Personal bankruptcy filings have set new records in each of the past 3 years, reaching about 1.4 million in calendar year 1998, of which more than 1 million were chapter 7 filings. There is little agreement on the causes for such high personal bankruptcy filings in a period of relatively low unemployment, low inflation, and steady economic growth. Nor is there agreement on the number of debtors who seek relief through the bankruptcy process who have the ability to pay at least a portion of their debts and the amount of debt such debtors could potentially repay. Several bills were introduced in the 105th Congress that would implement some form of “needs-based” bankruptcy for those who file for personal bankruptcy under chapter 7 of the bankruptcy code. The conference report on the Bankruptcy Reform Act of 1998, H.R. 3150, passed the House in October 1998, but did not reach a vote in the Senate. In the 106th Congress, the conference report version of H.R. 3150 was introduced in the House as H.R. 833, and a bill with somewhat different provisions, S.625, was introduced in the Senate. Each of these bills has included provisions for determining when a debtor could be required to file under chapter 13 of the bankruptcy code, rather than under chapter 7. Currently, the debtor usually determines whether to file under chapters 7 or 13. Generally, these bills would require debtors who filed under chapter 7 and whose gross monthly income met a specified income threshold to undergo a detailed analysis of their income, expenses, and debts to determine whether they could proceed under chapter 7 or be required to file under chapter 13. Under chapter 13, debtors enter into a repayment plan, which must be approved by the bankruptcy court, to repay their debts over a period not to exceed 3 years, unless for cause the bankruptcy court approved a period not to exceed 5 years. The “needs-based” bankruptcy reform bills introduced in the 105th and 106th Congress would generally mandate a 5-year repayment period for debtors required to file under chapter 13, rather than under chapter 7. Generally, the private panel trustee would be responsible for making the initial determination of whether a debtor would be permitted to proceed under chapter 7. Under the bankruptcy code, a debtor’s debts may be grouped into three general categories for the purposes of determining creditor payment priority: (1) secured debts, for which the debtor has pledged collateral, such as home mortgage and automobile loans; (2) unsecured priority debt, such as child support, alimony, and certain back taxes; and (3) unsecured nonpriority debt, such as credit card debts, student loans, and other unsecured personal loans. In analyzing debtors’ repayment capacity, the four reports focused principally on the proportion of total unsecured nonpriority debt that debtors could potentially repay. In general, “needs- based” bankruptcy bills introduced in the 105th and 106th Congress would require debtors to file under chapter 13 if the debtors met or exceeded a specific income standard and could repay all their nonhousing secured debts, all their unsecured priority debts, and a minimum specified amount of their unsecured nonpriority debts over a 5-year period. To evaluate and compare the four reports’ research methodologies, we assessed the strengths and limitations, if any, of each report’s assumptions and methodology for determining debtors’ ability to pay and the amount of debt that debtors could potentially repay. The comments and observations in this report are based on our review of the March 1998 and March 1999 Ernst & Young reports, the March 1999 Creighton/ABI report, and the January 1999 EOUST report; some additional information we requested from each report’s authors; independent analyses using the Creighton/ABI report’s database; and our experience in research design and evaluation. We reviewed specific aspects of each report’s methodology, including the proposed legislation on which the report was based, how the bankruptcy cases used in the analysis were selected, what types of assumptions were made about debtors’ and their debt repayment ability, how debtors’ income and allowable living expenses were determined, and whether appropriate data analysis techniques were used. We also assessed the similarities and differences in the methodologies used in the four reports. In addition to reviewing the reports, we had numerous contacts with the reports’ authors. On March 16, 1999, we met with one of the authors of the Creighton/ABI report, and on March 25, 1999, we met with the authors of the two Ernst & Young reports to discuss our questions and observations about each report’s methodology and assumptions. Following these discussions, we created a detailed description of each report’s methodology (see app.I), which we sent to the authors of each report for review and comment. On the basis of the comments received, we amended our methodological descriptions as appropriate. The authors of the Creighton/ABI report