Many Chapter 7 Filers Could Pay Debt, Study Shows

A new study found that 10% of those in Los Angeles County who sought protection under Chapter 7 of the Bankruptcy Code during the early 1990s could have repaid all of their debts within five years.

In addition, 25% of those who filed for Chapter 7 bankruptcy, which allows most filers to wipe out all their debts, had enough income to repay at least 43% of their debts in five years, according to the study by accounting giant Ernst & Young LLP.

The study was commissioned by credit card companies stung by the rising tide of uncollectible debt. These same companies are supporting current measures to reform the nation’s bankruptcy laws.

Researchers examined 2,477 Chapter 7 bankruptcy petitions filed in Los Angeles by all income levels from November 1991 through March 1992. They calculated, based on each debtor’s income, expenses and obligations, how much debt filers could have repaid. The study did not include Chapter 13 bankruptcy filings, which allow debtors to set up repayment plans.

“This really adds to the growing evidence that a significant number of bankruptcy filers are not entering into debt repayment plans even though they could,” said Tom Neubig, leader of the Ernst & Young team that conducted the study.

“About one out of every eight Chapter 7 filers in Los Angeles--and there were more than 73,000 in 1992--were not required to file a repayment plan when in reality they could have repaid a significant portion of what they owed,” he said.

Similar results were found for the three other cities surveyed: Boston, Chicago and Nashville.

Increasing debt loads, a loosening of lenders’ credit standards and a growing social acceptance of personal bankruptcy have all contributed to a personal bankruptcy filings surge nationwide in recent years.

Mark Zandi, chief economist at Regional Financial Associates, a consulting firm in West Chester, Pa., believes the Ernst & Young study says more about the number of people taking advantage of current bankruptcy laws and the proliferation of easy credit than the need for bankruptcy reform.

“New legislation is not going to stop the increase in bankruptcy filings,” Zandi said. “That will slow down when lenders tighten their standards.”

Last year, more than 1.3 million bankruptcy petitions were filed in the United States, a record.

More than 70% of the nation’s bankruptcies in 1997 were filed under Chapter 7. About 30% were filed under Chapter 13. The vast majority of filings made under Chapters 7 and 13 of the Bankruptcy Code are made by individuals or families.

Under bankruptcy reform legislation pending in the House of Representatives, debtors with higher incomes would be required to file Chapter 13 repayment plans. Specifically, filers whose income is greater than 75% of the national median family income would be forced to file Chapter 13 if they can repay 20% of unsecured debts after making secured debt payments, such as mortgage and auto loans and child support payments.