 1996 data from the Executive Office of U.S. Trustees

showed that 14 percent of payments were used to pay the debtors’

lawyers, the chapter 13 trustees’ statutory operating expenses in

administering the plans, and other administrative expenses.

3. The Center said that it believes it has clearly identified the universe of

debts for which it estimated debtors’ ability to pay as all “debts not

secured by real estate, without drawing a distinction between secured vs.

unsecured, priority vs. non-priority, or dischargeable vs.

non-dischargeable.” The Center commented that the distinction between

dischargeable and nondischargeable debts is simply “an interesting side

issue.” The Center said that such distinctions between categories of debt

were not necessary if the report’s intent was to assess debtor’s overall

ability to meet their obligations. The Center also said that unsecured

priority debt was not included in the base of total unsecured debt for many

of the repayment calculations, because the report assumed that unsecured

priority debt would be paid before unsecured nonpriority debt.

We do not agree that the distinction between dischargeable and

nondischargeable debt is just an interesting side issue. The distinction is

important if the Center’s data are to be used for considering the need to

alter existing bankruptcy statutes. It is the debtor’s total eligible

dischargeable debts that represent the potential loss to creditors if a

debtor is granted a discharge of his or her eligible dischargeable debts.

The Center did not attempt to identify this universe of debts in its analysis.

Creditors are not at risk in the bankruptcy process for debts that are

nondischargeable in bankruptcy or for eligible dischargeable debts that

the debtor reaffirms. Total dischargeable debts are total debts less total

nondischargeable debts. As discussed on pages 9 and 10 of our report, the

Center report may not have fully identified all eligible dischargeable debts,

because it excluded data on unexpired leases from Schedule G, such as

automobile leases. Thus, the Center did not identify that universe of debts

for which creditors are at risk in the bankruptcy process.

As we note on pages 9-10 of our report, to assume that all unsecured

priority debts would be fully paid over 5 years but that no other class of

nonhousing debts would be fully paid creates a disparity in the treatment

of nonhousing debts that does not reflect actual bankruptcy practice. In

chapter 13 repayment plans, secured debts would ordinarily be paid before

or concurrently with unsecured priority debts. Consequently, the Center

report’s calculations did not provide an estimate of the amount of

Page 39 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

unsecured nonpriority debt that could be repaid. If the Center report’s

purpose was simply to identify debtors’ overall ability to pay nonhousing

debts from net income after reported expenses, then the report should

have included unsecured priority debt with all other nonhousing

debts—secured and unsecured—and calculated debtors’ ability to pay the

resulting total nonhousing debt.

4. The Center agrees with us that its calculations of debtors’ ability to

repay their nonhousing debts did not consider the payments required to

pay the nonhousing debts that debtors stated it was their intent to reaffirm

(repay). The Center notes that the February 1997 testimony of law

professors Marianne Culhane and Michaela White before the National

Bankruptcy Review Commission stated that about 50 percent to 60 percent

of intended reaffirmations (the data used in the Center report) actually

result in signed reaffirmation agreements in which debtors reaffirmed

their debts. Thus, they noted it is possible that the number of final

reaffirmations could be less than that reported in debtors’ statements of

intent.

We agree that the number and dollar value of debts that debtors ultimately

reaffirm could be more or less than those found in debtors’ statements of

intent. We believe that this further supports our overall conclusion that the

results in the Center’s report should be viewed with caution. In

September 1997, professors Culhane and White reported updated results

of their study, which were based on debtor reaffirmations in only 7 of the

90 bankruptcy districts, and thus must be considered illustrative, not

conclusive. Nevertheless, the reaffirmation report’s findings provide

additional evidence that one should be cautious in interpreting

conclusions based solely on debtors’ initial schedules, such as schedules

of income and expenses as well as reaffirmations. For example, the

reaffirmation report found that debtors filed fewer reaffirmations than

indicated in their statements of intent and that the debts that debtors

ultimately reaffirmed were often quite different from those that debtors

stated it was their intention to reaffirm. The reaffirmation report and the

Center’s data indicated that debtors rarely stated their intention to

reaffirm unsecured debts. However, the reaffirmation report found that

debtors in fact ultimately reaffirmed unsecured debts as well as debts that

were not listed in their initial schedules at all. The reaffirmation report

also noted that court records provide an incomplete picture of

reaffirmations, because debtors may also sign reaffirmations with

creditors that the creditors fail to file with the court, as required.

