BY: ED FLYNN Executive Office for United States Trustees(1)
LOW INCOME CHAPTER 7 DEBTORS: In recent years there has been considerable debate in the bankruptcy community concerning how many chapter 7 debtors might be able to repay some or all of their unsecured debt out of future income. By its very nature, the debate has concentrated on the small proportion of chapter 7 debtors with relatively high incomes. In this column I examine the financial condition of the great majority of chapter 7 debtors who have incomes below the national median for their family size(2).
In mid-1998 the Executive Office for United States Trustees obtained a sample of 1,955 recently closed no-asset chapter 7 cases, most of which had been filed in late 1997 or early 1998. The cases were gathered from each of the 84 federal judicial districts served by the United States Trustee Program in proportion to the number of chapter 7 cases filed in each district during 1997. Of the 1,955 total cases, 1,592 (81.4%) had incomes below the national median for their family size. The following chart shows a few key figures for these below median income chapter 7 debtors.
|FAMILY SIZE||NUMBER OF CASES||AVERAGE GROSS INCOME||AVERAGE NET INCOME||AVERAGE EXPENSES||MEDIAN* UNSECURED DEBT|
|5 OR MORE||147||$28,860||$23,669||$27,803||$22,135|
* The median unsecu red debt figures are used because the average figures are
skewed by a few debtors with extremely high unsecured debts.
We did not record whether the below median income debtors were homeowners. However, 70.9% of them reported under $25,000 in secured debt (including 34.4% with no secured debt at all), and 21.3% reported over $50,000 in secured debt. The petitions make clear that most of the debtors in the first category are renters, and most in the second category are owners, so the actual home ownership rate is very likely in the 20% to 30% range. Whatever the actual ownership rate for below median chapter 7 debtors, it is far below the national rate, which was 65.9% during the first quarter of 1998.
Average family size of the below median
income debtors was 2.4. The below median income debtors are far more likely
to be in households of one (38.1%) than the overall population (25.1%). In contrast,
the below median income debtors are far less likely to be in households of two
people than the national average (21.7% for debtors vs. 32.4% for the overall
population). The proportion of below median income debtors in households of
three or more was representative of the population at large.
Although there is no typical chapter 7 debtor, the most common profile would include a one or two person household, with at least one member employed, an income below the national median for that family size, unsecured debts of around $20,000-most of it for credit cards- and expenses greater than net income, even excluding unsecured debt payments. For whatever reasons they got into bankruptcy, by the time they filed they had little if any capacity to repay. In fact, most will have to increase income or reduce expenses to remain solvent after bankruptcy.
* This article originally appeared in the American Bankruptcy Institute Journal, Vol. XVIII, No. 4, June 1999. It is reprinted with permission of the American Bankruptcy Institute.
1. All views expressed in this article are those of the author, and do not necessarily represent the views of the Executive Office for United States Trustees.
2. The median figures used were the 1996 Bureau of the Census figures for family incomes and for households with one earner.