About 25% of all debtors filing Chapter 7 bankruptcy could repay 30% or more of their non-housing debts according to a study released Friday by the Credit Research Center of Georgetown University. The study also noted that 5% of Chapter 7 filers could repay all of what they owe. Among Chapter 13 filers the report found 75% have a significant ability to repay. More than 3.8 million petitions in 13 district courts and 11 states were analyzed.
A new study of personal bankruptcy petitions shows that a significant percentage of debtors are able to walk away from their debts even though they have enough income to repay some of what they owe, The Georgetown University Credit Research Center announced today.
After completing one of the most comprehensive analyses of bankruptcy petitions ever undertaken, Dr. Michael Staten of Georgetown and Dr. John Barron of Purdue University concluded that about 25 percent of all debtors who file for Chapter 7 bankruptcy could repay 30 percent or more of their non-housing debts – but that current bankruptcy laws allow them to simply erase those debts.
The study, “Personal Bankruptcy A Report on Petitioners’ Ability-to-Pay,” also revealed that 5 percent of Chapter 7 filers could have paid ALL of what they owe, but received complete relief once their Chapter 7 petition was granted.
“Our research supports the call for building a gatekeeper mechanism into the bankruptcy system to match bankruptcy relief to debtor need,” said Staten. “The bankruptcy system was designed as a last resort – not a financial planning tool.” Many Americans are using bankruptcy to erase their debts, even when they have enough income to repay what they owe.”
Last year, more than 1.1 million bankruptcy petitions were filed in the United States, an all time record. That represented an increase of more than 26 percent over the previous year, and personal bankruptcies have risen more than 400 percent since 1980. This year bankruptcy filings are expected to reach 1.3 million.
More than 70 percent of all bankruptcy filers choose Chapter 7, under which virtually all debts are erased. Only about 30 percent choose Chapter 13, which requires the individual to enter into a repayment plan with his or her creditor.
Staten and Barron pointed out that their calculations of how much income debtors have available to repay are actually conservative, because they use the debtor’s own statement of income and living expenses. The current bankruptcy code creates incentives for debtors to understate income and overstate expenses.
The researchers also looked at Chapter 13 filers and found that more than 75 percent have significant ability to repay. Half could repay all of their debts, contradicting the oft-heard assertion that Chapter 13 imposes excessive hardship on over-extended debtors. Staten and Barron also suggested that the high failure rate for Chapter 13 repayment plans may be attributable to other factors – such as the debtor’s perception of a lack of incentives to stay with a plan – rather than to the lack of ability to repay.
Staten and Barron analyzed more than 3,800 1996 bankruptcy petitions from 13 district courts and 11 states in their study. “Giving consumers the option of a court-ordered release from their obligation to repay creditors invites opportunism,” said Staten. On average, Chapter 7 debtors took $93,000 of debt into bankruptcy court, of which $41,000 was unsecured. But, current bankruptcy law leaves the choice of whether to repay some or all of this debt entirely up to the consumer.
Staten and Barron said today that their research indicates a need for bankruptcy reform, which is picking up steam on Capitol Hill. “Congress is likely to consider consumer bankruptcy reform next year, and there is already legislation pending to ensure that debtors who can repay some of what they owe are required to do so,” said Staten. “Our research shows that this kind of reform would be appropriate.”
Staten added that all consumers are bearing the brunt of the rise in personal bankruptcies. “About $40 billion in consumer debt will be erased through bankruptcies this year,” he said. “Lenders of all types pass those losses on to all consumers, in the form of higher interest rates and higher prices for goods and services. The consumer who pays his bills on time ends up paying for the consumer who declares bankruptcy. That’s just not fair when some of those bankrupts have the capacity to repay.”
The Credit Research Center, located at the Georgetown University School of Business in Washington, D.C., is the only academic research center in the United States devoted to studying the economic issues of consumer credit and mortgage credit.