Page 40 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

In addition, the reaffirmation report reinforces our concern that local

court bankruptcy practice and rules may affect the data that debtors

report on their initial schedules and in the data found in debtors’ court

files generally. For example, the reaffirmation study found that the number

of final reaffirmation agreements filed with the bankruptcy court in each

district appeared to be affected by governing court decisions for the

districts studied. In two districts, the debtor could keep property, such as

a car, by simply maintaining ongoing contractual payments on the

property. Thus, it was not necessary for the debtor to file a reaffirmation

agreement with the court in order to keep the property. In two other

districts, court decisions required the debtor to file a reaffirmation

agreement or surrender or redeem the property. The number of final

reaffirmation agreements was lower in those districts that did not require

a reaffirmation agreement in order for the debtor to keep the property.

However, the report said that the data did not permit an empirical

evaluation of the extent to which such controlling court decisions affected

the number and type of reaffirmations that debtors in the report ultimately

filed with the bankruptcy courts.

5. The Center comments included data and analyses, not previously

provided, that the Center said address the impact of reaffirmations on

debtors’ ability to pay their nonhousing debts. These new analyses are

based on weighted data for the 13 locations included in the Center’s study.

We cannot assess the accuracy of the data in the tables because we do not

have the database used to develop these tables and, therefore, cannot

replicate how the new estimates were derived. However, we do have some

overall observations on these new data.

First, the weighted data are based on the same weighting methodology

used for the Center report’s other estimates and, therefore, are subject to

the same limitations of that weighting methodology that we noted in our

report. The weights are heavily influenced by filings in two

locations—Chicago and Los Angeles—which accounted for about

41 percent of all bankruptcy filings in the 13 locations.

Second, the tables presented in the comments need clarification in their

presentation. For example, table 1 of the comments does not indicate that

all dollar amounts in the table are averages, which they are. The table also

does not clearly indicate that the amount of nonhousing debt shown is the

total amount of nonhousing debt—secured and unsecured—less

unsecured priority debt.

Page 41 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Third, the assumptions underlying the data in table 2 are not explained.

For example, line “D” of table 2 is supposed to represent the amount of

unsecured nonpriority debt that could be paid over 5 years from future

income after liquidating all of the debtor’s nonexempt property, if any. The

calculation appears to assume that (1) when surrendered and liquidated,

the collateral would bring 100 percent of the value of the collateral, as

listed in the debtor’s initial schedules; and (2) 100 percent of the proceeds

realized from the liquidation would be used for repaying the debt secured

by the collateral. We found no basis for either of these assumptions. For

example, when a debtor’s nonexempt assets are liquidated to pay

creditors, the asset may bring more or less than the value of the collateral

as listed in the debtor’s schedules. Moreover, there are usually expenses

associated with liquidating a debtor’s nonexempt assets, such as statutory

bankruptcy trustees’ commissions and appraiser or auctioneer fees. Such

expenses would reduce the amount paid to creditors because these costs

would be paid before any remaining proceeds were distributed to

creditors.

The data in the new tables are subject to the same limitations as other

estimates of debtors’ ability to pay included in the report. The tables are

based on the assumptions, used throughout the report, that debtors’

income and expenses would remain unchanged over a 5-year period and

that 100 percent of a debtor’s discretionary net income will be used for

debt repayment. As previously discussed, both logic and available

evidence would suggest that these are not realistic assumptions. For

example, the Center provided us data, not included in its report, which

showed that the majority of nonhousing secured debt was vehicle debt.

