Military Personnel
Bankruptcy Filings among Active Duty Service Members Gao ID: GAO-04-465R February 27, 2004A declaration of bankruptcy is an extreme example of the failure to manage personal finances. Debtors who file personal bankruptcy petitions usually file under chapter 7 or chapter 13 of the bankruptcy code. Generally, debtors who file under chapter 7 of the bankruptcy code seek a discharge of all their eligible dischargeable debts. Debtors who file under chapter 13 submit a repayment plan, which must be confirmed by the bankruptcy court, for paying all or a portion of their debts over a 3-year period unless, for cause, the court approves a longer period not to exceed 5 years. This letter responds to the request of the Ranking Minority Member, Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia, Senate Committee on Governmental Affairs. We determined (1) the rate of personal bankruptcy filings among active duty military personnel, and how that rate compared with the rate found in the U.S. population; and (2) factors that should be considered when attempting to compare the rate of bankruptcy filings for active duty military personnel with the rate for the U.S. population.
DOD had limited data on the rate of bankruptcies among active duty military personnel. Responses to DOD's 1999 active duty survey--the most current data available--show that 1.2 percent, or about 16,000, of the 1.3 million active duty members in the survey population said that they had declared personal bankruptcy during the 12 months preceding the survey. This compares with a total of approximately 1.3 million personal bankruptcies filed in the United States in 1999. From 1999 through 2003, the number of personal bankruptcies increased from approximately 1.3 million to over 1.6 million for the U.S. population. The 23.6 percent increase in personal bankruptcy filings for the U.S. population may not readily translate into a comparable rate of increase for active duty military personnel. Loss of employment and medical-related problems (e.g., medical costs and loss of income during illness or accident) are among the major causes that contribute to personal bankruptcies in the U.S. population, but unemployment and catastrophic medical expenses are factors not confronted by active duty military personnel. In addition, Congress has authorized increased cash compensation-- increases in basic pay, housing allowance, and special pays--for active duty military personnel since 1999. For example, average annual military basic pay increases have exceeded average private-sector wage increases for fiscal years 2000 through 2004. DOD has also identified a need to improve the financial literacy and responsibility of military members. And in May 2003, DOD formally launched a financial readiness campaign to address military members' poor financial habits and increase financial management awareness, savings, and protection against predatory practices.
GAO-04-465R, Military Personnel: Bankruptcy Filings among Active Duty Service Members
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February 27, 2004:
The Honorable Richard J. Durbin:
Ranking Member:
Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia:
Committee on Governmental Affairs:
United States Senate:
Subject: Military Personnel: Bankruptcy Filings among Active Duty
Service Members:
A declaration of bankruptcy is an extreme example of the failure to
manage personal finances. Debtors who file personal bankruptcy
petitions usually file under chapter 7 or chapter 13 of the bankruptcy
code.[Footnote 1] Generally, debtors who file under chapter 7 of the
bankruptcy code seek a discharge of all their eligible dischargeable
debts.[Footnote 2] Debtors who file under chapter 13 submit a repayment
plan, which must be confirmed by the bankruptcy court, for paying all
or a portion of their debts over a 3-year period unless, for cause, the
court approves a longer period not to exceed 5 years.[Footnote 3]
This letter responds to your December 16, 2003, request. As agreed with
your office, we determined (1) the rate of personal bankruptcy filings
among active duty military personnel, and how that rate compared with
the rate found in the U.S. population; and (2) factors that should be
considered when attempting to compare the rate of bankruptcy filings
for active duty military personnel with the rate for the U.S.
population.[Footnote 4]
To respond to this request, we obtained information on the rate of
bankruptcies among active duty military personnel from a 1999
Department of Defense (DOD) survey. The survey population included
service members from the active duty services and reservists serving on
active duty assignments for at least 6 months. We also discussed
bankruptcy and compensation with officials in the Office of the Under
Secretary of Defense for Personnel and Readiness. We used data on
bankruptcy filings for the U.S. population from the Administrative
Office of the U.S. Courts. We also used findings from GAO;
Congressional Budget Office; Congressional Research Service; and
Department of Labor, Bureau of Labor Statistics reports on
compensation, military housing allowances, other benefits, and
unemployment. We conducted our review from January to February 2004, in
accordance with generally accepted government auditing standards.
