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MARCH 17, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 6246 words

HEADLINE: PREPARED TESTIMONY OF
LISA H. RYU
STAFF ECONOMIST
NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS
BEFORE THE HOUSE JUDICIARY COMMITTEE
SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
SUBJECT - BANKRUPTCY REFORM OF 1999

BODY:

Introduction
The National Association of Federal Credit Unions (NAFCU) is the only national organization exclusively representing the interests of the nation's federally chartered credit unions. NAFCU is comprised of approximately 1,100 federal credit unions -- financial cooperatives from across the nation -- that collectively hold approximately 70 percent of total federal credit union assets; NAFCU represents the interests of approximately 25 million individual credit union members. NAFCU and the entire credit union community appreciates this opportunity to participate in the discussion regarding the need for reform of the nation's bankruptcy system.
Nature of Credit Unions Historically, credit unions have served a unique function in the delivery of financial services to people of modest means. Every credit union is, by statute and practice, a cooperative association organized "for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes." (12 USC 1752(1)) While more than 60 years have passed since the Federal Credit Union Act was signed into law, two fundamental principles regarding the operation of credit unions remain every bit as important today as they were when Congress first authorized the establishment of federal credit unions:
- First, credit unions remain totally committed to providing their members with efficient, low-cost personal service.
- Second, credit unions continue to emphasize traditional cooperative values, such as democracy and volunteerism.
As owners of not-for-profit, cooperative financial institutions united by a common bond, all credit uembers have an equal say in the operation of their credit union -- regardless of the amount they have on account at the credit union. These singular rights extend all the way from making basic operating decisions to electing the board of directors. Unlike banks and thrifts, federal credit union directors, motivated by an altruistic desire to be of service to others, serve without remuneration -- a fact that epitomizes the true "volunteer spirit" which permeates the credit union community.
Credit unions play an important role in the financial lives of more than 70 million Americans from all walks of life who have chosen the convenient and lowcost financial services that only credit unions can provide. As the package of services offered by various types of financial institutions becomes more and more homogenized, the emphasis shifts from the type of service offered to the quality and cost of service provided. Historically, credit unions have been second to none in providing their members with quality personalized service at the lowest possible cost. According to an annual survey conducted by the American Banker newspaper, 1997 was the thirteenth consecutive year in which credit unions have rated higher than all other financial institutions in overall service quality and this trend shows no sign of change.
Need For Bankruptcy Reform
The number of consumers filing for bankruptcy rose dramatically in 1998. From 1993 to 1997, there was an average of 989,000 personal bankruptcy filings a year. In 1998 there were over 1,400,000 personal bankruptcy filings. This marks a new record in the number of bankruptcy filings. This upward trend in consumer bankruptcy filing is expected to continue in 1999.Unfortunately, a small but growing number of consumers are not financially responsible and abuse the bankruptcy system at a high cost to the consumers and the national economy. The credit union community feels strongly that bankruptcy reform is needed to encourage financial responsibility for debtors and for those creditors who would mislead or take advantage of consumers. The bankruptcy reform issue is not an issue of balancing the pursuits of debtors with the interests of creditors. It is simply an issue of financial responsibility versus financial irresponsibility.
The credit union community does not oppose bankruptcy relief for those persons who have a bona fide need for relief. Instead, the concern is with those consumers who use bankruptcy as a financial planning tool and those who turn to bankruptcy as the "easy way out."
Credit Union Response to Consumer Bankruptcy
Most credit unions have lower operating margins than other types of lenders. Typically, credit unions pay higher rates on savings and charge lower rates on loans than other financial institutions. Because of these smaller margins, credit unions are hit harder than other financial institutions by escalating bankruptcy costs. A natural reaction for some institutions is to increase interest rates, but that is not what credit unions do. Credit unions keep interest rates as low as possible for the benefit of their members.
Credit unions do much to promote financial responsibility among their members. Because credit union members pool their resources for the mutual benefit of all members, they have traditionally relied heavily on member education and individual counseling to encourage and promote financial responsibility. An example of this emphasis on credit unions' consumer education efforts is Navy Federal Credit Union. Navy FCU trains its employees in financial counseling, check book balancing and family budgeting. They advise members on the merits of saving and the consequences of heavy debt loads. Member articles are published and brochures are provided for members to assist in making responsible financial decisions.