The data in the new tables 2 and 4 provided with the Center’s comments

assumed that the debtor’s automobile would be sold, and no replacement

obtained. The absence of an automobile could very well affect a debtor’s

employment and, thus, a debtor’s future stream of income.

6. The Center’s comments noted that it would be difficult to estimate with

precision debtors’ ability to pay their nonhousing debts in any location

other than the 13 locations included in the Center report. On the other

hand, the Center concluded that debtors’ data in all 13 locations showed a

substantial repayment capacity, despite the great diversity in the

characteristics of the 13 locations, such as unemployment rates and the

percent of total personal bankruptcy cases that were chapter 7 cases. The

Center stated that this showed that substantial repayment capacity is a

widespread phenomenon, whether or not the report’s findings are

applicable to other locations.

Page 42 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

We agree that the Center’s data show that some debtors who file for

bankruptcy under chapter 7 may have some capacity to repay their debts.

But, from a policymaking standpoint, the more relevant questions are

whether the Center report’s findings provide a reasonable estimate of that

repayment capacity and whether the Center’s defined universe of debtors

and debts used to estimate repayment capacity was appropriate for

assessing the need for a change in current bankruptcy laws. As previously

discussed, we believe the Center’s universe of both debts and debtors may

not be the appropriate ones for assessing whether current bankruptcy

statutes should be changed. In answering these questions, it is also

important to note that the data used for the Center report were based on

information debtors provided at a single point in time—the time they filed

for bankruptcy—regardless of whether or not they completed the

bankruptcy process and received all or part of the relief they sought in

filing for bankruptcy. Thus, the report included data from debtors who

may have withdrawn their petitions voluntarily, had their petitions

dismissed by the court, or who received bankruptcy court discharges of all

or part of their eligible dischargeable debts. For example, in Los Angeles,

of those chapter 7 petitions filed on the same days of May and June 1996

as those petitions used in the Center sample, about 5 percent had been

dismissed by September 30, 1996. For chapter 13 petitions, more than

30 percent had been dismissed during the same period. In contrast, not

more than about 4 percent of chapter 7 and 13 petitions in San Diego had

been dismissed within 90 days. Because the report’s findings include

debtors who did and did not receive a discharge of their eligible debts, the

report’s findings cannot be used to reach conclusions about the most

relevant public policy question—the potential ability to pay of debtors

who received a discharge of all or part of their eligible dischargeable

debts.

7. The Center agreed with our general conclusion that scientific, random

sample methods were not used to select the bankruptcy petitions used in

the Center’s analysis. However, the Center said that the lack of a scientific,

random sample did not necessarily diminish the usefulness of the Center

report’s findings. The Center commented that it did not intend to obtain a

nationally representative probability sample and agrees that it did not use

a scientific random sampling methodology to select the 13 bankruptcy

locations or the bankruptcy petitions used in the analysis. The Center also

states that most social science research is conducted with samples that

are not nationally representative probability samples and concludes that

much useful information comes from samples that are technically less

ambitious than the standard that we applied.

Page 43 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

Our evaluation assumed that the Center report may be used for important

policymaking on a national scale. As a result, we believe that it is

appropriate to inform the Committee that the Center report’s data do not

meet scientific standards for estimating the characteristics of bankruptcy

debtors for the United States as a whole or for all bankruptcy debtors in

each of the 13 locations.

8. The Center discussed our observations on its methods of selection for

each of the three steps at which petition selections were made without

probability selection methods.

The Center agrees with us that the 13 locations were not selected using

probability selection techniques and, thus, may or may not be

representative of the remaining courts in the United States. The Center

commented that nonprobability samples have been used in some previous

studies of bankruptcies, including a study by GAO, and that the purpose of

the Center study was to form and test hypotheses about potential causal

factors. The Center also stated that the study has potential value for

policymakers because the large sample from a varied cross-section of

courts identifies significant numbers of petitioners with some capacity to

repay debts and because there was a finding of substantial repayment

capacity in every city in the study despite the great diversity in city/court

characteristics.