Results in Brief:
DOD had limited data on the rate of bankruptcies among active duty
military personnel. Responses to DOD's 1999 active duty survey--the
most current data available--show that 1.2 percent, or about 16,000, of
the 1.3 million active duty members in the survey population said that
they had declared personal bankruptcy during the 12 months preceding
the survey. This compares with a total of approximately 1.3 million
personal bankruptcies filed in the United States in 1999. From 1999
through 2003, the number of personal bankruptcies increased from
approximately 1.3 million to over 1.6 million for the U.S. population.
The 23.6 percent increase in personal bankruptcy filings for the U.S.
population may not readily translate into a comparable rate of increase
for active duty military personnel. Loss of employment and medical-
related problems (e.g., medical costs and loss of income during illness
or accident) are among the major causes that contribute to personal
bankruptcies in the U.S. population, but unemployment and catastrophic
medical expenses are factors not confronted by active duty military
personnel. In addition, Congress has authorized increased cash
compensation--increases in basic pay, housing allowance, and special
pays--for active duty military personnel since 1999. For example,
average annual military basic pay increases have exceeded average
private-sector wage increases for fiscal years 2000 through 2004. DOD
has also identified a need to improve the financial literacy and
responsibility of military members. And in May 2003, DOD formally
launched a financial readiness campaign to address military members'
poor financial habits and increase financial management awareness,
savings, and protection against predatory practices.
Limited Data Available on Personal Bankruptcies among Active Duty
Military Personnel:
DOD had limited data on the rate of personal bankruptcies among active
duty military personnel. DOD officials indicated that their most recent
data on bankruptcies among active duty military personnel (which
included reservists on active duty assignments for at least 6 months)
were gathered from September through December 1999 as part of a DOD-
wide survey.[Footnote 5] For the survey population, 1.2 percent of the
active duty military members said that they (and spouse, if applicable)
"went bankrupt (declared personal bankruptcy)" in the 12 months prior
to completing the survey. The 1.2 percent rate of personal bankruptcy
projected to the 1.3 million military personnel included in the survey
population translates into approximately 16,000 personnel on active
duty declaring personal bankruptcy during the 12 months preceding the
survey. The survey included neither follow-up items to determine the
events that precipitated the bankruptcy nor did it include a breakout
of the percentage of reservists serving on active duty assignments for
at least 6 months compared with full-time active duty personnel
declaring bankruptcy.
In 1999, the total number of personal bankruptcies filed in the United
States was 1.3 million.[Footnote 6] We did not calculate a per capita
rate because we could not determine the number of individuals versus
households filing for personal bankruptcy. Although trend data from
1999 through 2003 are not available for military personnel, the total
number of personal bankruptcy filings in the United States increased by
23.6 percent to 1.6 million from 1999 through 2003.
Changes in Bankruptcy Rate for U.S. Population May Not Be Indicative of
Changes for Military Personnel:
Changes in the rate of bankruptcy filings for the U.S. population may
not readily translate into comparable rate changes for active duty
military personnel. Among the factors that suggest caution in
generalizing the 23.6 percent increase found in the U.S. population to
the active duty military personnel population are changes in civilian
unemployment rates and military cash compensation. Also, DOD has
reported that it has placed additional emphasis on financial counseling
since the 1999 survey data were gathered.
Unemployment and Catastrophic Medical Expenses Not Factors for Active
Duty Military Personnel:
The 23.6 percent increase in personal bankruptcy filings for the U.S.
population may not result in a similar increase in bankruptcies for
active duty military personnel because (1) an increase in civilian
unemployment for fiscal years 1999 through 2003 was not a factor for
active duty military personnel and (2) all active duty military
personnel and their families have medical coverage. Unemployment and
medical expenses have been shown to be related to bankruptcy filing.