Reform Efforts: Credit Union Perspective
Because of the rising number of personal bankruptcy filings, the credit union community believes that legislative action is necessary to improve the current bankruptcy system. To support Congress in that effort, NAFCU established an ad hoc Bankruptcy Committee in 1997. After extensive study and bolstered with the input of a nationwide survey of credit unions, NAFCU's ad hoc Bankruptcy Committee approved a formal "Proposal to Improve the Bankruptcy System" (see Appendix 1). The product is a genuine effort to improve our nation's bankruptcy laws and procedures.
To better understand how the nation's credit unions are affected by bankruptcy, NAFCU's ad hoc Bankruptcy Committee surveyed over 1,050 federally chartered credit unions. In the survey three issues seem to move to the forefront of the credit union agenda with regards to bankruptcy.
First is requiring Chapter 13 consideration before establishing eligibility for Chapter 7. Bankruptcy courts do not require any showing of need or minimum level of debt. The bankruptcy court simply accepts the debtor's assertion that bankruptcy is necessary. As a result, Chapter 7 often gives more relief than is necessary. The full discharge of debts provided by Chapter 7 is a carryover form the last century, when most credit was secured by tangible assets.

Today's consumer-based economy is built on unsecured revolving credit with the promise that debtors will pay from future income. Approximately 97 percent of the respondents support a bankruptcy system that is needs-based. This would help to increase debtor accountability, create a fairer bankruptcy system, and more fairly distribute payments among all creditors.
Second is mandatory financial education for all bankruptcy filers. Credit unions have a long history of educating their members in financial matters. The wise use of credit as well as the value of systematic savings are basic credit union principles. Most credit unions attempt to provide the best possible education for their members. Of those surveyed 84 percent support a requirement that would require debtors to participate in credit counseling before filing bankruptcy.
Third is strengthening the right of reaffirmation for credit union members. Credit unions traditionally have higher reaffirmation rates than many other lenders, partly because their members realize that credit unions offer them low interest rates on loans and high dividend rates on savings. The higher credit union reaffirmation rates reflect other characteristics of the credit union philosophy such as the knowledge that fellow credit union members will bear the costs of any debt discharged in bankruptcy. Credit unions believe that their members should be assured that they can retain their relationship with their financial institutions by reaffirming loans at reasonable rates, rather than being forced to pay higher prices elsewhere. 76 percent of those surveyed believe that the bankruptcy code should not include any limitations on the right to reaffirm, but support requirements that would make sure debtors were fully informed about reaffirmation agreements and corresponding responsibilities.
Reflected in NAFCU's proposal, credit unions throughout the country advocate meaningful reform of the bankruptcy system. NAFCU's proposal include recommendations that:
- The Bankruptcy Code should require that debtors who are able to pay a portion of their debts file a repayment plan under Chapter 13;
- The Code should establish uniform rules and procedures for processing creditors' claims and payments;
- The Code should establish uniform federal exemptions;
- Debtors should be required to complete a basic financial education course prior to receiving discharge;
- A debtor should be required to notify secured creditors, within ten days of filing bankruptcy, whether the debtor intends to surrender, redeem, or reaffirm the collateral; and,
- For creditors seeking to recover collateral, the automatic stay should expire at the end of the notification period.NAFCU also recommends establishing a Bankruptcy Advisory Council, which includes debtor and creditor representatives. The council should be charged with studying bankruptcy and bankruptcy reform. This council could be established under the auspices of the U.S. Department of Justice. Alternatively, the Federal Reserve Board's existing Consumer Advisory Council should be required to submit an annual report to Congress on bankruptcy and bankruptcy reform.
Reform Efforts: Congressional Action
Despite all of the efforts to educate, to make sound loans, and to assist those in trouble, bankruptcy reform is needed and is needed now to encourage financial responsibility. The needs-based approach of H.R. 833, the Bankruptcy Reform Act of 1999, introduced by Representatives George Gekas, Rick Boucher, Bill McCollum and Jim Moran, is a positive step towards helping to ensure more responsibility. H.R. 833 would make a number of changes to U.S. bankruptcy law in an effort to prevent fraudulent bankruptcies and increase the likelihood that bankruptcy filers will repay their debts. NAFCU supports H.R. 833.
