Military Personnel
Observations on the Use and Effects of the National Guard and Reservists Debt Relief Act of 2008 Gao ID: GAO-10-1014R September 30, 2010In section 3 of the National Guard and Reservists Debt Relief Act of 2008 (Pub. L. No 110-438 (2008)), Congress mandated that we provide information on the use and the effects of the provisions of law amended (and as amended) by the act. Specifically, the act amended the existing bankruptcy code to exempt qualifying members of the National Guard and Reserve Components from the means test process when they file a petition for Chapter 7 bankruptcy relief. We are fulfilling the act's requirement by transmitting the this briefing to the President Pro Tempore of the Senate and the Speaker of the House of Representatives.
GAO-10-1014R, Military Personnel: Observations on the Use and Effects of the National Guard and Reservists Debt Relief Act of 2008
This is the accessible text file for GAO report number GAO-10-1014R
entitled 'Military Personnel: Observations on the Use and Effects of
the National Guard and Reservists Debt Relief Act of 2008' which was
released on September 30, 2010.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as
part of a longer term project to improve GAO products' accessibility.
Every attempt has been made to maintain the structural and data
integrity of the original printed product. Accessibility features,
such as text descriptions of tables, consecutively numbered footnotes
placed at the end of the file, and the text of agency comment letters,
are provided but may not exactly duplicate the presentation or format
of the printed version. The portable document format (PDF) file is an
exact electronic replica of the printed version. We welcome your
feedback. Please E-mail your comments regarding the contents or
accessibility features of this document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
GAO-10-1014R:
United States Government Accountability Office:
Washington, DC 20548:
September 30, 2010:
Congressional Committees
Subject: Military Personnel: Observations on the Use and Effects of
the National Guard and Reservists Debt Relief Act of 2008:
In section 3 of the National Guard and Reservists Debt Relief Act of
2008 (Pub. L. No 110-438 (2008)), Congress mandated that we provide
information on the use and the effects of the provisions of law
amended (and as amended) by the act. Specifically, the act amended the
existing bankruptcy code to exempt qualifying members of the National
Guard and Reserve Components from the means test process when they
file a petition for Chapter 7 bankruptcy relief. We are fulfilling the
act's requirement by transmitting the enclosed briefing slides to the
President Pro Tempore of the Senate and the Speaker of the House of
Representatives.
We provided a draft of the enclosed slides to the Administrative
Office of the U.S. Courts, the Executive Office for U.S. Trustees, and
the Department of Defense for review and comment. They provided us
with technical comments, which we have incorporated as appropriate.
We are sending copies of this report to the appropriate congressional
committees, the Director of the Administrative Office of the U.S.
Courts, the Assistant Attorney General for Administration at the
Department of Justice, and the Secretary of Defense. The report is
also available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
Should you or your staff have any questions concerning this report,
please contact me at (202) 512-5257 or merrittz@gao.gov. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. Key contributors to this
report include Elizabeth McNally, Assistant Director; Jason Bromberg,
Assistant Director; Jeremy Cluchey; Julie A. Corwin; Cynthia Grant;
Stuart M. Kaufman; Shvetal Khanna; Joanne Landesman; Gregory A.
Marchand; Jungjin Park; Terry Richardson; Michael Shaughnessy; Michael
Silver; and Amie M. Steele.
Signed by:
Zina D. Merritt:
Acting Director:
Defense Capabilities and Management:
Enclosure:
List of Committees:
The Honorable Sheldon Whitehouse:
Chairman:
The Honorable Jeff Sessions:
Ranking Member:
Subcommittee on Administrative Oversight and the Courts:
Committee on the Judiciary:
United States Senate:
The Honorable Steve Cohen:
Chairman:
The Honorable Trent Franks:
Ranking Member:
Subcommittee on Commercial and Administrative Law:
Committee on the Judiciary:
House of Representatives:
[End of section]
Enclosure: Briefing Slides:
Military Personnel: Observations on the Use and Effects of the
National Guard and Reservists Debt Relief Act of 2008:
September 30, 2010:
GAO-10-1014R Debt Relief Act:
Table of Contents:
Introduction to the National Guard and Reservists Debt Relief Act of
2008:
Background:
Objectives:
Eight Percent of Eligible Servicemembers Who Filed for Bankruptcy
Relief Under Chapter 7 Have Claimed the Means Test Exemption:
Thirty-Two Percent of the Aggregate Debt Reported by Servicemembers
Could Potentially Be Discharged:
Ten of the 11 Eligible Servicemembers We Interviewed Did Not Attribute
Their Debt to Military Service:
Debt Relief Act Has Had Little Perceived Effect on the Bankruptcy
System or on Creditors:
Servicemembers Report That Debt Relief Act Has Had No Impact on Their
Debt Incurrence Practices:
Appendix I: The National Guard and Reservists Debt Relief Act of 2008:
Appendix II: Scope and Methodology:
[End of section]
Introduction to the National Guard and Reservists Debt Relief Act of
2008:
The National Guard and Reservists Debt Relief Act of 2008 (Debt Relief
Act):[Footnote 1]
* applies to members of the National Guard and Reserve Components who,
after September 11, 2001, are ordered to active duty or to perform a
homeland defense activity for at least 90 days[Footnote 2] and;
* temporarily exempts these members of the National Guard and Reserve
Components from certain proof requirements of the Chapter 7 bankruptcy
process (specifically, undergoing an income/expense calculation, which
is known as the means test).
