Ernst & Young released a report yesterday showing one fourth of Chapter 7 bankruptcy filers have enough income to repay at least one-third of their debts, while 10% of filers could pay all their debts. EY researchers also found that, had the ‘Bankruptcy Reform Act of 1998’ been in place in 1993, about 14% of Chapter 7 filers would have been required to file a repayment plan under Chapter 13. EY projects Chapter 7 filers forced into Chapter 13 could repay 63% of their unsecured, non-priority debt. The EY analysis is based on a study of 1,273 bankruptcy petitions filed in Boston in 1993.
A new study of Boston bankruptcy filers has found that, using the filers’ own estimations of income and expenses, a significant percentage of Chapter 7 filers actually had enough income to repay at least one-third of their debts, even though they were permitted by the bankruptcy system to erase those debts.
Fully 10 percent of filers could have repaid all of their debts, the study shows (see Table 2).
The study, conducted by economists and statisticians at Ernst & Young LLP, also examined the impact that a single provision of legislation pending in the U.S. House of Representatives would have on Boston filers.
Researchers found that, had the Bankruptcy Reform Act of 1998 (H.R. 3150) been in place in 1993, about 14 percent of the city’s Chapter 7 filers would have been required to file a repayment plan under Chapter 13. According to the study, these individuals could have repaid 63 percent of their unsecured, non-priority debt (see Table 1).
Last year, more than 1.3 million bankruptcy petitions were filed in the United States, an all-time record. More than 70 percent were filed under Chapter 7, in which most debtors receive complete relief from his or her debts, regardless of whether he or she has enough income to repay some of those debts.
Just 30 percent file under Chapter 13, which requires the establishment of a timely repayment plan.
“This report reveals two very important findings,” said Tom Neubig, the leader of the Ernst & Young team that conducted the study. “First, it demonstrates that current bankruptcy law requires reform because a significant number of filers received complete debt relief when they actually could have repaid some of their debts.
“Second, it shows that reforms of the type contained in H.R. 3150 would have a significant impact on the amount of debt repaid. That would save consumers money, since bankruptcy losses are passed on to consumers through higher prices and higher interest rates.”
Researchers examined 1,273 bankruptcy petitions that were filed in Boston in 1993 and calculated, based on each debtor’s income, expenses and obligations, how much debt they could have repaid.
The study found that fully 10 percent of the Boston sample could have repaid all debts, while 25 percent had enough income to repay at least one-third of what they owed. Similar results were found for three other cities surveyed, including Chicago, Los Angeles and Nashville.
The results corroborate a study undertaken last year by the Georgetown University Credit Research Center, which found similar results in 13 cities for 1996 bankruptcies.
“Our study adds to the growing body of evidence that our current bankruptcy system offers more relief than some people need,” said Neubig.
He acknowledged that the limited scope of the study prevented Ernst & Young from making any national projections, but said that the similar results of the two studies strongly suggested a widespread phenomenon.
“We used a different database, covering a different time period, yet found similar results in our four cities as the Credit Research Center researchers found in their 13 cities,” said Neubig.
Ernst & Young researchers also tested whether the needs-based formula contained in H.R. 3150 would result in more repayment than occurs under current law.
Under the proposal, filers whose income is greater than 75 percent of the national median family income would be required to file a repayment plan under Chapter 13 if they can repay 20 percent of unsecured debts (i.e., credit cards, personal loans) after making secured (i.e., mortgage, auto loans) and priority (i.e., alimony, child support) debt payments.
Researchers found that 14.3 percent of filers in the Boston sample could have repaid at least that, and would have been prohibited from getting complete debt relief in Chapter 7.
The study examined only the effect the needs-based provision of H.R. 3150 would have on repayment. Other reform provisions of H.R. 3150 were beyond the scope of the study.
“What these findings tell us,” said Neubig, “is that about one out of every seven Chapter 7 filers in Boston — and there were more than 10,000 in 1993 — were not required to file a repayment plan when in reality they could have repaid a significant portion of what they owed.
“That represents a significant amount of money that could be recovered. The proposed legislation would ensure that those debtors who could repay are required to do so, without placing an undue administrative burden on the courts.”
Ernst & Young LLP is one of the world’s leading professional services organizations. Ernst & Young’s Policy Economics and Quantitative Analysis Group in Washington, D.C., provides consulting and statistical services for public and private sector clients on policy issues.
The group is headed by Dr. Tom Neubig, formerly director and chief economist of the Office of Tax Analysis of the U.S. Treasury Department.
