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Halting Chapter 7s

A first-ever nationwide study of bankruptcy petitions has found that nearly 150,000 filers who filed last year could have repaid a significant portion of what they owe. According to the new study by Ernst & Young LLP, these debtors could have repaid 64% of their unsecured debts, representing a potential recovery of more than $4 billion. The study found that, had the needs-based provision of H.R. 3150, the Bankruptcy Reform Act of 1998, been in effect, 15% of the 957,000 Chapter 7 filers in 1997 would have been ineligible for the debt relief they received and forced to file Chapter 13 plans instead. The Ernst & Young study is based on a review of 2,100 petitions filed last year in all 90 bankruptcy courts nationwide.

FULL STORY:
The first-ever nationwide study of bankruptcy petitions has found that nearly 150,000 filers who were allowed to walk away from debts in 1997 could have repaid a significant percentage of what they owed – and would have been required to do so if a bankruptcy reform bill pending in the House of Representatives had been in effect. According to the study, conducted by Ernst & Young LLP, these debtors could have repaid 64 percent of their unsecured debts, representing a potential recovery of more than $4 billion.

The study also found that the proposed legislation would have predominantly affected higher-income filers with high replacement capacity, while low-income debtors who truly needed bankruptcy relief could still have their debts erased.

“This national study shows that last year many bankruptcy filers received Chapter 7 debt relief when in reality they had enough income to repay some debts,” said Tom Neubig, national director of Ernst & Young’s policy economics practice and head of the research team. “The proposed legislation would require that these individuals repay at least some of what they owe, reducing the burden on other consumers.

Ernst & Young economists and statisticians examined more than 2,100 petitions filed last year in all 90 bankruptcy courts nationwide. The reults reinforce research the firm completed last month that found similar results in four cities using data from the early 1990s.

“This study goes hand in hand with previous Ernst & Young research, as well as independent studies conducted by the Georgetown University Credit Research Center and the WEFA Group,” said the Bankruptcy Issues Council in a statement. “In every database used, a substantial percentage of Chapter 7 filers have been found to have enough income to repay a significant portion of what they owe. We believe this is the strongest evidence yet that the time for needs-based bankruptcy has come.”

The new study found that, had the needs-based provision of H.R. 3150, the Bankruptcy Reform Act of 1998, been in effect, 15 percent of the 957,000 Chapter 7 filers in 1997 would have been ineligible for the debt relief they received. Instead, they would have been required to file a repayment plan under Chapter 13.

Last year, an all-time record of more than 1.35 million personal bankruptcy petitions were filed. More than 70 percent were filed under Chapter 7, in which most debtors receive complete relief from their debts, regardless of whether they have enough income to repay a portion of what they owe. Just 30 percent filed under Chapter 13, which requires the establishment of a repayment plan.

Ernst & Young tested how often the needs-based formula in H.R. 3150, which was intruduced last month by Reps. George Gekas (R-PA), James Moran (D-VA), Bill McCollum (R-FL) and Rick Boucher (D-VA), would require a repayment plan rather than debt relief. Under the bill, filers whose income is 75 percent or more of the national median family income are required to file a repayment plan under Chapter 13 if they can repay at least 20 percent of their unsecured debts (i.e. credit cards, personal loans), after accounting for living expenses and secured (i.e., mortgage, auto loans) and priority (i.e., alimony, child support) debt payments. For 1996, the latest year for which figures are available, the national median income for all U.S. households was $35,492. Filers who cannot meet these requirements would continue to be eligible for debt relief under Chapter 7.

In addition to finding significant capacity for repayment, the study found that H.R. 3150 would predominantly impact higher-income filers with high repayment capacity. The study found that the median gross income of filers who would have had to file a repayment plan under H.R. 3150 was $44,738, which is 26 percent higher than the national median. The study also found that the median gross income for filers NOT impacted by H.R. 3150 was $20,417.

“These figures show that low-income individuals will not be penalized by this kind of needs-based approach,” said Neubig. “In fact, the proposal affects principally individuals whose income is significantly higher than the national median and who have significant ability to repay their debts. Those filers with enough income to repay at least some of what they owe will have to do so, while those in the most serious financial difficulty will continue to be able to get Chapter 7 relief.”

The study was commissioned by the Bankruptcy Issues Council, which represents Visa, MasterCard and their 6,000 member financial institutions.

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