The Debt Relief Act also requires GAO to provide a study on the use
and the effects of the act by December 2010. (See appendix I for
information on the reporting requirements.)
[End of section]
Background: Types of Bankruptcy and the Bankruptcy Process:
Bankruptcy is a federal court procedure that can help provide relief
for both individuals and businesses from debts that they cannot fully
repay and help creditors receive some payment.[Footnote 3] An
individual or an individual and spouse jointly may file a petition for
bankruptcy relief. Individuals usually file a petition under Chapter 7
or 13 of the Bankruptcy Code.
* Under Chapter 7, bankruptcy debtors may be eligible for discharge of
most unsecured debts.[Footnote 4]
* Under Chapter 13, bankruptcy debtors submit a proposed repayment
plan for the court's approval in which they agree to pay all or a
portion of their unsecured debts over time.
The Chapter 7 bankruptcy process employs a "means test" to weigh an
individual debtor's historical income against his/her debts and living
expenses, according to a statutory formula, to determine if the debtor
is eligible for Chapter 7 bankruptcy protection.[Footnote 5] In
general, a debtor whose income minus allowable living expenses exceeds
certain thresholds might not qualify for Chapter 7 bankruptcy
protection and would have to either seek conversion to a different
chapter of bankruptcy or have his/her bankruptcy case dismissed and
receive no bankruptcy relief at all.
Entities Involved with the U.S. Bankruptcy System:
The U.S. bankruptcy system involves entities in both the judicial and
executive branches of government.
Within the judicial branch, the Administrative Office of the U.S.
Courts serves as the central support entity for federal courts,
including bankruptcy courts, and provides a wide range of
administrative, legal, financial, management, and information
technology functions. The Administrative Office of the U.S. Courts has
developed and supports nationwide data systems to manage and maintain
information on bankruptcy cases, but these systems are largely
operated, managed, and maintained by the local bankruptcy courts.
Within the executive branch, the U.S. Trustee Program”-a component of
the Department of Justice”-oversees the administration of most
bankruptcy cases.[Footnote 6] The program's Executive Office for U.S.
Trustees provides a wide range of administrative, legal, financial,
management, and information technology functions. Day-to-day
operations are conducted by 95 field offices and 21 U.S. Trustees. The
U.S. Trustees supervise the administration of federal bankruptcy cases
and the approximately 1,400 private trustees who administer bankruptcy
estates and distribute payments to creditors.
The Department of Defense is not involved in the bankruptcy system and
does not collect information about the rate of personal bankruptcy
filings among military personnel. It does, however, maintain
activation data on members of the National Guard and Reserve
Components who are ordered to active duty. When authorized by law, the
Department of Defense, via the secretaries of the military
departments, places members of the National Guard and Reserve
Components in active duty status. The Secretary of Defense also has
the authority, by statute, to provide funds for members of the
National Guard to perform a "homeland defense activity" under certain
circumstances. This is a special status that is applicable only to the
National Guard; it is not applicable to other components of the
Reserves. It is defined by statute and, according to Department of
Defense officials, has never been used.
The Debt Relief Act and the Means Test Process:
The Debt Relief Act exempts qualifying members of the National Guard
and Reserve Components from the means test process when they file a
petition for Chapter 7 bankruptcy relief. See figure 1. However,
qualifying members who "pass" the means test could still face
dismissal of their case or conversion to another chapter of bankruptcy
for other reasons.
Figure 1: The Means Test Process and Eligible Members of the National
Guard and Reserve Components[Footnote 7]:
[Refer to PDF for image: illustration]
National Guard and Reservists Debt Relief Act of 2000:
Exempted from the means test process.
Service member files for a Chapter 7 bankruptcy:
Mans test process:
Step 1:
Compare 1 years's historical income with the state's median income:
Less than median: proceed with Chapter 7 bankruptcy;
Greater than median: proceed to step 2.
Step 2:
Calculate disposable income based on established formula:
Less than $7,025: proceed with Chapter 7 bankruptcy;
Greater than $11,725: Case may be dismissed or converted to another
chapter of bankruptcy;
Between $7,025 and $11,725: proceed to step 3.
Step 3:
Calculate threshold debt payment amount:
Equal to or less than disposable income: Case may be dismissed or
converted to another chapter of bankruptcy;
Greater than disposable income: proceed with Chapter 7 bankruptcy.
