The Credit Research Center and Ernst & Young Reports on Debtors' Ability to Pay
T-GGD-98-76: Published: Mar 11, 1998. Publicly Released: Mar 11, 1998.
GAO discussed the results of its review of the Credit Research Center report on personal bankruptcy debtors' ability to pay their debts and observations on the February 1998 Ernst & Young report that also examines debtors' ability to pay.
GAO noted that: (1) both studies share two fundamental assumptions that: (a) the information found in debtors' initial schedules of estimated income, estimated expenses, and debts is accurate; and (b) this information could be used to satisfactorily forecast debtors' income and expenses for a 5-year period; (2) these assumptions have been the subject of considerable debate, and the researchers did not test their validity; (3) with regard to the first assumption, the accuracy of the data in bankruptcy petitioners' initial schedules of estimated income, estimated expenses, and debt is unknown; (4) however, both reports also stated that to the extent the data in the schedules were not accurate, the data would probably understate the income debtors have available for debt repayment; (5) with regard to the second assumption, there is also no empirical basis for assuming that debtors' income and expenses, as stated in their initial schedules, would remain stable for a 5-year period following the filing of their bankruptcy petitions; (6) these two assumptions--debtors' income and expenses remain stable and all repayment plans would be successfully completed--could result in a somewhat optimistic estimate of debt repayment; (7) neither report allowed for situations in which the debtor's income decreases or expenses increase during the 5-year period; (8) one difference between the two reports involve the calculation of debtor expenses; (9) a second difference between the two reports involves the calculation of mortgage debt and family size; (10) a third difference between the reports involves assumptions about repayment of secured, nonhousing debt; (11) on March 10, 1998, GAO received an Ernst & Young report that used a national sample of Chapter 7 petitions from calendar year 1997 to estimate debtors' ability to pay; (12) the report appears to have addressed many of the sampling issues GAO raised regarding the Center report and February 1998 Ernst & Young report; and (13) however, the March 1998 Ernst & Young report shares the fundamental unvalidated assumptions of the Credit Center report and the February 1998 Ernst & Young report.