The relationship between filing for bankruptcy and unemployment is
illustrated by the findings from one study in which over two-thirds of
the individuals filing for bankruptcy had job-related financial stress,
with layoffs being identified as a major factor.[Footnote 7] For each
of the fiscal years from 1999 through 2003, an increase or a decrease
in the total number of U.S. personal bankruptcy filings was accompanied
by an increase or a decrease in the unemployment rate for the same
fiscal year (see table 1). In contrast to the changing unemployment
picture for civilians, active duty military members--by definition--
were employed for each of the 5 years, in the sense that each military
member received a regular salary while on active duty.[Footnote 8]
Table 1: Changes in Bankruptcy Filings and Overall Unemployment in the
U.S. Population for Fiscal Years 1999-2003:
[See PDF for image]
Sources: Administrative Office of the U.S. Courts for number of
bankruptcy filings; GAO's analysis of court data for the percent change
in bankruptcies; and GAO's analysis of unemployment rates from the U.S.
Department of Labor, Bureau of Labor Statistics.
[End of table]
DOD provides employee benefits that include health coverage to more
than 1.3 million active duty service members and their nearly 2 million
spouses and other dependents. The health care for active duty service
members and their dependents costs the federal government about $9
billion per year. For active duty service members, this benefit offers
care in military treatment facilities and does not require enrollment
fees or co-payments for care or drugs obtained from military treatment
facilities.[Footnote 9] In addition, legislation in 2000 eliminated co-
payments for the families of many active duty military personnel.
Medical coverage for all DOD active duty personnel and dependents is
unlike the coverage for the population in a study that found
approximately one household in five citing medical-related problems
(e.g., medical costs and loss of income during illness or accident) as
a reason for filing bankruptcy.[Footnote 10] Given that health coverage
can be a benefit offered as part of employment compensation, a higher
unemployment rate may indicate that more of the U.S. population was
placed at risk for medical expenses.
Increases in Cash Compensation for Military Personnel Greater Than
Those for Average Civilians:
The Congressional Budget Office noted that cash compensation for
military personnel consists of basic pay, allowances for things like
housing and food, special pays and bonuses, and the tax advantages that
military members receive because some allowances are not subject to
federal income tax.[Footnote 11] During the period from 2000 through
2004, Congress authorized increases in the pays and allowances to
active duty military personnel.
Military Pay Increases Exceed Civilian Wage Increases:
For fiscal years 2000 through 2004, Congress provided average raises in
military basic pay that exceeded the average wage increases found for
all private-sector employees (see table 2).[Footnote 12] For example,
in fiscal year 2002, raises for active duty personnel increased 0.4 to
5.4 percentage points more than did the raises of the average private-
sector worker, and in fiscal years 2003 and 2004, the military averaged
0.7 and 0.45 percentage points more in their raises, respectively, than
did those working in the private sector. For fiscal year 2005, DOD's
budget request includes a 3.5 percent increase in basic pay, which
matches the raise determined by the statutory formula. Thus, military
basic pay raises have been greater than the raises in wages for the
average private-sector employee for the 5 years since the 1999 data on
bankruptcies among active duty military were gathered.
Table 2: Changes in Military Basic Pay for Fiscal Years 2000-2005:
Fiscal year: 2005;
Annual percent increase in active duty military pay;
Percent indicated by statutory formula: 3.5;
Annual percent increase in active duty military pay;
Percent actually provided: 3.5 requested.
Fiscal year: 2004;
Annual percent increase in active duty military pay;
Percent indicated by statutory formula: 3.7;
Annual percent increase in active duty military pay;
Percent actually provided: 4.15 average, with a range of 3.7 to 6.25.