Source: GAO analysis of Pub.L.No. 110-438 and bankruptcy form B 22A
(Chapter 7 Statement of current monthly income and means-test
calculation).
[End of figure]
The Debt Relief Act and Eligibility Requirements:
Servicemembers who have served on active duty or performed a homeland
defense activity, as defined by statute, for at least 90 days are
eligible for the means test exemption if they file a petition for
Chapter 7 bankruptcy relief between December 19, 2008 and December 19,
2011. Servicemembers may also be eligible for the exemption during
this service or the performance of this activity if they believe that
they will complete 90 consecutive days of service, according to
officials from the Executive Office for U.S. Trustees. Servicemembers
who have completed the minimum 90-day period of service and are no
longer serving have a little less than 1.5 years (540 days) after they
have completed the minimum 90-day period of service to claim the means
test exemption. Servicemembers who completed their service periods
dating as far back as June 28, 2007, may be eligible for the exemption
if they filed for bankruptcy relief on December 19, 2008. (See fig.
2.) Servicemembers who are engaged in other military activities, such
as response efforts related to a local natural disaster, are not
eligible for this exemption if their service does not meet the
definitions in the statute.
Figure 2: Eligibility for the Means Test Exemption:
[Refer to PDF for image: illustration]
Eligibility period to qualify for the means test exemption: 540 days.
June 28, 2007:
Service members have up to 540 days after completing the minimum 90-
day period of active duty service or homeland defense activity to
claim the means test exemption.
Chapter 7 bankruptcy filing period:
December 19, 2008:
Pub. L. No. 110-438 went into effect.
December 19, 2011:
Pub. L. No. 110-43 will expire.
Source: GAO analysis of Pub. L. No. 110-438.
[End of figure]
[End of section]
Objectives:
The Debt Relief Act requires GAO to provide information on the use and
effects of the means test as amended by the act. Our objectives
include determining:
1. the extent to which eligible members of the National Guard and
Reserve Components (hereafter referred to as servicemembers) have
claimed the exemption from the means test process for Chapter 7
bankruptcy filings, and the characteristics of these cases;
2. the extent to which eligible servicemembers who have claimed the
means test exemption have attributed their debt to their active duty
or performance of a homeland defense activity; and;
3. the effects, if any, the Debt Relief Act has had on the bankruptcy
system, creditors, and the debt incurrence practices of eligible
servicemembers who have taken the exemption.
Eight Percent of Eligible Servicemembers Who Filed for Bankruptcy
Relief Under Chapter 7 Have Claimed the Means Test Exemption:
The Debt Relief Act requires GAO to determine the number of bankruptcy
cases in which eligible servicemembers claimed the means test
exemption.
Based on our analyses of bankruptcy data and activation records, we
found that 2,122 eligible servicemembers filed a petition for Chapter
7 bankruptcy relief during the first year the Debt Relief Act was in
effect.[Footnote 8] Of the 2,122 eligible servicemembers who filed a
petition for Chapter 7 bankruptcy only 8 percent, or 176 eligible
servicemembers, [Footnote 9] claimed the means test exemption.
* Based on our analyses, we found the percentage of servicemembers who
filed a petition for Chapter 7 bankruptcy relief to be small relative
to the population of eligible members of the National Guard and
Reserve Components.
- Of the 701,309 servicemembers, derived from activation records, who
potentially could have filed for bankruptcy during our review period
and claimed the means test exemption, we found that the 2,122 eligible
servicemembers who filed a petition for Chapter 7 bankruptcy relief
represented 0.3 percent of the total number of eligible servicemembers.
Most but not all of the 176 servicemembers completed the Chapter 7
bankruptcy process. (See table 1.)
Table 1: Types of Chapter 7 Bankruptcy Cases for Servicemembers
Claiming the Means Test Exemption:
Type of Chapter 7 bankruptcy case status: Successful completion
(indicates servicemembers who received a discharge);
Number of eligible servicemembers: 168.
Type of Chapter 7 bankruptcy case status: Dismissed cases or cases
closed without discharge;
Number of eligible servicemembers: 4.
Type of Chapter 7 bankruptcy case status: Ongoing cases (as of August
9, 2010);
Number of eligible servicemembers: 4.
Type of Chapter 7 bankruptcy case status: Total;
Number of eligible servicemembers: 176.
Source: GAO analysis of bankruptcy data and activation records.
[End of table]
The Debt Relief Act requires GAO to determine whether there are any
indications of abuse or potential abuse of the exemption.
* We were unable to identify any clear indications of abuse or
potential abuse of the exemption.
