LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

MARCH 17, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 931 words

HEADLINE: PREPARED TESTIMONY OF
DR. THOMAS S. NEUBIG
ERNST & YOUNG LLP
BEFORE THE HOUSE JUDICIARY COMMITTEE
SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
SUBJECT - CONSUMER ISSUES ON H.R. 833,
"BANKRUPTCY REFORM ACT OF 1999"

BODY:

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 nationally representative study of 1997 bankruptcy petitions. I have included the report as an attachment to my statement.
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 of other policy analyses of personal bankruptcy. That limitation does not apply to our study. Thus, we are able to evaluate what effect the needs-based provision of H.R. 833 would likely have had on Chapter 7 filers in 1997. We did not quantify the effects of other provisions of H.R. 833 which are also designed to reduce bankruptcy losses.
Nationally Representative Study
The data base upon which this study is based is the only statistically reliable national bankruptcy database ever created.
This database:
Is extensive. It includes over 2,100 Chapter 7 petitions.
Is broad. It includes petitions from each of the 90 bankruptcy district in the nation.
Is current. It includes petitions from each calendar month in 1997.
The results are statistically reliable and can be used with confidence.
I will highlight the study's findings.
Percentage of Chapter 7 Filers Likely Impacted
As shown on the chart, we found that 81 percent of Chapter 7 filers had gross income below the national median income (adjusted for family size). Creditors would be barred from making motions against these debtors.
Another 9 percent of Chapter 7 filers had income above the median income but did not have the ability to repay $5,000 or 25% of their unsecured non-priority debts (after paying for living expenses and making secured debt payments).
Thus, 90 percent of Chapter 7 filers would likely not be effected at all by H.R. 833's needs-based provision as they would not be subject to creditor motions or they have relatively low repayment ability.
Based on the nationally representative study, we can confidently predict that if the needs based provision had been in effect in 1997, 10 percent of Chapter 7 filers, or about 100,000 filers, would likely have been required to file a Chapter 13 repayment plan.
Potential Recoveries and Repayment Ability
These approximately 100,000 filers with enough income and ability to repay could potentially repay $3 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 filers likely to be impacted could repay an average 53 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 $21,400, or $360 per month, which on average is about 8 percent of their current gross monthly income.
Effect on Different Income Groups
H.R. 833's needs-based provision would impact principally higher income filers. The median gross income of likely impacted filers was $52,000. This is 46 percent higher than the 1996 US national median income for all households of $35,500.
Expense Composition
In calculating debtor repayment ability, H.R. 833 requires using IRS standards for certain expenses (e.g., apparel, food) and actual debtor expenses for other expenses (e.g., health care, education, secured debts).
The majority of total expenses for likely impacted debtors are the debtors' actual expenses. Accordingly, the needs-based provision of H.R. 833 primarily reflects life style decisions which the debtor has made.
This 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 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 $3 billion annually, which can then be subject to sensitivity analysis.
In 19 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.

END

LOAD-DATE: March 20, 1999