Low-income Chapter 7 Debtors

In recent years there has been considerable debate in the bankruptcy community concerning how many chapter 7

debtors might be able to repay some or all of their unsecured debt out of future income. By its very nature, the

debate has concentrated on the small proportion of chapter 7 debtors with relatively high incomes. In this column I

examine the financial condition of the great majority of chapter 7 debtors who have incomes below the national

median for their family size.^{<small><a href="#2" name="2a">2</a></small>}

</p><p>In mid-1998 the Executive Office for U.S. Trustees obtained a sample of 1,955 recently closed no-asset chapter 7

cases, most of which had been filed in late 1997 or early 1998. The cases were gathered from each of the 84 federal

judicial districts served by the U.S. Trustee Program in proportion to the number of chapter 7 cases filed in each

district during 1997. Of the 1,955 total cases, 1,592 (81.4 percent) had incomes below the national median for their

family size. The table shows a few key figures for these below-median income chapter 7 debtors.

</p><p>As a group, these debtors were in rather poor financial shape at the time of filing. Average annual gross income for

the group was $20,484. Five percent of the debtors (79 of 1,592) reported no income at the time of filing. Their

average reported expenses on Schedule J ($19,922) were more than $3,000 above their average net income

($16,675). More than 70 percent of the debtors reported that their expenses exceeded their income, and only about

10 percent indicated their monthly net income was at least $100 above expenses. Since the carrying cost of the

unsecured debt is not included in the reported expenses, most of these debtors will have to trim expenses or increase

their income to remain solvent after bankruptcy.

</p><p>Although income and expenses rose according to family size, the median unsecured debt amount was relatively level

at around $21,000 for each family size. More than one-half of the debtors had total unsecured debts between

$10,000 and $30,000. The typical lower income debtor owed a little more than one year's gross income in

unsecured debt. For most of the debtors, credit card debt accounted for a majority of the total unsecured debt.

Including late fees and over-the-limit charges, the annual carrying cost of the unsecured debt at the time of

bankruptcy was more than 20 percent of the gross income for the majority of the lower income chapter 7 debtors.

</p><p>We did not record whether the below-median income debtors were homeowners. However, 70.9 percent of them

reported less than $25,000 in secured debt (including 34.4 percent with no secured debt at all), and 21.3 percent

reported more than $50,000 in secured debt. The petitions make clear that most of the debtors in the first category

are renters, and most in the second category are owners, so the actual home ownership rate is very likely in the 20 to

30 percent range. Whatever the actual ownership rate for below-median chapter 7 debtors, it is far below the national

rate, which was 65.9 percent during the first quarter of 1998.

</p><p>Average family size of the below-median income debtors was 2.4 persons. The below-median income debtors are

far more likely to be in households of one (38.1 percent) than the overall population (25.1percent). In contrast, the

below-median income debtors are far less likely to be in households of two people than the national average (21.7

percent for debtors vs. 32.4 percent for the overall population). The proportion of below-median income debtors in

households of three or more was representative of the population at large.

</p><p>Although there is no typical chapter 7 debtor, the most common profile would include a one- or two-person

household, with at least one member employed, an income below the national median for that family size,

unsecured debts of around $20,000—most of it for credit cards—and expenses greater than net income, even

excluding unsecured debt payments. For whatever reasons they got into bankruptcy, by the time they filed they had

little, if any, capacity to repay. In fact, most will have to increase income or reduce expenses to remain solvent after

bankruptcy.

</p><p></p><center><table border="1" cellpadding="5" width="600">

<tbody><tr>

<th>Family Size</th>

<th>No. of Cases</th>

<th>Average Gross Income</th>

<th>Average Net Income</th>

<th>Average Expenses</th>

<th>Median* Unsecured Debt</th>

</tr>

<tr>

<td>1</td>

<td>606</td>

<td>$14,783</td>

<td>$12,061</td>

<td>$14,418</td>

<td>$19,374</td>

</tr>

<tr>

<td>2</td>

<td>345</td>

<td>$19,903</td>

<td>$16,729</td>

<td>$20,629</td>

<td>$22,506</td>

</tr>

<tr>

<td>3</td>

<td>257</td>

<td>$23,544</td>

<td>$18,816</td>

<td>$22,869</td>

<td>$21,148</td>

</tr>

<tr>

<td>4</td>

<td>237</td>

<td>$27,398</td>

<td>$21,665</td>

<td>$24,881</td>

<td>$23,200</td>

</tr>

<tr>

<td>5+</td>

<td>147</td>

<td>$28,860</td>

<td>$23,669</td>

<td>$27,803</td>

<td>$22,135</td>

</tr>

<tr>

<td><b>Total</b></td>

<td><b>1,592</b></td>

<td><b>$20,484</b></td>

<td><b>$16,675</b></td>

<td><b>$19,922</b></td>

<td><b>$21,195</b></td>

</tr>

<tr>

<td colspan="6"><i>* The median unsecured debt figures are used because the average figures are skewed by a few debtors with extremely high unsecured debts.</i></td>

</tr>

</tbody></table></center>

<hr>

<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} All 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. <a href="#1a">Return to article</a>

</p><p>^{<small><a name="2">2</a></small>} The median figures used were the 1996 Bureau of the Census figures for family incomes and for households with one earner. <a href="#2a">Return to article</a>