* Although we were unable to identify any clear indications of abuse
or potential abuse, we found 122 bankruptcy debtors who were reported
as having claimed the means test exemption but did not appear eligible
to do so based on the criteria established in the Debt Relief Act. It
is unknown why potentially ineligible bankruptcy debtors might claim
the exemption or why use of the exemption might be reported in the
case file when it was not actually claimed. We did not examine the
specific circumstances with regard to use of the exemption in these
cases because the bankruptcy case files did not provide sufficient
information. Accordingly, we are not suggesting that this use was
indicative of abuse.[Footnote 10]
Thirty-Two Percent of the Aggregate Debt Reported by Servicemembers
Could Potentially Be Discharged:
The Debt Relief Act requires GAO to determine the aggregate amount of
debt eligible servicemembers reported to have the aggregate amount of
this debt discharged by the bankruptcy process, and the aggregate
amount of the debt in Chapter 7 cases that were converted to Chapter
13 cases.
In our review of the bankruptcy case files of 168 eligible
servicemembers who claimed the exemption and completed the Chapter 7
bankruptcy process, we determined that the aggregate amount of debt
that these servicemembers reported was approximately $43.7 million.
The median amount of debt that these servicemembers reported was
approximately $198,413. Table 2 shows ranges of debt these
servicemembers reported.
Table 2: Debt Ranges Reported by Eligible Servicemembers Claiming the
Means Test Exemption:
Debt in dollars: $65,000 and less;
Number of eligible servicemembers with this range of debt: 42.
Debt in dollars: $65,001 to $260,000;
Number of eligible servicemembers with this range of debt: 58.
Debt in dollars: $260,001 to $360,000;
Number of eligible servicemembers with this range of debt: 24.
Debt in dollars: More than $360,000;
Number of eligible servicemembers with this range of debt: 44.
Total:
Number of eligible servicemembers with this range of debt: 168.
Source: GAO analysis of bankruptcy data.
[End of table]
Under bankruptcy law, certain types of debts are subject to be
discharged. Generally speaking, discharge excuses the debtor from
personal liability for many kinds of debt, subject to various
exceptions. We could not determine the amount of debt actually
discharged because bankruptcy case files do not include these data and
this information was not available from other sources. However, the
aggregate amount of debt that servicemembers could potentially have
discharged was approximately $13.8 million, or 32 percent, of the
total amount of debt that they reported.[Footnote 11] The median
amount of debt that could potentially be discharged was approximately
$63,110.
Table 3 shows the ranges of debt these servicemembers could
potentially have had discharged.
Table 3: Ranges of Debt That Potentially Could Have Been Discharged
for Eligible Servicemembers Claiming the Means Test Exemption:
Debt that could be discharged: $35,000 and less;
Number of eligible servicemembers with this range of debt: 39.
Debt that could be discharged: $35,001 - $80,000;
Number of eligible servicemembers with this range of debt: 71.
Debt that could be discharged: $80,001 ” $100,000;
Number of eligible servicemembers with this range of debt: 16.
Debt that could be discharged: More than $100,000;
Number of eligible servicemembers with this range of debt: 42.
Total:
Number of eligible servicemembers with this range of debt: 168.
Source: GAO analysis of bankruptcy data.
[End of table]
Like bankruptcy debtors in the general population, servicemembers
filing for bankruptcy relief under Chapter 7 often have a combination
of dischargeable and Service member debt. See table 4 for examples of
both types of debt.
Table 4: Examples of Debt That Potentially Can and Cannot Be
Discharged in Chapter 7 Bankruptcies:
Debt that can be discharged:
* Many types of unsecured credit card debt;
* Debt from bills for medical and other expenses;
* Debts remaining following foreclosure on or surrender of property
securing debt[A].
Debt that cannot be discharged:
* Most taxes;
* Most types of student loans;
* Most debt from domestic support obligations (e.g., alimony,
maintenance, and child support);
* Mortgages and other debt secured by property (e.g., liens, many car
loans)[A].
Source: GAO analysis of the Bankruptcy Code.
[A] Although a discharge protects the debtor from personal liability
for secured debt, if the Chapter 7 debtor is delinquent the creditor
may still foreclose on or repossess the property securing the debt.
[End of table]
In addition to the 168 eligible servicemembers who claimed the means
test exemption, there was 1 additional eligible Service member who
initially filed a petition for Chapter 7 bankruptcy relief and claimed
the exemption, but whose case was converted to Chapter 13. The amount
of debt the Service member reported to have in this case was
approximately $980,000.
Ten of the 11 Eligible Servicemembers We Interviewed Did Not Attribute
Their Debt to Military Service:
The Debt Relief Act requires GAO to study the extent to which eligible
servicemembers who claimed the means test exemption when filing for
bankruptcy relief under Chapter 7 had debts "substantially" or
"materially" related to their military service.[Footnote 12] We were
unable to determine the extent to which debts were substantially or
materially related to servicemembers' military service because
bankruptcy case files commonly do not identify the reasons individuals
incur particular debts or declare bankruptcy and this information was
not available from other sources.[Footnote 13]
We conducted interviews with 11 eligible servicemembers and found that
10 of the 11 randomly selected servicemembers did not attribute their
debts to their military service; however, the results from this sample
are not generalizable. Generally, they cited a combination of other
reasons for filing for bankruptcy. Some of these reasons include
unemployment or income decline, family breakup caused by divorce or
separation, medical expenses, and housing reasons (e.g., increased
mortgage payments or value of house declining). The Service member who
attributed some of his indebtedness to military service told us that
he had to pay the costs of maintaining two households in different
states”one for himself near his assigned military duty station and
another for his family.