We agree that this diverse set of 13 locations demonstrates that based on

the data and assumptions the Center used, the Center’s indicators of

debtors’ ability to repay debts are found at greater than negligible rates at

all locations. However, we also concluded that users of the Center data

should consider the variation among locations and the lack of a national

estimate as limitations. The important variations between the studied

cities might be of importance for some policy purposes. In addition, we

cannot confirm the Center’s conclusion that there is a “substantial”

repayment capacity in every city, because we do not have a basis for

determining how much repayment capacity should be considered to be

substantial and because, as explained above, we can not conclude that

petitioners’ reports of income on bankruptcy petitions can be accepted as

an accurate estimate of income for the following 5 years.

9. The second sampling issue on which the Center commented was what

the Center referred to as seasonality—the fact that the Center’s petitions

were filed in the spring and summer months and might not be

representative of petitions filed at other times of the year. The Center

Page 44 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

stated that ample evidence from previous researchers and supplemental

testing in the Center study suggest that the potential bias from focusing

only on cases filed in the spring and summer months is negligible. The

Center cited as evidence the findings from two previous studies and the

Center’s analysis of Indianapolis petitions from its current study.

The Center and we agree that the study petitions were drawn from a

limited part of the year. We did not have a sufficiently strong basis to

conclude that seasonality factors could or could not have possibly affected

the Center report’s estimates of the debtors’ repayment capacity. The two

previous studies cited in the Center’s comments do not address the effect

of season on the debtors’ ability to repay debts but only examined the

number of chapter 7 and chapter 13 bankruptcy filings by season. The

results of the Center’s analysis do show that season of the year did not

affect estimates of the ability to pay in one city, Indianapolis. We agree

that we do not have a strong theoretical reason for expecting a seasonal

effect. However, in the absence of evidence from more than one location,

and in view of the fact that the present study is strongly concentrated by

season, we continue to believe that the season in which the petitions were

selected should be considered a limitation in interpreting the results from

the study.

10. The third sampling issue addressed in the Center comments was the

time of the month from which the Center’s petitions were drawn. The

Center agrees that the bankruptcy petitions used in the study were

generally drawn from days early in the month. The Center explains that

the petitions were drawn from the beginning of the month to maintain

tight control over the petition selection procedure and to minimize

uncertainty about the characteristics of cases that were not studied. The

Center maintains that Texas is the only one of the 13 locations where there

is evidence or reason to believe that cases early in the month might differ

from those late in the month. In Texas there were a disproportionate

number of past-due home mortgage chapter 13 petitions early in the

month, and the Center said it was now drawing additional cases in Texas.

In addition the Center notes that although chapter 13 petitions might differ

by time of month in Texas, it is not clear why the characteristics of the

chapter 7 cases would differ over the month. The Center also notes that

the study did not find differences in the values of variables that measure

ability to pay at the one location, Indianapolis, that could be tested with

the data from the Center study.

Page 45 GAO/GGD-98-47 Personal Bankruptcy
Appendix I 

Comments From the Credit Research Center

We believe that the differences among petitions at different times of

month in Texas should be considered. Those debtors who file for chapter

13 early in the month to prevent a mortgage foreclosure may have different

financial characteristics from chapter 13 debtors filing later in the month.

The only clear evidence of the absence of a time-of-month effect comes

from a single court in Indianapolis. We are concerned that there may be

other court-specific factors of which we are unaware. For example,

working with the Federal Judicial Center, we learned that mortgage

foreclosures early in the month also could affect the type of filings early in

the month in Atlanta. Although the Atlanta filings for this study did not

happen to be concentrated at the beginning of the month, the Atlanta

example indicates that it is difficult to exclude time-of-month effects.

Thus, we believe that the lack of representativeness by time of month

should be considered in evaluating the study.

(188635) Page 46 GAO/GGD-98-47 Personal Bankruptcy
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100