The U.S. General Accounting Office has cast doubt on the validity of the data that lenders are using to support their position on the need for bankruptcy reform.
The GAO scrutinized a study-funded largely by Visa U.S.A. and MasterCard International, and conducted by Georgetown University's Credit Research Center-which asserted that many people who file for bankruptcy are able to pay back some or all of the debts they owe.
The data in the controversial Georgetown report were analyzed by the GAO at the request of Sen. Charles E. Grassley, R-Iowa, and Sen. Richard J. Durbin, D-Ill., who are leading the legislative effort to overhaul bankruptcy legislation. The GAO critique, a draft of which was obtained Wednesday by American Banker, does not bode well for the lending community, which is fighting for legislation that would ensure greater scrutiny of the finances of filers.
"To some extent the research is being used to justify the industry's push for bankruptcy reform," said Stuart A. Feldstein, president of SMR Research, Hackettstown, N.J., which recently conducted its own analysis on the causes for the record high level of bankruptcy filings. "I hope that Congress does not overreact," Mr. Feldstein said.
Consumer advocates hope Congress will back down from its initial support of HR 2500, a "needs-based" bankruptcy bill introduced in September and supported by 150 members of the House of Representatives.
"I think some of the cosponsors are likely to back away once this GAO report is fully public," said Gary Klein of the Consumer Law Center, Boston. A final version of the GAO report is to be sent to Congress on Feb. 6.
Mr. Klein said the GAO's questions about the card associations' central research findings will probably "make Congress uncomfortable about taking action" on bankruptcy legislation.
The crux of the Credit Research Center's research, led by management professor Michael E. Staten, is the conclusion that 25% of people who file for Chapter 7-bankruptcy protection that allows people to discharge their debt-could actually repay 30% or more of their nonhousing debts.
The researchers also concluded that more than 75% of people who file for bankruptcy protection under Chapter 13-a plan that allows for the repayment of debts-have significant ability to repay.
The GAO said the research was a "useful first step," but that the report's general findings "must be interpreted with caution."
The GAO focused on how the study accounted for debtors' ability to meet their obligations, noting that the report relied on debtors' own estimates of their income and expenses. GAO contended that these estimates may be unreliable.
Spokesmen for Visa and MasterCard said the GAO "missed the point" of the study. The data will"stand up to congressional scutiny," insisted David Sandor of Visa.
Visa has been the leader of the movement for bankruptcy reform legislation. The San Francisco-based company claims to be the largest repository of information on bankruptcy statistics and trends.
Based on information culled from bankruptcy courts, Visa estimates that a record 1.3 million people filed for bankruptcy in 1997. Visa's economists project that the rate of growth will increase by 14.9% this year.
The GAO did not dispute the 1.3 million figure, but did argue with Visa's claims that many bankruptcy filers could pay off their debt. The government agency concluded that the Georgetown research did not account for debts that filers have to pay after bankruptcy, like car loans and student loans.
The GAO also criticized the statistical sample that the Credit Research Center chose to analyze, saying the 13 locations from which data were drawn were not chosen scientifically.
Furthermore, the GAO said that the Georgetown study "did not clearly define the universe of debts for which it estimated debtors' ability to pay."
Mr. Staten acknowledged the GAO had a point about reaffirmed debt-the expenses that filers can't write off. "We were looking at how much can a person repay rather than who they would be making the payments to," he said.
Mr. Staten said his research team has prepared an answer to the GAO, one that includes more detailed statistical breakdowns and that focuses on reaffirmed debts.
At least one expert on bankruptcy felt frustration at the GAO. Mr. Feldstein said the fuss the agency was making about the Georgetown report enabled it to stall making a decision on how to stem the rising tide of bankruptcy filings.
"Rather than carp about someone else's work, why don't they conclude for themselves how many people could afford to pay more?" Mr. Feldstein said. "This is not one of those issues you can (afford) to study forever."