Twelve of the private bankruptcy trustees with whom we spoke stated
that in the cases they handled, they had not observed or did not
recall military service having an impact on the bankruptcy debtors'
financial condition. Three of the trustees told us that they would not
have known some of the bankruptcy debtors were in the military if they
had not taken the exemption.
The Debt Relief Act also requires GAO to study whether the average
levels of debt eligible servicemembers incurred increased before,
during, or after their military service. We were unable to determine
when eligible servicemembers incurred their debt in relation to their
military service because bankruptcy case files commonly contain
information only about debt that was outstanding at the time of the
filing and information about when debtors incurred their debt was not
available from other sources.[Footnote 14]
However, 7 of the 11 servicemembers with whom we spoke told us that
the amount of their debt had decreased or remained the same during
their military service. The other 4 servicemembers with whom we spoke
told us that the amount of their debt had increased during their
military service.
Six of the 11 servicemembers with whom we spoke voluntarily indicated
that their income from their military service was financially
beneficial to them. For example, 1 of these servicemembers told us
that he might not have lost his home had his military service and
corresponding income begun earlier than they did.
Debt Relief Act Has Had Little Perceived Effect on the Bankruptcy
System or on Creditors:
The Debt Relief Act requires GAO to study the effects that use of the
act by eligible servicemembers has had on the bankruptcy system and on
creditors.
Based on our analyses, we found the number of servicemembers who filed
for bankruptcy to be a small percentage of the total number of filings
from the general population.
* Of the approximately 1 million Chapter 7 bankruptcy cases filed
nationwide during the first year the Debt Relief Act was in effect, we
found that the 2,122 eligible servicemembers who filed a petition for
Chapter 7 bankruptcy relief represented 0.2 percent of total Chapter 7
bankruptcy filings.[Footnote 15]
According to interviews we held with public and private administrators
of the bankruptcy system and officials from creditor and bankruptcy
associations, the Debt Relief Act has had minimal effects on the
bankruptcy system or creditor operations.
* Although officials at the Administrative Office of the U.S. Courts
and the Executive Office for U.S. Trustees could not provide
implementation cost data to us, they described the procedural updates
they made to implement the Debt Relief Act, which involved updating
the relevant bankruptcy form to allow individuals to claim the
exemption, training employees on how to administer the Debt Relief
Act, and making minor changes to information technology systems.
Officials told us that the cost of these actions was minimal.
* Private trustees stated that the Debt Relief Act had little or no
effect on their role in the bankruptcy system or on the resources they
expended in cases. Additionally, representatives from the creditor
association and from associations with legal expertise in bankruptcy
stated that the Debt Relief Act has had little to no effect on their
business operations or the bankruptcy system.
Servicemembers Report That Debt Relief Act Has Had No Impact on Their
Debt Incurrence Practices:
The Debt Relief Act requires GAO to study the effects that use of the
act has had on the debt incurrence practices of servicemembers.
Interviews with 11 eligible servicemembers showed that the Debt Relief
Act did not change servicemembers' debt incurrence practices because
awareness of the exemption was limited. For example:
* Five of the eligible servicemembers with whom we spoke stated that
they only learned about the exemption from their attorneys after
declaring bankruptcy.
* Two of the servicemembers we interviewed told us that they learned
of the means test exemption on their own during the bankruptcy
proceedings.
* Four other servicemembers told us that they were unaware of using
the means test exemption until we contacted them.
Bankruptcy system and military association representatives also stated
that it is unlikely that the Debt Relief Act has had any effect on the
debt incurrence practices of servicemembers.
* Representatives from associations with legal expertise in bankruptcy
told us that in their experience, individuals who file for bankruptcy
relief are typically unaware of their rights. In their view, it was
unlikely that servicemembers using the means test exemption in a
Chapter 7 bankruptcy filing would understand it well enough to be
influenced by it.
* Representatives from military associations told us that they did not
believe servicemembers were aware of the Debt Relief Act.
[End of section]
Appendix I: The National Guard and Reservists Debt Relief Act of 2008:
Section 3 of the National Guard and Reservists Debt Relief Act of 2008
(Debt Relief Act) requires GAO to complete a study on the use and the
effects of the law, as amended by the act.[Footnote 16] Specifically,
we are required to provide information on the following:
* Whether and to what degree servicemembers availed themselves of the
benefits of the law.
* Whether and to what degree such members are debtors in cases that
are substantially or materially related to service that qualifies such
members for the benefits of the law.
- A case shall be considered substantially related to the service of a
Service member if more than 33 percent of the aggregate amount of
his/her debt is incurred as a direct or indirect result of such
service.