NAFCU agrees with the needs-based approach of H.R, 833. This would help in determining the correct amount of financial relief necessary. The Debtor's Bill of Rights provision in H.R. 833 should provide protection for debtors from "bankruptcy mills" -- law firms and other groups that steer consumers to bankruptcy. Other provisions of the Bankruptcy Reform Act of 1999 that will aid bankruptcy reform include: the creation of a consumer education program, debtor notification, and developing a national database.
Reform Efforts: The Means-Test
When the Bankruptcy Reform Act of 1998, H.R. 3150, was introduced in the 105th Congress, the means-test provision of the bill was questioned. The means test provisions sparked many different opinions and studies. H.R. 833 retains the means-test provision of H.R. 3150.
The test takes a debtor's individual circumstances into account while at the same time ensuring that those who can afford to repay some of their debt are required to do so. The test included in H.R. 833 works only if a Chapter 7 filer earns more than the national median income and can afford to pay back either $5,000 or 25 percent of his or her debt over five years. If that is the case, a judge may convert the filing to a Chapter 13 bankruptcy or dismiss the case all together.The judge may take any extraordinary circumstances into account, such as a decline in income, divorce, or unexpected medical expenses.
NAFCU believes the means-test is necessary and it is a fair test to afford bankruptcy to those who are in need. In a period of unprecedented economic prosperity in the United States, the fact that non-business bankruptcy filings continue to rise has left many observers bewildered. In spite of low unemployment, stable prices and rising personal income, non-business bankruptcy filings have increased by 79 percent since 1994. This increase can be mainly attributed to a dramatic increase in Chapter 7 bankruptcy filings. With over 1 million petitions, total chapter 7 bankruptcies filed by individuals in 1998 was 60 percent higher than the average filings during the recessions of 1990 and 1991.1 If non-business Chapter 7 filings increase at the same rate as the last five-year's average, the total number of Chapter 7 petitions are expected to reach 2.3 million by 2003.2 Chapter 7 bankruptcy filings as a percentage of total non-business filings have increased steadily in recent years. In 1998, over 72 percent of nonbusiness bankruptcy filings were Chapter 7 petitions. While personal factors such as divorce and medical problems are often cited as underlying causes of many personal bankruptcies, these factors do not seem to explain the sharp rise in personal bankruptcies during the 1990s.
As non-profit financial cooperatives, credit unions face unique problems associated with rising bankruptcies. As of December 1998, about half of all federally insured credit unions (5,497 credit unions) have assets less than $6.2 million. As with many other financial institutions, bankruptcy is a major problem for credit unions. In 1998 alone, nearly 250,000 credit union members with $1 billion in outstanding loans filed for bankruptcies.3 On average, nearly half of all loan losses at federally insured credit unions in 1998 was due to bankruptcy. Bankruptcy accounted for more than 70 percent of all charge-offs among 27 percent of all credit unions. The growing number of credit union member bankruptcies adds an extra burden on credions; because of their non-profit cooperative characteristics, the cost of the bankruptcies is directly born by all members. When a few high-income member-debtors are permitted to file for chapter 7 bankruptcies, the system, in fact, subsidizes these debtors at an expense of financially responsible credit union members with modest means. For instance,
according to Navy Federal Credit Union, if there were no bankruptcy losses, the interest rate on Navy Federal's VISA Classic credit card could be 1.3 percentage points lower than the current rate.4
The means-testing provision is one of the most important components of the proposed bankruptcy reform legislation. By requiring high-income debtors to file under Chapter 13 rather than Chapter 7, means-testing attempts to remedy the increasingly regressive nature of the current bankruptcy proceedings by raising the transaction cost of Chapter 7 bankruptcy filings for high-income debtors. Overall, the means-testing provision achieves two broad effects. First, by requiring high income debtors to repay at least a portion of their debt, the provision reduces the social and economic costs of irresponsible financial management and abuse of the current bankruptcy system by wealthy debtors. Second, means-testing is anticipated to have a longer-term benefit as it deters fraudulent bankruptcy filings.
With the means-testing provision, bankruptcy can regain once again its role as the last resort for debtors in dire financial needs. According to the Congressional Budget Office (CBO), the total number of bankruptcies is expected to drop 5 percent immediately upon the enactment of the proposed bankruptcy reform that includes the means-testing provision?
While most agree that means-testing is likely to have an impact on Chapter 7 petitioners, the degree of this impact is widely debated.

