BANKRUPTCY BY THE NUMBERS
The Impact of the Coming Fee-waiver Provision1
Pursuant to 28 U.S.C. ï½§1930, all chapter 7 debtors are currently required to pay a filing fee, although some debtors pay the fee in installments. For the first time, under S. 420 and H.R. 333, the court may waive payment of the filing fee in chapter 7 cases. The applicable language in ï½§418 of the respective bills is as follows:
Under the procedures prescribed by the Judicial Conference of the United States, the district court or the bankruptcy court may waive the filing fee in a case under chapter 7 of title 11 if the court determines that such debtor has income less than 150 percent of the income official poverty line...and is unable to pay that fee in installments.
The fee-waiver provision has received relatively little attention compared to many other aspects of bankruptcy reform. In this article, we examine the fee-waiver provision contained in the pending reform legislation.
In 1993, Congress directed the Judiciary to conduct a study on waiver of the filing fee in individual chapter 7 cases. In 1998, the Federal Judicial Center (FJC) issued a comprehensive report2 on the results of a pilot fee-waiver program conducted in six judicial districts.3 Key findings in the report included:
- Overall, 3.4 percent of chapter 7 debtors in the pilot districts applied for a fee waiver, and 2.9 percent were actually approved (85.6 percent of those who applied);
- The percentage of debtors who applied for a fee waiver ranged from a low of .3 percent in the Western District of Tennessee to a high of 8.3 percent in the Eastern District of Pennsylvania;
- More than one half of the fee-waiver applications filed and granted in the six pilot districts were in the Eastern District of Pennsylvania, where legal services and pro bono representation are widely available to chapter 7 debtors;
- Fee-waiver applicants were more likely to have filed pro se than other chapter 7 debtors;
- Attorneys had been paid in 6.4 percent of the cases, and non-attorney petition preparers had been paid in another 6.0 percent of the cases; and
- Availability of fee waivers had little or no effect on total filings or the mix of filings in the pilot districts.
The FJC estimated the nationwide cost of the fee waivers (in lost filing fees and additional personnel costs) to be between $4.5 million and $7.7 million per year, depending on various eligibility standards and assumptions. However, the FJC also noted that the cost might rise significantly if fee waivers were given automatically based on a bright-line income standard.
The official poverty statistics are updated annually by the Bureau of the Census. The current poverty figures can be found at http://www.census.gov/hhes/www/poverty/data/threshld/index.html. For each sized family, there are minor variations depending on the number of children under age 18 and whether or not the householder is 65 or older, but there are no adjustments made for local cost of living. The current poverty thresholds are listed in Table 1.
As a first step to gauge the potential impact of the fee-waiver provision, we estimated the number of debtors who would be eligible to apply for a fee waiver based on income alone. We applied the poverty thresholds that were in effect at the time of filing to the 5,165 no-asset chapter 7 cases currently in our research database. These cases were filed between 1998 and 2000, and were drawn from all judicial districts except for the six districts in North Carolina and Alabama, which are served by bankruptcy administrators.
We found that 29.7 percent of individual chapter 7 debtors have incomes that are less than 150 percent of the applicable poverty line. This is somewhat higher than the figure for the population at large. According to the Census Bureau figures for 1999, 21 percent of the U.S. population had incomes less than 150 percent of the poverty line.
This proportion of debtors below the 150 percent threshold varied somewhat based on family size, ranging from about one-quarter of debtors in households of one or two persons to about one-half of debtors in households of six or more. There was relatively little variation by state in these figures; most came in at about 30 percent. States with relatively few debtors with incomes less than 150 percent of the poverty line included Nevada (11.4 percent), Texas (18.3 percent), Connecticut (20.8 percent) and Kansas (23.3 percent). Notable exceptions on the high end included Puerto Rico (72.7 percent), West Virginia (50 percent), Arkansas (48.8 percent) and Kentucky (44.8 percent).
There was considerable variation on the percentages based on gender and marital status. In particular, female debtors, regardless of marital status, were much more likely to have incomes below the 150 percent threshold than either male debtors or joint filers (see Table 2).
Certainly, some of the chapter 7 debtors who are under the 150 percent poverty threshold would be able to pay the filing fee. However, based on the debt, income and expense figures our database of debtors reported on Schedules F, I and J, most chapter 7 debtors expect to have little if any available money after bankruptcy. Only about 8 percent of the below-150-percent-threshold debtors reported having at least $50 disposable income after expenses (the approximate amount they would need to pay the fee in installments). Their average gross annual income at filing was only $11,820, while their average reported general and priority unsecured debt was $34,724.
Based on the use of the word "procedures" in the legislation, it appears that Judicial Conference's role will be to issue guidance on the mechanical steps a debtor must follow to file a request for a fee waiver. One major issue is whether debtors who are represented by a paid attorney will be eligible for a fee waiver. Bankruptcy Rule 1006(b)(1) allows an individual to apply to pay the filing fee in installments if the debtor is unable to pay the full fee at filing and if "the applicant has neither paid any money nor transferred any property to an attorney for services in connection with the case." Following on this Rule, many judges may determine that eligibility for fee waivers should not be more liberal than the existing standard for paying fees in installments.
As noted above, the FJC reported significant geographical differences in the use of the fee waiver during the pilot program. It is not clear whether there is a valid method of extrapolation from this variability to form an estimate of the waiver provision's use when it is available nationally.
2 The report was prepared under the direction of the Judicial Conference Subcommittee on In Forma Pauperis, chaired by District Judge Donald E. Walter of the Western District of Louisiana. The principal author of the report was Elizabeth C. Wiggins of the FJC's Research Division. Return to article
3 Pilot districts included the Eastern Districts of Pennsylvania and New York, the Southern District of Illinois, the Western District of Tennessee and the Districts of Montana and Utah. Return to article