Fiscal year: 2003;
Annual percent increase in active duty military pay;
Percent indicated by statutory formula: 4.1;
Annual percent increase in active duty military pay;
Percent actually provided: 4.8 average, with a range of 4.1 to 6.5.
Fiscal year: 2002;
Annual percent increase in active duty military pay;
Percent indicated by statutory formula: 4.6;
Annual percent increase in active duty military pay;
Percent actually provided: 6.9 average, with a range of 5.0 to 10.0.
Fiscal year: 2001;
Annual percent increase in active duty military pay;
Percent indicated by statutory formula: 3.7;
Annual percent increase in active duty military pay;
Percent actually provided: 4.1 average, with an initial 3.7 across the
board, plus a later targeted raise that averaged 0.4.
Fiscal year: 2000;
Annual percent increase in active duty military pay;
Percent indicated by statutory formula: 4.8;
Annual percent increase in active duty military pay;
Percent actually provided: 6.2 average, with an initial 4.8 across the
board, plus a later targeted raise that averaged 1.4.
Sources: Congressional Research Service and DOD.
Note: The Congressional Research Service noted that targeted and
variable increases were typically keyed to pay grade groups. In fiscal
years 2000 and 2001, Congress authorized additional targeted increases
and they became effective on July 1 of those respective years, whereas
the other raises took effect earlier in the fiscal years.
[End of table]
Smaller Out-of-Pocket Housing Expenses for Active Duty Military
Members:
Out-of-pocket housing expenses for active duty military members living
in private-sector housing have decreased during the period since 1999.
In fiscal year 2000, housing allowances did not cover about 19 percent
of the typical active duty military member's housing and utility
costs.[Footnote 13] For fiscal year 2002, DOD plans called for
increasing this allowance so that the out-of-pocket costs for obtaining
private-sector housing would decrease to 8 percent in 2003 and 4
percent in 2004.[Footnote 14] The 2005 budget request for DOD seeks to
totally eliminate out-of-pocket expenses for housing for the average
active duty military member.
The decreases in out-of-pocket expenses are equivalent to increases in
total compensation. This point can be illustrated using the $910 per
month that DOD identified as the January 2003 national median cost of
obtaining civilian equivalent housing for the most junior level of
enlisted military personnel (i.e., E1-E4) with dependents. The median
monthly out-of-pocket expense in 2003 was $68 (or 7.5 percent), but it
would have been about $173 (19 percent) had the out-of-pocket
percentage remained at the fiscal year 2000 level. This difference of
$105 per month translates into $1,260 per year being available for
other needs, and the yearly housing allowance of $10,104 would have
been tax exempt.
The intent of the basic allowance for housing program is to provide
active duty service members with accurate and equitable housing
compensation when on-base or other government housing is not
provided.[Footnote 15] The legislation establishing the program
required that rates be based on the cost of adequate housing for
civilians with comparable incomes, and that the rates vary by a
member's rank or pay grade; by dependency status--that is, either
having or not having dependents; and by geographic location.[Footnote
16]
Special Pays and Tax Treatment for Deployed Active Duty Military
Personnel Enhanced:
Relative to their peers who deployed in 1999 when the bankruptcy data
for military personnel were gathered, more recently deployed active
duty military personnel may be eligible to receive higher special
pays.[Footnote 17] Since April 2003, Congress has temporarily increased
the family separation allowance[Footnote 18] by 150 percent and
imminent danger pay by 50 percent (see table 3). The April 2003
increases in these special pays would result in deployed active duty
personnel's having relatively higher cash incomes today than would
their peers who were deployed during the 12 months prior to the 1999
active duty survey.
Table 3: Changes in Two Special Pays for Deployed Active Duty Military
Personnel--Before and After April 2003:
Special pay; Family separation allowance:
Monthly pay before and after April 2003; Before: $100;
Monthly pay before and after April 2003; After: $250;
Monthly pay before and after April 2003; Percent Increase: 150%.