Two major empirical studies concerning means-testing, the Ernst & Young report/6 and the Culhane and White report, 7 yield two conflicting results. In contrast to the Ernst & Young report which found that 15 percent of all Chapter 7 petitioners would be affected by the means-testing, Culhane and White concluded that the impact would be limited to 3 percent of Chapter 7 petitioners. The findings of Ernst & Young confirmed both the results of a previous Ernst & Young study using four sample districts and other studies concluding that a significant portion of Chapter 7 petitioners would be affected by the provision.8 The conflicting results reported in the Ernst & Young report and the Culhane and White report are baffling since, at least at the surface, the Culhane and White report seemed to have emulated the methodology used earlier by Ernst & Young. Some of the assumptions questioned by the General Accounting Office (GAO)9 in its evaluation of the Ernst & Young report were also maintained by the Culhane and White report with the exemption of the incorporation of administrative expenses. The minor differences in assumptions are not likely to have any significant impact on the results. However, a closer evaluation of the Culhane and White report reveals methodological and interpretive biases that were not present in the Ernst & Young study. A discretionary interpretation of the language of the proposed bill, combined with the manner of sample selection and presentation, are factors that introduced biases to the data analysis.
Appendix 7 summarizes the major differences between the two reports. Because the income criteria for means-testing was raised from 75 percent to 100 percent of the median national income adjusted for family size since the publication of the Ernst & Young study, part of the difference between the results of two studies reflects this change in the income criteria. However, as illustrated in Appendix 7, there are other major methodological differences between the two studies, and these differences can lead to divergent results. First, the sample years of the two studies are different. While the Ernst & Young report analyzed Chapter 7 personal bankruptcies filed in 1997, the more recent Culhane and White report examined 1995 filings. The previous work by Ernst & Young/10 using Chapter 7 filings during the 1992-1993 period found that a smaller percentage of debtors would be impacted by the provision. Based upon these findings, the sample year of the study clearly has relevance to the study's results.
Second, while the Ernst & Young report drew its sample from all 90 district courts in the nation, the Culhane and White report selected samples from only seven sample districts. These districts were the Northern District of California, the District of Colorado, the Northern District of Georgia, the District of Massachusetts, the District of Nebraska, the Middle District of North Carolina and the Western District of Wisconsin. According to the Culhane and White report, these districts were chosen to represent "coast-to-coast coverage and a good mix of urban (Atlanta, Boston, Denver, and the Bay Area) and less densely populated areas" as well as "the spectrum of high and low cost-of-living areas."11 The selection of these districts was, however, highly subjective as it did not follow a statistically sound random sampling process. Therefore, it is difficult to ascertain with any degree of statistical confidence how well the individual characteristics and behavior of Chapter 7 filers in these districts represent all Chapter 7 filers.
While Culhane and White selected the sample districts with specific criteria in mind, it failed to recognize the differences in regional macroeconomic circumstances and legal practices among these districts in its statistical analysis. Other studies of personal bankruptcy have found a substantial variation in bankruptcy practices and the debtor's ability to repay across the states.12 Recognizing this variance, GAO questioned the inference of national statistics using the findings of sample districts not selected by a statistically random method in its analysis of a Credit Research Center's report on debtors' ability to pay.13 The GAO stated that: (...) the Center report presented results based on data from all 13 locations combined. However, the data provided to us by the report's authors, but not included in the report, showed wide variation among the report's 13 locations in debtors' estimated ability to pay. (...) These variations may in part reflect the influence of varying local bankruptcy practices.14 Given these variations, we believe it is appropriate to be cautious in making general statements about the debtors across all 13 locations.15 (italics added)
Third, even though both studies used a two-step sampling technique, there were substantial methodological differences in the sample selection process. Ernst & Young selected a stratified random sample of approximately 500 non-business Chapter 7 petitions from 90 district courts (43,730 cases), which were later reduced to 2,142 cases using self-weighted random sampling process reflecting monthly total Chapter 7 petitions per district. As a result of this random sampling process, the number of petitions per district included in the sample is representative of the total population of Chapter 7 filers. Additionally, Ernst & Young have over-sampled asset-case Chapter 7 petitions to derive a statistically significant sample size of asset- case Chapter 7 petitions. Ernst & Young took extra steps to ensure that the final sample was statistically unbiased. These steps included an adjustment of sample totals as a proportion to the population to reduce coverage and non-response bias and variance effects. Due to this statistically random sampling process, the Ernst & Young report was able to use a statistical technique for determining the accuracy of their findings. At a 95 percent confidence level, the percentage of Chapter 7 filers impacted by means-testing would fall between 13.1 percent and 16.9 percent. In comparison, the sample selection process used by the Culhane and White study is not based on a statistically random method and it is likely to introduce a substantial degree of sampling bias. As a first step, the study selected a stratified random list of 400 docket numbers from seven district courts. However, unlike Ernst & Young, the list included Chapter 7 and Chapter 13 filings as well as both business and non-business filings. The second step selected the first 150 cases on each district list that were non-business Chapter 7 cases with adequate information to "assure adequate and useful data." Unfortunately, this was not a statistically random selection process and, therefore, significant bias was likely to be introduced during the sampling process. In addition, because the final sample is composed of an equal number of cases from each of seven districts in spite of the difference in the probability of filing for Chapter 7, the sample bears no resemblance to the population of Chapter 7 petitioners. Appendix 9 illustrates the magnitude of the authors' misrepresentation of the population of Chapter 7 petitions per district.