responded to written questions we submitted. Ernst & Young, Creighton/ABI, and EOUST provided additional details on their methodologies and assumptions that were not fully described in their reports. We did not verify the accuracy of the data used in any of these reports back to the original documents filed with the bankruptcy courts. However, the Creighton/ABI authors provided us with a copy of the database used in their analysis. Ernst & Young declined to provide a copy of their database, citing VISA’s proprietary interest in the data. (VISA U.S.A. and MasterCard International sponsored the Ernst & Young reports.) We received the EOUST report in early April and, because of time constraints, did not request the database for the report. We reviewed the Creighton/ABI data and performed some analyses of our own to verify the authors’ categorization of data used in their analyses. In our review, we found that the Creighton/ABI researchers prepared and analyzed their data in a careful, thorough manner. The team that reviewed the reports included specialists in program evaluation, statistical sampling, and statistical analysis from our General Government Division’s Design, Methodology, and Technical Assistance group. We did our work between February and May 1999 in Washington, D.C., in accordance with generally accepted government auditing standards. On May 18, 1999, we provided a draft of our report to Ernst & Young, the authors of the Creighton/ABI report, and EOUST for comment. Each provided written comments on the report. In addition, on May 28, 1999, we met with representatives from Ernst & Young to discuss their comments on the draft report. Ernst & Young and Creighton/ABI also separately provided technical comments on the report, which we have incorporated as appropriate. The Ernst & Young, Creighton/ABI, and EOUST written comments are summarized at the end of this letter and contained in appendixes III through V. Each of the reports found that at least some portion of chapter 7 debtors— ranging from 3.6 percent to 15 percent--met the definition of “can-pay” debtors as that term was defined in each report’s methodology. The amount of unsecured nonpriority debt that each report estimated these “can-pay” debtors could repay over 5 years ranged from about $1 billion to about $4 billion. It is important to note that these estimates do not necessarily represent unsecured nonpriority creditors’ potential net gain from implementing needs-based bankruptcy, compared with current bankruptcy practice. It was not the objective of any of these reports to estimate the potential net gain to creditors (secured or unsecured) under “needs-based” bankruptcy and, consequently, none of the reports attempted to do so. Currently, many chapter 7 debtors repay at least some of their debts. Debtors may voluntarily reaffirm—that is, agree to repay—specific debts (most commonly home mortgage or vehicle loans) or they may, in effect, be required to repay others. Some debts, including such unsecured nonpriority debts as most student loans, cannot be discharged in bankruptcy. Following the close of their bankruptcy cases, debtors remain financially responsible for all debts reaffirmed with the bankruptcy court and all debts that cannot be discharged in bankruptcy. In developing its estimates of “can-pay” debtors and the total amount of debt such debtors could repay, each report made a number of assumptions, which varied by report. Three of these assumptions were used in all four reports: (1) the data in debtors’ schedules of current estimated income, current estimated monthly expenses, and debts were accurate and could be used as the basis for forecasting debtors’ income and expenses for a 5-year period; (2) debtors’ income and allowable living expenses would remain unchanged during the 5-year repayment period; and (3) all debtors required to file under chapter 13 and enter a 5-year repayment plan would complete that plan. The reports used the second and third assumptions because proposed “needs-based” legislation specified their use in identifying “can-pay” chapter 7 debtors. However, none of these assumptions has been validated. Each report’s data on debtors’ income, debts, and most living expenses were from the financial schedules that debtors generally file at the same time as their bankruptcy petitions. The instructions for the income and expense schedules specifically ask the debtors to enter their “estimated” monthly income or expenses. Although these schedules are the only source of detailed debtor financial data publicly available, the data in the schedules are of unknown accuracy and reliability. Both Ernst & Young and Creighton/ABI, for example, developed separate methodologies for valuing the amount of unexpired vehicle leases because the data debtors reported on the schedule for unexpired leases was incomplete or inconsistent. In some cases, for example, debtors reported the monthly lease payment rather than the total amount of the payments due on the remainder of the lease.