- A case shall be considered materially related to the service of a
Service member if more than 10 percent of the aggregate amount of
his/her debt is incurred as a direct or indirect result of such
service.
The effects that the use of the law, as amended by the act, has on the
bankruptcy system, creditors, and the debt incurrence practices of
such members. As defined in the act, effects include:
* the number of cases in which servicemembers use the benefits of the
act;
* the aggregate amount of debt in these cases;
* the aggregate amount of debt discharged in these cases;
* the aggregate amount of debt in cases as of the time they are
converted to Chapter 13;
* the amount of resources expended by the bankruptcy courts and
bankruptcy trustees in these cases;
* whether and to what extent there is any indication of abuse or
potential abuse of the exemption;
* any increase in the average levels of debt incurred by
servicemembers before, during, or after their military service;
* any indication of changes in the debt incurrence practices adopted
by servicemembers in anticipation of benefiting from the exemption; and
* any indication of abuse or potential abuse of the exemption,
reflected in the debt incurrence of servicemembers.
[End of section]
Appendix II: Scope and Methodology:
Our review focused on members of the National Guard and Reserve
Components”Army National Guard, Army Reserve, Navy Reserve, Marine
Corps Reserve, Air National Guard, Air Force Reserve, and Coast Guard
Reserve”who filed a petition for Chapter 7 bankruptcy between December
19, 2008 and December 18, 2009 (i.e., the first year the Debt Relief
Act was in effect).
(1) To determine the extent to which eligible servicemembers[Footnote
17] have claimed the exemption from the means test process when filing
for a Chapter 7 bankruptcy and to determine the characteristics of
these cases, we did the following:
* Obtained data from (1) the Administrative Office of the U.S. Courts
for all Chapter 7 bankruptcy filings between December 19, 2008 and
December 18, 2009; (2) the Administrative Office of the U.S. Courts
and the Executive Office for U.S. Trustees for all Chapter 7
bankruptcy cases during the same time frame in which the means test
exemption was claimed from both; and (3) the Department of Defense's
Defense Manpower Data Center for all servicemembers who were activated
between June 28, 2007 and December 18, 2009.
* Interviewed officials from and analyzed responses regarding the
accuracy and completeness of the data provided by the Administrative
Office of the U.S. Courts, the Executive Office for U.S. Trustees, and
the Department of Defense to determine the reliability of the data. In
addition we performed electronic testing of the data elements,
checking for invalid and missing values. We found some invalid Social
Security numbers and inconsistent names in both the bankruptcy and
Service member data. These problems were statistically insignificant
but could result in an undercount of (1) the number of servicemembers
who filed petitions for bankruptcy relief and (2) the number of
eligible servicemembers who claimed the exemption. We determined that
these data were sufficiently reliable for the purposes of reporting on
the Debt Relief Act's requirements.
* Matched records of all Chapter 7 bankruptcies against the activation
data from Defense Manpower Data Center by using unique identifiers
(e.g., name and Social Security number) for each bankruptcy debtor to
ascertain how many eligible servicemembers declared Chapter 7
bankruptcy.
* Compared these eligible servicemembers against the record of Chapter
7 bankruptcies in which the exemption was claimed to determine how
many eligible servicemembers, as well as non-eligible bankruptcy
debtors, who claimed the exemption.
* For those eligible servicemembers who claimed the exemption, we
reviewed the relevant bankruptcy court documents available in the
Public Access to Court Electronic Records system to provide an
approximate aggregate amount of debt these debtors reported and an
estimate of how much of-this debt was potentially subject to
discharge. In addition, we reviewed the court information for those
eligible servicemembers who had filed a petition for Chapter 7
bankruptcy and claimed the exemption but were later converted to
Chapter 13, in order to determine how much debt they owed.
- To provide a comprehensive estimate of how much debt was owed, we
aggregated the total liabilities amount listed in the Summary of
Schedules in the Voluntary Petition of each Chapter 7 bankruptcy case
file (including those cases that were later converted to Chapter 13).
- To provide an estimate of how much of this debt was potentially
subject to discharge, we aggregated the total Schedule F (Creditors
Holding Unsecured Nonpriority Claims) amount included in the Voluntary
Petition of each Chapter 7 bankruptcy case file.
- We decided to use the documents and types of debt referenced above
on the expert advice of officials from the Executive Office for U.S.
Trustees.
- The data that we used to estimate the debt amounts have the
following limitations: (1) the debt amounts contained in court
documents are self-reported by the bankruptcy debtor and have not been
independently verified; (2) the debt amounts shown on the forms may
not have been the final amounts, since some further actions by the
parties could have affected the amounts in the cases; and (3) the
amount of debt that could be discharged may not be final, since the
amounts actually discharged are not verified-after cases are closed
and further actions could affect whether specific debts are considered
dischargeable.[Footnote 18]
(2) To determine the extent to which eligible servicemembers who
claimed the means test exemption attributed their debt to their
military service, we did the following:
* Randomly selected 28 servicemembers, from the 176 eligible current
and former servicemembers who claimed the exemption, for follow-up
interviews. For these 28
individuals, we attempted to obtain recent phone numbers as well as
recent addresses and e-mail addresses from the public records
available through Lexis Nexis, an online information service, and
personnel data available through the Defense Manpower Data Center.
