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. Currently, many chapter 7 debtors repay at least some of their debts. 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. However, none of these assumptions has been validated. The final estimates of the percentage of “can-pay” debtors in each sample ranged from 3.6 percent to 15 percent. Based on the data available to us, the reports reached different estimates of “can-pay” debtors principally because each report used different and noncomparable samples of debtors, different proposed “needs-based” legislative provisions, and different methods and assumptions for determining debtors’ allowable living expenses. Which report most accurately reflects what would happen under chapter 7 if needs-based bankruptcy reform were enacted is unknown. Three Assumptions Used in All Three Reports

In estimating the proportion of chapter 7 debtors who could pay a substantial portion of their debts, all three reports used three assumptions that have not been validated: (1) the information on debtors’ income, expenses, and debts, as reported in the debtors’ financial schedules, was accurate and could be used to project debtors’ income and expenses over a 5-year period; (2) debtors’ income and expenses would remain stable over a 5-year debt repayment period; and (3) all debtors required to enter a 5-year repayment plan under chapter 13 would successfully complete that plan. The major steps in each report’s analysis were the following: identify the debtors whose gross annual income, adjusted for household size, meets or exceeds a specific median national household income for households of the same size (all three reports); for those debtors who passed the median income test, determine their allowable living expenses using data from the debtors’ expense schedules and the IRS collection financial standards (all three reports); for those debtors who passed the median income test, determine their total nonhousing secured debts, total unsecured priority debts, and total unsecured nonpriority debts (all three reports); for those debtors who passed the median income threshold, determine whether they had more than $50 in projected net monthly income after paying allowable living expenses and paying all of their nonhousing secured debt and unsecured priority debt over 5 years (1998 Ernst & Young and Creighton/ABI); for those debtors who passed both the median annual income test and the monthly net income test, determine whether they could repay at least 20 percent of their unsecured nonpriority debt over 5 years if they devoted 100 percent of their projected net monthly income to the repayment of their unsecured nonpriority debt (1998 Ernst & Young and Creighton/ABI); for those debtors with household incomes at or above the median income threshold for households of comparable size, determine whether the debtors had sufficient income, after paying allowable living expenses, to pay all their nonhousing secured debt, all their unsecured priority debt, and $5,000 or 25 percent, whichever was less, of their unsecured nonpriority debt over 5 years (1999 Ernst & Young). “Can-pay” debtors were defined in the proposed legislation used in the four reports’ analyses as those debtors who (1) met a specific household income test and (2) could potentially repay a specific minimum amount of their unsecured nonpriority debt over 5 years. 4. 6. We believe that each of the four reports provided Congress with important information about the potential impact of proposed “needs-based” legislation.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the methodologies used in four reports on bankruptcy debtors' ability to pay their debts--two by Ernst Young LLP, one by Creighton University, and one by the Executive Office for U.S. Trustees.

What GAO Found

GAO noted that: (1) determining which of these four reports most accurately reflects what would happen to chapter 7 debtors if needs-based bankruptcy reform were enacted would depend on the details of the legislation eventually enacted as well as which assumptions about debtors' income, expenses, debts, and repayment capacity prove to be more accurate; (2) each of the four reports represents a reasonably careful effort to estimate: (a) the percentage of chapter 7 debtors who would be required to enter a chapter 13 debt repayment plan if a specific set of proposed needs-based legislative provisions were enacted; and (b) the amount of debt such debtors could potentially repay over a 5-year repayment period; (3) can-pay debtors were defined as those debtors whose gross income met or exceeded a household income test and who could potentially repay a specific minimum amount of unsecured nonpriority debt over 5 years; (4) the reports' estimates of the proportion of the can-pay debtors in their respective samples were 15 percent, 10 percent, and 3.6 percent; (5) the reports' estimates of the amount of unsecured nonpriority debt that the can-pay debtors could potentially repay over 5 years ranged from about $1 billion to $4 billion; (6) it is important to note that these repayment estimates do not necessarily represent unsecured nonpriority creditors' potential net gain from implementing needs-based bankruptcy, compared with current practice; (7) under the bankruptcy law, many chapter 7 debtors already repay at least some of their debt, either because they voluntarily reaffirm some debts or because the debts cannot be discharged in bankruptcy; (8) following the close of their bankruptcy cases, debtors remain financially responsible for all debts that they reaffirm with the bankruptcy court and all debts that cannot be discharged in bankruptcy; (9) to develop its percentage and dollar estimates, each of the reports made a number of assumptions, which varied by report; (10) however none of these assumptions has been validated; and (11) the reports reached different estimates of can-pay debtors principally because each report used different and noncomparable samples of debtors, different proposed needs-based legislative provisions, and different methods and assumptions for determining debtors' allowable living expenses.