The sampling bias observed in the Culhane and White report resembles the GAO findings on the Credit Research Center report on debtors' ability to pay even though the two studies are very much different in many other aspects. GAO questioned the Center's sample selection method by stating that:
(...) the center's researchers selected the 13 bankruptcy locations and 3,798 personal bankruptcy petitions without using scientific random sampling techniques. As a result, the national estimates presented in the report are not based on representative probability sampling methods. In addition, standard statistical methods, such as the calculation of statistical error rates, cannot be used to evaluate the likely accuracy of the results in the Center report. Consequently, the methods used in the Center's analysis do not provide a sound basis for generalizing the Center report's findings to the annual 1996 filings in each of the 13 locations nor to the national population of personal bankruptcy filings.16 (italics added)
Another concern about the final sample of Culhane and White is that it eliminated seven cases as outliers because of a high level of total debts reported by these debtors. According to Culhane and White, because these seven cases each had total debt in excess of $1 million, "they seemed likely to distort totals" in a sample of its size. However, this subjective decision on the authors' part has no credible statistical explanation. Since they used the "median" rather than the mean for the income and debt level assessment of the sample, the inclusion of these cases would not distort the result if the sample were indeed selected in a statistically random fashion.17 Even in a case like the Culhane and White study where a strict statistically random sampling method was not used, the exclusion of any selected sample is highly undesirable because the exclusion of these cases can lead to a significant bias in the result. For a statistical analysis to be dependable, researchers cannot exclude certain cases just because they do not like what they see. It must also be noted that these types of debtors with exceptionally high amount of debts are most likely to be wealthy individuals who are exactly the types of debtors for which the means-testing provision is intended. Thus, the exclusion of these cases is likely to lead to an underestimation of the impact of the means-testing.
Finally, Culhane and White interpreted the language of the 1997-1998 legislation somewhat differently from Ernst & Young. For one, they added ownership allowance (net of payment on an automobile loan) to all automobile owners regardless of the existence of automobile debt payment. For instance, a Chapter 7 bankruptcy petitioner who owns an automobile with no outstanding debt at filing is given $20,100 in ownership allowance to reflect leasing and replacement cost in the study.

The assumption that an individual who cannot pay his or her existing debts should be expected to incur additional debt to purchase a new car as a replacement of an aging one is an unreasonable assumption. Also, the bankruptcy reform legislation specifies that monthly living expenses are to be derived using allowances under the applicable "National Standards, Local Standards and Other Necessary Expenses" allowance issued by the Internal Revenue Service (IRS). Collection Financial Standards (CFS) of the IRS sets a specific guideline regarding allowance for transportation expenses that states:
If a taxpayer has a car payment, the allowable ownership cost added to the allowable transportation expense. If a taxpayer has no car payment, or no car, only the operating cost portion of the transportation standard is used to come up with the allowable transportation expense. 18 (italics added)
Therefore, Culhane and White are likely to have substantially overstated the amount of transportation expenses, and thus, underestimated the debtor's ability to repay.
