Bankruptcy: Billions not Millions

I'm still trying to learn more about S. 256, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. S.256 is not all bad; it has real advantages that need to be balanced against the costs. Until that time, allow me to correct a member of the Volokh Conspiracy.

By targeting high-income bankrupts with substantial repayment capacity, it is estimated that means-testing will recover roughly $3 million of the $40 million discharged in bankruptcy every year. Although means-testing will affect only 7-10% of bankruptcy filers, but focusing scrutiny on those high-income debtors who can repay a substantial portion of their debts without significant hardship, the Bill makes possible the recovery of substantial losses with minimal administrative cost.

Prof. Todd J. Zywicki, February 10, 2005
Senate Judiciary Committee Hearing

CBO estimates that implementing S. 256 would cost $392 million over the 2006-2010 period primarily to pay for increased responsibilities of the United States Trustees (U.S. Trustees). . . . Although the private trustees would be responsible for conducting the initial review of a debtor's income and expenses and filing the majority of motions for dismissal or conversion, CBO expects that the workload of the U.S. Trustees would increase under the means-testing provision. . . . As a result, CBO estimates that implementing this [means-testing] provision would cost $150 million over the 2006-2010 period, assuming appropriation of the necessary funds.

Congressional Budget Office, February 17, 2005
Senate Judiciary Committee Hearing

I believe Prof. Zywicki means billions of dollars not millions, or else the BAPCA fails the sanity test: While some of that "$40 million discharged in bankruptcy every year" is probably abuse, spending $24 million a year to "recover roughly $3 million" seems to me more like a recipe for bankruptcy than a solution for bankruptcy. We should be talking billions, not millions.

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 bankruptcies—a fairly big assumption—one 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.

Ed Flynn, March 1998
ABI Journal, Vol. XVII, No. 2

I have more to say about the bill; stay tuned.