These 28 servicemembers reside in 17 states.
* Sent an advance letter to these servicemembers notifying them that
we would be contacting them and requesting that they participate in a
semistructured telephone interview. Afterward, we followed up with
them via phone calls and e-mails (when available). We called each
Service member at various times, including during the mornings,
afternoons, and evenings on both weekdays and weekends, for a maximum
of 8 attempts, to ensure that those who wanted to participate had the
opportunity to do so. We left voicemail messages when possible.
* Obtained contact information for the 28 servicemembers; however,
only 11 of these 28 servicemembers voluntarily agreed to be
interviewed.
- Reasons why we were not able to interview all 28 servicemembers
included the absence of up-to-date contact information, overseas
deployment, failure to respond to our phone and e-mail messages, or
refusal to participate in the interview process.
- GAO has no general authority to compel these individuals to be
interviewed; therefore GAO's interactions with these servicemembers to
collect information occurred on only a voluntary basis.
- The group of 11 individuals we interviewed included eight members of
the Army National Guard, two members of the Army Reserve, and one
member of the Navy Reserve.
* Administered a semistructured telephone interview that consisted of
a series of structured closed and open-ended questions to all 11
eligible servicemembers who agreed to participate. After conducting
the interviews, we reviewed the responses and summarized the key
results. The views of this small group are not generalizable, and we
could not independently verify the information they provided.
* Supplemented these interviews by reviewing bankruptcy data where the
means test exemption was claimed and sorted these bankruptcy cases
according to the private trustee who administered them. We
judgmentally selected 12 private trustees who had administered at
least two cases and conducted semistructured telephone interviews with
them.
We were unable to determine the extent to which eligible
servicemembers who claimed the means test exemption when filing for
Chapter 7 bankruptcy had debts "substantially" or "materially" related
to their military service, as required by the Debt Relief Act, because
bankruptcy case files do not identify the reasons individuals incur
particular debts or declare bankruptcy and this information was not
available from other sources.[Footnote 19]
(3) To determine the effect, if any, the Debt Relief Act has had on
the bankruptcy system, creditors, and the debt incurrence practices of
exempted servicemembers, we did the following:
* Interviewed officials and representatives at the Administrative
Offices of the U.S. Courts and the Executive Office for U.S. Trustees,
a creditor association, and associations with expertise in either
bankruptcy or the financial conditions of military personnel. We also
interviewed 12 private bankruptcy trustees and 11 eligible
servicemembers who had claimed the means test exemption.
* To identify the creditor association and associations with expertise
in either bankruptcy or the financial conditions of military
personnel, we reviewed congressional testimony related to the Debt
Relief Act to identify expert witnesses who had testified, and we
asked agency officials for recommendations. Also, we conducted
Internet and database searches to identify creditor and other
associations knowledgeable about either Chapter 7 bankruptcy or
military personnel's financial issues.
* Reviewed the interview responses and summarized the key results;
however, we could not independently verify the information we obtained
during any of these interviews.
We visited or contacted the following departments and organizations
during our review.
* Department of Defense:
- Office of the Secretary of Defense;
- Office of Reserve Affairs;
- Office of General Counsel;
- Office of Legal Policy;
- Office of Personal Finance;
- Office for Military Community and Family Policy;
- Defense Manpower Data Center.
* Department of Justice:
- Executive Office for U.S. Trustees;
- Administrative Office of the U.S. Courts;
- National Guard Association of the United States;
- Enlisted Association of the National Guard of the United States;
- Reserve Officer Association;
- National Consumer Law Center;
- National Association of Consumer Bankruptcy Attorneys;
- American Financial Services Association.
We conducted this performance audit from July 2009 through September
2010 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of Briefing Slides]
Footnotes:
[1] Pub. L. No. 110-438 (2008). The act went into effect on December
19, 2008, and will expire on December 19, 2011.
[2] The act defines active duty by reference to 10 U.S.C. § 101(d)(1)
and homeland defense activity by reference to 32 U.S.C. § 901(1).
Section 901(1) defines "homeland defense activity" as an activity
undertaken for the military protection of the territory, domestic
population of the United States, or infrastructure or other assets of
the United States determined by the Secretary of Defense as being
critical to national security from a threat or aggression against the
United States. This statute applies to members of the National Guard.
[3] Generally, statutes pertaining to bankruptcy are found in Title 11
of the U.S. Code.
[4] Although a discharge protects the debtor from personal liability
for secured debt, if the Chapter 7 debtor is delinquent the creditor
may still foreclose on or repossess the property securing the debt. In
a Chapter 7 case, any eligible nonexempt assets are gathered, reduced
to cash, and distributed to creditors in accordance with distribution
priorities and procedures found in the Bankruptcy Code.