Another difference between the Ernst & Young report and the Culhane and White report is their treatment of administrative expenses. While the Ernst & Young report did not take administrative expenses into consideration in its analysis, the Culhane and White report subtracted administrative expenses -Chapter 13 trustee's fees and attorney expenses -- from net income. While these administrative expenses are considered to be priority claims under section 507(a) of current bankruptcy code, their inclusion in the determination of the ability to repay is a matter of some debate. Jones and Zywicki,/19 for instance, states that "trustees' fees are irrelevant to the debtor's ability to pay -- although they are relevant to the creditors' ability to collect." The matter is, however, largely an issue of legal interpretation that should be resolved in the subsequent discussion.
The methodological and interpretative biases present in the Culhane and White report are likely to have resulted in significant underestimation of the Chapter 7 debtors' ability to repay. According to the later recalculation by Culhane and White, correcting for transportation expenses alone can increase the percentage of Chapter 7 filers impacted by the means-testing to 6.5 percent. If corrected for income and other biases as well as transportation expenses, the percentage of filers impacted by the means-testing is more likely to be close to 10 percent.20 This estimate is, in fact, close to the CBO projection. The CBO projected that as a result of the bankruptcy reform, "about 5 percent of all chapter 7 debtors would not file for any type of bankruptcy protection and that about 5 percent of all chapter 7 cases would be filed as or converted to chapter 13 cases."21
Even using a conservative estimate,22 these debtors who would be impacted by the means-testing currently hold $7.5 billion in total debt. In other words, every year financially responsible U.S. consumers are forced to provide $7.5 billion in financial subsidy to these high-income debtors. Under the current system of U.S. bankruptcy filings, which can be viewed as a regressive form of taxation, low- income households are those who bear the heaviest burden of this subsidy due to the credit reallocation and higher interest rates.
According to the CBO estimate, the Consumer Bankruptcy Reform Act of 1998, H.R. 3150, as reported by the Senate Committee on the Judiciary on June 4, 1998 is expected to cost the federal government $293 million over a five-year period. This figure, however, does not incorporate cost savings from the longterm impact of means-testing. Fifty percent of this projected cost or $152 million is associated with debtor financial management training. The long-term impact of this training is likely to be a reduction in total bankruptcy filings in coming years, which, in turn, will reduce the court cost of bankruptcy. In addition, number of judges overseeing bankruptcy proceedings are expected to rise even without means-testing if the current level of increase in bankruptcy filings continues in coming years. Therefore, the projected costs related to additional judgeships and support ($57 million in total over the five-year period) pertaining to means-testing are likely to be somewhat overestimated.
If 10 percent of current Chapter 7 debtors file under Chapter 13 and repay 60 percent of their total debts over the five-year period, nearly $14 billion of outstanding debts held by impacted debtors would be repaid to creditors. Approximately $6.1 billion of this repayment is for unsecured nonpriority debts that would be discharged if these debtors filed for Chapter 7 bankruptcy. Even taking the results of the Culhane and White report at face value, the estimated amount of repayment resulting from the means-test during the next five years will be $4. 7 billion, 16 times larger than the projected cost. Forty three percent of this repayment or $2 billion is a repayment on the otherwise non-collectible portion of the unsecured nonpriority debt.24 Some of the other economic benefits, although they are likely to be substantial, are not easily quantifiable prior to the actual implementation of the legislation. Some expected benefits include lower loan rates and greater credit availability to lower-income households as the financial benefit of the means-testing is reallocated to a more productive use. Particularly for credit unions, because of their nonprofit cooperative nature, these types of expected future benefits will be distributed directly to their members.
Conclusion
Even before the National Bankruptcy Commission released its findings to Congress in October 1997, the need for overhaul of the nation's troubled bankruptcy system was evident. As bankruptcy filings increase, the burden on financial institutions also increases -- a burden that ultimately is shouldered by the American consumer. NAFCU recognizes the need for reform and is grateful that Congress is focused on the problem and is determined to implement reforms.
To that end, NAFCU supports the Bankruptcy Reform Act of 1999. NAFCU believes that the means-test incorporated within H.R. 833 is the most effective way to deal with the rising bankruptcy filings, it will ensure that the system is fair for debtors, creditors and consumers. Credit unions take great pride in working with their members who encounter financial difficulties and this legislation is certainly a step in the right direction.
On behalf of NAFCU, thank you for considering the credit union perspective. NAFCU applauds the efforts of the Committee and hopes to continue to work with you to resolve this and other challenging issues.
