Posted: 7 Feb 2000
Several bills pending in Congress would apply means-testing to Chapter 7 debtors, requiring those with apparent ability to repay to be dismissed from Chapter 7, leaving Chapter 13 as their main route to a discharge. Chapter 13 would require repayment over 5 years to prebankruptcy creditors.
The authors applied one proposed means-testing formula to a sample of 1043 Chapter 7 cases from seven states across the country. They found that only 3.6% of the debtors emerged as "can-pays" who would be barred from Chapter 7, and that unsecured creditors could expect to collect much less from such debtors than industry-sponsored studies have claimed. Further, the paper shows how predictable avoidance behavior, such as increasing secured debt and/or charitable contributions, could further reduce the number of "can-pays." Thus, the paper casts doubt on the efficacy of imposing burdensome additional requirements on all Chapter 7 debtors in order to bar 3.6% of those debtors from that chapter.
Suggested Citation: Suggested Citation
Culhane, Marianne B. and White, Michaela M., Taking the New Consumer Bankruptcy Model for a Test Drive: Means-Testing Real Chapter 7 Debtors. American Bankruptcy Inst. Law Review, Vol. 7, Spring 1999. Available at SSRN: https://ssrn.com/abstract=168834