Testimony of Dr. Thomas S. Neubig
Ernst & Young LLP
House Judiciary Subcommittee on Commercial and Administrative LawHearing
on Consumer Issues on H.R. 3150, "Bankruptcy Reform Act of 1998,"
H.R. 2500, "Responsible Borrower Protection Act," and
H.R. 3146, "Consumer Lenders and Borrowers Bankruptcy Act of 1998"
March 12, 1998
Mr. Chairman and Members of the Subcommittee:
I am the National Director of Ernst & Young LLP's Policy Economics and Quantitative Analysis group. I was previously the Director of the Treasury Department's Office of Tax Analysis.
I appreciate the opportunity to present the findings of the new Ernst & Young LLP study on Chapter 7 filers' ability to repay. The findings are based on a new nationally representative study of 1997 bankruptcy petitions. I have included the report as my written testimony and Dr. Scheuren will describe Ernst & Young's role in developing this national sample.
The personal bankruptcy reform legislation you are considering is similar to prior reforms of the tax law, which often are influenced by personal anecdotes, but where detailed distributional data and simulation analysis is critical for making sound policy.
The lack of a nationally representative study has been characterized as a limitation to prior policy analyses of personal bankruptcy. That limitation has now been removed. Thus, we are able to evaluate what effect the needs-based provision of H.R. 3150 would have had on Chapter 7 filers in 1997. We did not quantify the effects of other provisions of H.R. 3150 which are also designed to reduce bankruptcy losses.
I will highlight the study's findings.
Percentage of Chapter 7 Filers Impacted
· As shown on the chart, we found that 53 percent of Chapter 7 filers had gross income below 75 percent of the national median income.
· Another 32 percent of Chapter 7 filers did not meet the net income and repayment tests.
· Thus, 85 percent of Chapter 7 filers would not be effected at all by H.R. 3150's needs-based provision and therefore would continue to be eligible for debt relief under Chapter 7.
· Based on the nationally representative study, we can confidently predict that if the needs-based provision had been in effect in 1997, 15 percent of Chapter 7 filers, or almost 150,000 filers, would have been required to file a Chapter 13 repayment plan.
Potential Recoveries and Repayment Ability
· These approximately 150,000 filers with enough income and ability to repay could potentially repay over $4 billion of their unsecured non-priority debt under a five-year repayment plan based on their current income. Actual repayments would depend on their circumstances during the next five years.
· Based on their current income, these impacted filers could repay an average 64 percent of their unsecured non-priority debts. This is after paying all secured debt payments (such as a mortgage and auto loans), after paying priority debts (such as alimony, child support, and back taxes), and after a living expense allowance currently used by the Federal government.
· The median amount of unsecured non-priority debt that these impacted filers could repay over five years would be as much as $21,700, or $360 per month, which on average is less than 10 percent of their current gross monthly income.
Effect on Different Income Groups
· H.R. 3150's needs-based provision would impact principally higher income filers. The median gross income of impacted filers was $45,000. This is 26 percent higher than the 1996 US national median income for all households of $35,500.
This new national study finds similar results to an earlier Ernst & Young study of repayment ability of Chapter 7 filers in four cities during 1992 and 1993, and also the Georgetown Credit Research Center's study of filers in 13 cities during 1996.
The General Accounting Office, from their auditor perspective, has noted some "unvalidated assumptions" included in these calculations. Dr. Scheuren will comment on this issue in more detail, but let me stress that the 15 percent of Chapter 7 filers who would have been impacted in 1997 is based on information available to the bankruptcy court and then simply applying the needs-based calculation formula.
The potential amount of debt repayments would depend on the filers' financial circumstances during the five years after bankruptcy. Making assumptions in policy simulations is unavoidable and must be based on available information. Using debtors' current income provides policymakers with an estimate of potential debt repayments of over $4 billion annually, which can then be subject to sensitivity analysis.
In 18 years of doing policy analysis, including 10 years at the Treasury, I've found that it is more helpful to have estimates based on how the proposed law would have applied in the past or estimates of the future based on reasonable assumptions, rather than waiting to validate every assumption or shy away from making projections that are common in most policy decisions. This new national study provides a sound basis for action on bankruptcy reform.
That concludes my testimony. I would be happy to answer any questions about the Ernst & Young bankruptcy repayment study.
Impact of H.R. 3150 Needs-Based Provision on Chapter 7 Filers
This Chart is not available in electronic format