ome researchers have estimated that current chapter 7 debtors could contribute from $3 billion to $5.1 billion annually in payment of unsecured debt if required to file chapter 13. (We will call such debtors "means-tested chapter 13 debtors.") These estimates became controversial when other researchers estimated the available annual yield to be under $1 billion.²

Numbers in the billions are hard for most of us to work with, so it helps to have some simple yardsticks. Any estimate of the potential yield to unsecured creditors is essentially the product of two numbers—the number of debtors who would be means-tested into chapter 13, and the average amount that each would pay to his or her unsecured creditors. The product of these two numbers must equal $3 billion to reach the lower range of the estimates in the higher yield studies, whether this means that the system has 3,000 debtors each paying an average of $1 million, or 1 million debtors each paying $3,000, or something in between these extremes.

In last month's column, we reported that during the 12 months ending Sept. 30, 1998, chapter 13 estates returned approximately $540 million to unsecured creditors.³ More than five times this amount would be needed from the means-tested cases to raise $3 billion per year. In this column, we use this information and a few key assumptions to answer the following question: Is there any conceivable scenario that would generate the return to unsecured creditors that has been promised by some advocates of means testing? We conclude that there is not.

Average Payment per Case

As noted above, during FY 1998 approximately 1 million chapter 13 debtors repaid $540 million in unsecured debt; thus, the average yield per debtor was about $540. This number represents the average paid through any chapter 13 case that was open during the year. Our estimate of the average payment to unsecured creditors over the life of a chapter 13 case is $1,618.⁴ If we assume that means-tested chapter 13 debtors would provide the same average yield, it would require approximately 1.85 million debtors per year to return $3 billion. This is approximately twice the number of chapter 7 cases that are now filed nationwide per year.

However, we know that, in general, the debt profiles of chapter 7 debtors are more highly loaded with unsecured debt, and that a lower percentage of chapter 7 debtors have secured and priority debts listed in their schedules.⁵ Therefore, we might reasonably relax the first assumption and let the payments to unsecured creditors by means-tested chapter 13 debtors hypothetically increase to 2, 3 or even 5 times the yield from current chapter 13 debtors. If we assume (rather optimistically) that the return will be 5 times as high, the average yield to unsecured creditors will be approximately $8,090 per case. To raise $3 billion per year would require about 370,000 cases per year—about 40 percent of current chapter 7 filings.

Number of Means-tested Debtors

No one has suggested that 40 percent of current chapter 7 debtors would be forced into chapter 13 under means testing. The estimates have ranged between 3.6 and 15 percent, assuming no pre-bankruptcy planning by debtors. Less than 20 percent of current chapter 7 debtors exceed the various income thresholds in H.R. 833 and S. 625. A high proportion of these debtors would remain eligible for chapter 7 after an expense analysis. Based on our research, we can see no scenario in which even 10 percent of debtors would be means-tested into chapter 13. In fact, we feel that even an estimate of 5 percent of current chapter 7 debtors being means-tested into chapter 13 would be optimistic.

If we assume that 10 percent of present chapter 7 debtors are forced into chapter 13, the average payment to unsecured creditors per case would have to be $32,360 to raise $3 billion—20 times the current chapter 13 per-case average. This figure increases to 40 times the chapter 13 case average if the number of means-tested cases is assumed to be 5 percent.

Clearly, there is something wrong here. It is rather unrealistic to posit that any bankruptcy system is going to generate enough debtors paying enough money to unsecured creditors to generate $3 billion per year. Whatever may be the virtues of means-testing and essentially mandatory chapter 13 cases, there is little hope that they will generate several billion dollars or more per year in payments to unsecured creditors.

Footnotes

¹ The opinions expressed here are those of the authors and do not necessarily reflect the positions of the U.S. Trustees or the Department of Justice. Return to article

² See, e.g., General Accounting Office, "Personal Bankruptcy: Analysis of Four Reports on Chapter 7 Debtors' Ability to Pay," GAO/GGD-99-103 (June 1999); Staten, Michael and Barron, John, "Personal Bankruptcy: A Report on Petitioners' Ability-to-Pay," Credit Research Center (October 1997). Return to article

³ This amount does not include contributions from Alabama and North Carolina, which are not served by the U.S. Trustee Program. Both of these states have very active chapter 13 practices, however, that presumably make substantial contributions to unsecured creditors. Return to article

⁴ We make this rough estimate by dividing total payments to unsecured creditors in 1998 by average annual filings between 1995 and 1999. Neither figure in this equation includes cases or receipts for chapter 13 cases in Alabama and North Carolina. Return to article

⁵ Staten & Barron, supra n.2. Return to article