FOOTNOTES:
1 See the attatched Appendix 2.
2. See the attatched appendix 3.
3 See the attached Appendix 4-6 for statistics on bankruptcy by credit union members.
4 Testimony of Brian L. McDonell before Subcommittee on Administrative Oversight and the Courts (March 11, 1998). In 1997, Navy Federal Credit Union offered a VISA Classic credit card rate of 12.5 percent with a nonannual fee.
5 Congressional Budget Office cost estimate, S. 1301 Consumer Bankruptcy Reform Act of 1998, as reported by the Senate Committee on the Judiciary on June 4, 1998.
6 Ernst & Young, LLP, Chapter 7 Bankruptcy Petitioners' Ability to Repay: the National Perspective, 1997 (March 1998).
7 Marianne B. Culhane and Michaela M. White, Means-Testing for Chapter 7 Debtors: Repayment Capacity Untapped? (December 1998).
8 Ernst & Young, LLP, Chapter 7 Bankruptcy Petitioners' Ability to Repay: Additional Evidence from Bankruptcy Petition Files (February 1998); WEFA Group, The Financial Costs of Personal Bankruptcy (February 1998); John M. Barron and Michael E. Staten. Personal Bankruptcy: A Report on Petitioners' Ability-to-Pay (October 1997).
9 United States General Accounting Office, Personal Bankruptcy: The Credit Research Center and Ernst & Young Reports on Debtors' Ability to Pay, Testimony Before the Subcommittee on Commercial and Administrative Law, Committee on the Judiciary U.S. House of Representatives (March 1998).
10 Ernst & Young, LLP (February 1998). (The study found a weighted average of 11.8 percent of Chapter 7 bankruptcies flied in the four sample districts would be affected by the means-test provision. The degree of the impact ranged across the district from 8 to 14 percent.
11 Culhane and White (December 1998).
12 For example, Michelle J. White, "Why It Pays to File for Bankruptcy: A Critical Look at the Incentives Under U.S. Personal Bankruptcy Law and a Proposal for Change," The University of Chicago Law Review (Summer 1998).
13 Barron and Staten (October 1997).
14 See the attached Appendix 8 for the variation in state asset exemptions across seven districts examined by the Culhane and White report.
15 U.S. General Accounting Office, Personal Bankruptcy: The Credit Research Center Report on Debtors' Ability to Pay (February 1998).
16 U.S. GAO (February 1998).
17 When a sample distribution is biased, the median is a more robust estimator than the mean. Mean and median converge only if the sample distribution is normal and unbiased.
18 Internal Revenue Service, Collection Financial Standards. (http://www.irs.treas.gov/prod/ind info/coli stds/).
19 Judge Edith H. Jones and Todd J. Zywicki, "It's Time for Means- Testing," Brigham Young University Law Review (forthcoming).
20 Based upon income data from the U.S. Census Bureau and probability of Chapter 7 bankruptcy filings per district, the income bias is roughly estimated to be 3.3 percent. Correcting the percentage of debtors passing the income test for this estimated bias decreases the percentage of debtors with less than median household income from 79 to 76.4%. This figure is further corrected for seven excluded cases (0.7% of the total), which brings the percentage down to 75.7%. Culhane and White's own calculation shows that the percentage of debtors with less than $50 in net income would be reduced from 17 to 13.5% if corrected for transportation expenses. Adding these figures together lead to an estimated 9.8 percent of debtors to be impacted by the means-testing. However, this estimate is based upon very rough calculation and it should be empirically tested using national data.
21 Congressional Budget Office Cost Estimate (June 1998).
22 WEFA Group (February 1998). (The study estimated that the Chapter 7 debtors held an average of $74,650 in total debts. However, the amount of debts held by the impacted debtors is likely to be higher than this average because of their higher income level. The estimated amount of total debts held by the impacted debtors is based upon the study's estimate.)
23 Even if we assume that only 36 percent of chapter 13 petitioners complete their repayment plan as GAO (February 1998) pointed out, financial benefits of means-testing in terms of repayment of unsecured nonpriority debts alone, are still $2.2 billion, a significant amount. See the attached Appendix 10 for a graphical illustration of the repayment by the impacted debtors.
24 See the attached Appendix 10 for a graphical illustration of the repayment by the impacted debtors.
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LOAD-DATE: March 18, 1999