TABLE 1 Chapter 7 Filers' Ability to Repay Debt if H.R. 3150 Needs-Based Proposal Had Been in Effect, 1991-93 Chicago Los Angeles Boston Nashville Average ( in percentages ) Chapter 7 Filers Impacted 11.9 11.7 14.3 8.4 11.8 Unsecured, Non-Priority Debit Repayable Over 5 Years by Impacted Filers 75 75 63 85 74 TABLE 2 Percentage of Non-Housing, Non-Priority Debt Repayable by Chapter 7 Filers, 1991-93 Debtor Percentile Chicago Los Angeles Boston Nashville Average ( in percentages ) 5 100 100 100 100 100 10 100 100 100 96 100 15 86 85 71 79 83 20 70 58 48 60 60 25 55 43 33 45 45 30 42 29 18 32 31 35 30 18 10 20 19 40 19 8 3 11 10
Source “Chapter 7 Bankruptcy Petitioners’ Ability to Repay Additional Evidence from Bankruptcy Petition Files,” Ernst & Young LLP, February 1998.
Chapter 7 Bankruptcy Petitioners’ Ability to Repay
Additional Evidence from Bankruptcy Petition Files
Policy Economics and Quantitative Analysis Group
Ernst & Young LLP
Record levels of personal bankruptcy filings in recent years have focused attention on current bankruptcy laws. Reform proposals are being considered by Congress, and their impact on the number of bankruptcy filers and debt repayment on the bankruptcy system are important factors to consider in the public policy debate.
This study analyzes the effects of the needs-based bankruptcy proposal of the “Bankruptcy Reform Act of 1998” (H.R. 3150) on Chapter 7 filers, employing a new database of bankruptcy petitions.
This database (the Visa bankruptcy petition database) is a sample of 5,722 Chapter 7 bankruptcy petitions filed in four bankruptcy courts (Boston, Chicago, Los Angeles and Nashville), mainly during 1992 and 1993.
The study also replicates the calculations of petitioners’ ability to repay non-housing debt published in a recent academic (Georgetown Credit Research Center) paper. (See “Personal Bankruptcy A Report on Petitioners’ Ability-to-Pay” by professor John M. Barron of Purdue University and Credit Research Center Director Michael E. Staten of Georgetown University (Oct. 6, 1997)).
Needs-Based Bankruptcy Proposal in H.R. 3150
The needs-based bankruptcy proposal in H.R. 3150 requires petitioners with incomes above 75 percent of the national median to enter a Chapter 13 repayment plan.
If they can repay at least 20 percent of their unsecured non-priority debts within five years, after allowing for secured and priority debt payments and living expenses calculated from the IRS Collection Financial Standards.
It is important to emphasize that this analysis only measures the needs-based provision of H.R. 3150. This pending House legislation contains numerous provisions which will impact creditor repayment and consumer bankruptcy filings. The impact of these other provisions is beyond the scope of this study.
Using the new database, 8-14 percent (the four city average is 12 percent) of Chapter 7 filers from four cities would have been impacted by the needs- based provision of H.R. 3150 and required to file Chapter 13 — had it been in effect in 1992-93.
These filers would have had the ability to repay 63 to 85 percent (average 74 percent) of their unsecured non-priority debts, if income remained unchanged relative to expenses and liabilities during the 60-month repayment period. These findings are presented in Charts 1 and 2. (Detailed assumptions which impact these calculations are presented in the report.)
Replication of Georgetown Credit Research Center Calculations
Using the new database, this study replicates the calculations of petitioners’ ability to repay non-housing debt in John Barron and Michael Staten’s recent paper, “Personal Bankruptcy A Report on Petitioners’ Ability-to-Pay” (Oct. 6, 1997).
This analysis corroborates the Georgetown finding that “a sizeable minority of Chapter 7 debtors could make a significant contribution toward repayment of their non-housing debt over a five-year period.”
This outcome is important because the database used by Ernst & Young for this study represents a different time period, and includes two different cities than those chosen by Georgetown.
The calculations of Chapter 7 petitioners’ repayment ability from the new database are somewhat higher, in most cases, than those reported in the Georgetown study.
For example, the professors report that 25 percent of Chapter 7 filers in their 1996 database had the ability to repay at least 30 percent of their non-housing debt. In the new database, the corresponding figures range upwards from 33 percent for Boston to 55 percent for Chicago. The weighted average across the four cities is 45 percent.
A detailed explanation of the methodology used in these calculations, including the key assumptions underlying the repayment capacity, is included in this paper. The ability to repay non-housing, non-priority debt was calculated using a methodology that replicated, to the extent possible using the new database, the Georgetown calculation.
Since the new database did not contain all the same elements which were contained in the Georgetown database, certain imputations were required. These imputations are described and analyzed in the report. The impact of these imputations on the conclusions of the report are thought to be minimal.