Myths or Misconceptions about Consumer Bankruptcy Trends?
Executive Office for
United States Trustees 1
The current debate and legislative proposals regarding consumer bankruptcy are predicated on a number of widely-repeated statements. In this article, I examine three common statements to see how well they comport with available facts.
1) Bankruptcy filings have undergone unprecedented growth in recent years.
Filings increased from 832,829 in calendar year 1994 to about 1.4 million in calendar year 1997. The three-year increase of about 570,000 cases is certainly far larger in absolute terms than during any previous increase. However, the percentage increase (about 68 percent) has been topped on a number of occasions, including during the three-year periods ending June 30, 1987 (+73 percent), 1981 (+78 percent), 1955 (+70 percent), 1949 (+155 percent), and 1923 (+205 percent).
2) Under a needs-based bankruptcy system there would be billions of dollars available from future income for unsecured creditors.
Drs. Staten and Barron estimated that nationwide, "Chapter 7 debtors in 1996 had the capacity to repay $5.1 billion [non-housing debt] over a five-year period."2 Their report also contained information on the repayment capacity of chapter 13 debtors, which can be compared with actual distribution amounts. In their response to the draft General Accounting Office report on their study, Drs. Staten and Barron indicated that chapter 13 debtors could repay an average of $6,885 to $8,648 to unsecured creditors over five years (depending on whether one assumes that secured debt is reaffirmed). Over the last five years chapter 13 filings have averaged slightly over 300,000 per year. This leads to a very rough estimate that annual payments to unsecured creditors by chapter 13 debtors should be somewhere between $2 and $2.6 billion per year. In fact, according to figures compiled by the Office of Review and Oversight of the Executive Office for U.S. Trustees and by the Administrative Office of the U.S. Courts for cases in Alabama and North Carolina, unsecured creditors were paid approximately $500 million in chapter 13 cases during FY 1996only about one-quarter to one-fifth of what would have been expected.
The gap between these figures in this very rough analysis indicate that either the estimates of available income in a needs-based bankruptcy system are overly optimistic, or that chapter 13 as currently administered recovers only a fraction of the income available to repay unsecured creditors.
3) Bankruptcy losses amount to $40 billion or $400 per household per year.
Based on a quick Internet search, "$40 billion" seems to be a popular estimated figure for a variety of subjects. For example, it is cited in reports of varying credibility as the annual total for losses due to telemarketing fraud, the amount people are conned out of each year, the amount of Russian criminal money in Swiss banks, the spending power of teenagers, the cost of unnecessary auto repairs, total world expenditures on golf, the amount psychiatrists defraud the government and health insurance carriers, world sales of recorded music and the amount that differential geometry could save the government. In fact, the German Stutterers Association estimates there are 40 billion stutterers worldwide. (This was probably a translating error since the world population is still below six billion).
The roots of this widely cited figure as applied to bankruptcy are obscure, as there are no firm national figures on the amount of debt discharged in bankruptcy. Nevertheless, unlike certain other "$40 billion" estimates, it is probably about right.
The Staten/Barron study indicated that chapter 7 debtors have an average of $41,228 in unsecured debt, and chapter 13 debtors report an average of $20,953 in unsecured debt. Assuming that these averages (based on a study of 3,798 personal bankruptcies filed in 13 cities during mid-1996) are fairly representative of all personal bankruptciesa fairly big assumptionone can make a rough estimate of total unsecured debt nationwide in non-business cases. Applying these averages to FY 1997 non-business filings yields an estimate of approximately $46 billion in unsecured debt. The amount actually discharged would be reduced somewhat by the debts that are not discharged in the approximately 50 percent of chapter 13 cases that end up being dismissed, non-dischargeable debts and payments made through liquidation of assets in chapter 7 cases, chapter 13 plan payments, reaffirmations and other repayments. There are about 100 million households in the United States, so the $400 per household estimate is also in the right ball park.
Whatever the true amount, the burden is not shared equally by all households. Nearly one-half of this amount is for credit card debt, so the ultimate costs are paid by consumers who carry a monthly balance on their credit cards but do not default on their debts. Additionally, nearly one-quarter of the unsecured debt is classified as "personal loans." Therefore, a person who follows Shakespeares advice to "neither a borrower nor a lender be"3 could reduce his or her bankruptcy "tax" by close to 75 percent.
1All views expressed in this article are those of the author, and do not necessarily represent the views of the Executive Office for U.S. Trustees. Return to Text
2See Michael E. Staten and John M. Barron, Personal Bankruptcy: A Report on Petitioners Ability to Pay, Credit Research Center, Georgetown School of Business, (1997). Return to Text
3Hamlet, Act I, Scene 3. Return to Text