Special pay; Imminent danger pay:
Monthly pay before and after April 2003; Before: $150;
Monthly pay before and after April 2003; After: $225;
Monthly pay before and after April 2003; Percent Increase: 50%.
Source: GAO.
[End of table]
Some or all of the income that active duty military personnel earn
while serving in combat zones is also tax-free.[Footnote 19] The
military pay, up to prescribed amounts, received while in these combat
zones is excluded from gross income and is not subject to federal
income tax.
Other special pays may be tax-free as the result of service in a combat
zone. For example, service members who reenlist while serving in a
combat zone are typically eligible to receive any applicable selective
reenlistment bonus tax-free. For fiscal years 1999 through 2003, DOD's
budget for that program grew from $418 million to an estimated $734
million, a 76 percent increase.[Footnote 20]
DOD Efforts Under Way to Improve Financial Literacy and Responsibility
of Military Members:
We recently reported that DOD identified a need to improve the
financial literacy and responsibility of military members in its July
2002 human capital strategic plan.[Footnote 21],, As part of DOD's
balanced scorecard, the Under Secretary of Defense for Personnel and
Readiness reviews issues affecting force management risk. One of the
indicators used in the review is personal finances, which is evaluated
in terms of the self-reported financial condition of junior enlisted
personnel (E1-E4) and their self-reported ability to pay bills on time.
Data to support these evaluations are supplied on an annual basis
through Defense Manpower and Data Center surveys of active duty service
members. Among other things, DOD is reviewing a draft personal
financial management policy that seeks to establish a uniform approach
to educating and training all military service members.
In May 2003, DOD formally launched a "financial readiness campaign" to
address military service members' poor financial habits and to increase
financial management awareness, savings, and protection against
predatory practices. DOD has also entered into a number of partnerships
with nonprofit organizations and government agencies that have agreed
to support counselors who offer financial assistance programs to
military service members. The services have also made improvements. For
example, the Navy has raised its mandatory number of personal financial
management training hours, and it is using mobile financial management
teams to train financial specialists, including those in geographically
remote regions where there are no financial educators to provide
training. The services also provide financial planning information on
their Web sites.
Agency Comments:
DOD did not provide formal agency comments. Program officials from the
Office of the Under Secretary of Defense for Personnel and Readiness
and the military services did, however, review a draft of this report
and provided technical comments, which we incorporated as appropriate.
As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 14 days
from its issue date. At that time, we will send copies of this report
to the Secretary of Defense. We will also make copies available to
appropriate congressional committees and to other interested parties on
request. In addition, the report will be available at no charge at the
GAO Web site at http://www.gao.gov.
If you or your staff have questions about this report, please call me
at (202) 512-5559 (stewartd@gao.gov) or Jack Edwards at (202) 512-8246
(edwardsj@gao.gov).
Sincerely yours,
Derek B. Stewart:
Director, Defense Capabilities and Management:
FOOTNOTES
[1] Title 11, United States Code.
[2] Eligible debts may be discharged in bankruptcy proceedings. A
dischargeable debt is a debt for which the bankruptcy code allows the
debtor's personal liability to be eliminated.
[3] See U.S. General Accounting Office, Personnel Bankruptcy: The
Credit Research Center Report on Debtors' Ability to Pay, GAO/GGD-98-47
(Washington, D.C.: Feb. 9, 1998).
[4] For information on reservists and income changes, see U.S. General
Accounting Office, Military Personnel: DOD Needs More Data to Address
Financial and Health Care Issues Affecting Reservists, GAO-03-1004
(Washington, D.C.: Sept. 10, 2003).
[5] Defense Manpower Data Center, Tabulations of Responses from the
1999 Survey of Active Duty Personnel: Volume 2: Programs and Services,
Family, Economic Issues, and Background, DMDC Report No. 2000-006
(Arlington, Va.: September 2000).