[5] The means test was added by the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005, Pub. L. No. 109-8, § 102 (2005),
codified at 11 U.S.C. § 707(b). The means test applies to individual
debtors whose debts are primarily consumer debts. See § 707(b)(1).
Even if a debtor does not "pass" the means test, he or she may be able
to avoid dismissal or conversion by demonstrating special
circumstances. See § 707(b)(2)(B). Debtors who "pass" the means test
could still face dismissal or conversion for other reasons.
[6] Bankruptcy cases in Alabama and North Carolina are not under the
jurisdiction of the U.S. Trustee Program; instead, bankruptcy
administrators within the judicial branch administer the cases in the
judicial districts in those states.
[7] One year's historical income is calculated according to a
statutory formula. See 11 U.S.C. §§ 707(b)(7) and 101(10A). The dollar
amounts for comparison to disposable income are periodically adjusted.
See 11 U.S.C. § 104(a). Finally, an individual who "fails" the means
test may be able to proceed in Chapter 7 under certain circumstances.
See 11 U.S.C. § 707(b)(2)(B) (special circumstances) and § 704(b)(2)
(U.S. Trustee declines to bring a motion to dismiss).
[8] We use the term "eligible Service member" to refer to members of
the National Guard or Reserve Components identified in data provided
by the Department of Defense as having served on active duty for a
period of at least 90 days or beginning and not completing such
service during the period of our study.
[9] Members who did not claim the exemption added by the Debt Relief
Act may nevertheless have been covered by a different exemption. These
176 eligible servicemembers filed 173 bankruptcy cases. In 3 cases,
the joint filers were both eligible servicemembers.
[10] There are procedures in place in the course of a bankruptcy
proceeding to verify information reported by the debtor.
[11] Because bankruptcy case files do not indicate how much debt is
actually discharged, we used a type of debt listed in the bankruptcy
case file (unsecured nonpriority claims), which was identified by
officials from the Executive Office for U.S. Trustees to typically
represent the amount of debt potentially subject to being discharged.
Unsecured nonpriority claims are listed in Schedule F of a Chapter 7
bankruptcy case file. Examples from the case files we reviewed
included unsecured credit card debt and medical bills.
[12] According to Pub. L. No. 110-438, a case shall be considered
"substantially" related to qualifying military service if more than 33
percent of the aggregate amount of an eligible servicemember's debt is
incurred as a direct or indirect result of such military service. A
case shall be considered "materially" related to military service if
more than 10 percent of the aggregate amount of the eligible
servicemember's debt is incurred as a direct or indirect result of
such service.
[13] While Bankruptcy Schedules E and F ask for the consideration for
each claim (i.e., each debt), debtors may not include some or all of
this information on the Schedules. Moreover, the information listed
may not sufficiently convey the circumstances surrounding the claim.
[14] While Bankruptcy Schedules D, E, and F ask for the date each
claim (i.e., debt) was incurred, debtors may not include some or all
of this information on the Schedules. Additionally, the forms may not
reflect debt incurred but paid off prior to filing.
[15] These 1 million Chapter 7 bankruptcy cases include business
entities and individual debtors.
[16] Pub. L. No. 110-438, § 3(a) (2008). The provision of law referred
to in the act is 11 U.S.C. § 707(b)(2)(D) amended (and as amended) by
the act.
[17] We use the term "eligible servicemembers" to describe individuals
whom the Department of Defense identified as members of the National
Guard or Reserve Components and classified as having served on active
duty for a period of at least 90 days (recently enough that they could
have filed for bankruptcy during the period the Debt Relief Act was in
effect) or still serving on active duty for any period of time as of
December 18, 2009. Department of Defense officials informed us that
the homeland defense activity classification had never been used.
[18] For example, the debt listed in Schedule F may not include
unsecured debt that is listed elsewhere in the bankruptcy petition,
such as the unsecured portion of secured debt. Certain forms of debt
are exempt from discharge, see 11 U.S.C. § 523(a), and other debt may
remain undischarged as a result of a reaffirmation agreement between
debtor and creditor under 11 U.S.C. § 524. The amount of debt
considered discharged might also change as a result of the
distribution of any assets. Because of the difficulty of determining
whether or not specific claims were dischargeable, and since some of
these actions could occur outside the record or after the bankruptcy
proceeding has concluded, we used the claims listed in Schedule F as a
proxy for the amount of debt potentially subject to discharge at the
conclusion of the case.
[19] While Bankruptcy Schedules E and F ask for the consideration for
each claim (i.e., each debt), debtors may not include some or all of
this information on the Schedules. Moreover, the information listed
may not sufficiently convey the circumstances surrounding the claim.
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Phone:
The price of each GAO publication reflects GAO‘s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO‘s Web site,
[hyperlink, http://www.gao.gov/ordering.htm].
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional
information.
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