[6] Administrative Office of the U.S. Courts, Personal Bankruptcy
Filings Continue to Rise in Fiscal Year 2003 (Washington, D.C.: Nov.
14, 2003).
[7] See Teresa A. Sullivan, Elizabeth Warren, and Jay Lawrence
Westbrook, The Fragile Middle Class: Americans in Debt (New Haven,
Conn.: Yale University Press, 2000). The authors noted that job-related
financial stress was implicated in over two-thirds of the more than
2,400 bankruptcy filings they examined. They also noted that while
layoffs were a major factor in the decision to file for bankruptcy,
other serious job-related trouble could result even if workers had a
job, because the job may change and both income and benefits may erode.
[8] Active duty military families may, however, be influenced by
civilian unemployment trends if spouses of military personnel become
unemployed.
[9] If military treatment facilities are not available or if service
member families choose to use civilian doctors or medical facilities,
two other health care programs provide service member families with
extensive coverage for medical costs, including a $1,000 annual
catastrophic cost cap.
[10] See Sullivan et al., The Fragile Middle Class: Americans in Debt.
[11] Congressional Budget Office, Military Compensation: Balancing Cash
and Noncash Benefits (Washington, D.C.: Jan. 16, 2004).
[12] See Congressional Research Service, The Library of Congress,
Military Pay and Benefits: Key Questions and Answers, Order Code
IB10089 (Washington, D.C.: Jan. 15, 2004). That report noted that
upward adjustments to military basic pay are linked--but not identical-
-to the raises calculated with the statutory formula for determining
pay increases for federal General Schedule employees. 37 U.S.C. section
1009 requires the President to increase military basic pay to match any
annual pay increase for federal General Service employees as mandated
by the statutory formula specified in 5 U.S.C. section 5303(a). This
statutory formula is based on the Employment Cost Index, which is
calculated by the Department of Labor's Bureau of Statistics and
measures annual percentage increases in wages for all private-sector
employees.
[13] About two-thirds of the married and one-third of the single
military members in the United States live in private housing in the
communities surrounding military installations. They receive a cash
housing allowance to help defray the cost of renting or purchasing a
home and the cost of utilities. The remaining military families live in
government-owned or privatized housing. These latter families pay no
out-of-pocket expenses for housing or utilities. Families in government
housing receive no housing allowance, while families in privatized
housing use their housing allowance to pay rent and normal utility
costs.
[14] See U.S. General Accounting Office, Military Housing: Management
Improvements Needed as the Pace of Privatization Quickens, GAO-02-624
(Washington, D.C.: June 21, 2003).
[15] See U.S. General Accounting Office, DOD Personnel: Improvements
Made to Housing Allowance Rate Setting Process, GAO-01-508 (Washington,
D.C.: Apr. 16, 2001).
[16] See 37 U.S.C. 403.
[17] Public Law 108-11, section 1316 (Apr. 16, 2003) and Public Law
108-136, sections 606, 619 (Nov. 24, 2003).
[18] Military families may incur additional expenses such as an
increased need for childcare when active duty military members are
separated from their families during deployments.
[19] Department of the Treasury, Internal Revenue Service, Armed
Forces' Tax Guide: For Use in Preparing 2003 Returns, Publication 3,
Cat. No. 46072M. This publication noted that all military pay for the
month is excluded from income when an enlisted service member, warrant
officer, or commissioned warrant officer served in a combat zone during
any part of a month or while hospitalized as a result of service in the
combat zone. The amount of the exclusion for a commissioned officer
(other than a commissioned warrant officer) is limited to the highest
rate of enlisted pay, plus imminent danger/hostile fire pay, for each
month during any part of which an officer served in a combat zone or
while hospitalized as a result of service there.
[20] See U.S. General Accounting Office, Military Personnel: DOD Needs
More Effective Controls to Better Assess the Progress of the Selective
Reenlistment Bonus Program, GAO-04-86 (Washington, D.C.: Nov. 13,
2003).
[21] See GAO-03-1004.
