"The key to a successful RDR system is the objective and statistically precise estimate of consumer debt capacity and debt repayment capability."

Unlike traditional debt collection grading assessments, Manning's system is based on a statistically complex and geographically robust empirical algorithm. This generates two crucially important evaluative assessments: classification of individual consumers into appropriate means-tested debt management programs and specific statistical estimates of consumers' debt capacity and ability to repay outstanding unsecured debt.

"The RDR algorithm improves the efficiency of the overall system of consumer debt management programs," said George Hofheimer, Filene's chief research officer, "by guiding consumers to the plans that best match their financial situations. The program offers a win-win proposition to lenders and financially distressed borrowers."

Many financially distressed households that do not qualify for an accredited consumer credit counseling service program enroll in debt settlement programs, while others simply give up by filing for bankruptcy in a last-gasp effort to save their homes or to seek protection from the stress of debt collection. Manning said that mortgage debt figures are especially important, since many American families have relied upon their home's equity to finance household expenses and are getting hit with rising credit card balances and rates.

The recent emergence and growth of heavily indebted near-bankrupt households (those with credit card debts in the $40,000--$60,000 range) underscores the need for a partial payment plan that balances the interests of creditors and consumers without incurring costly debt collection litigation or bankruptcy filing fees, Manning added.

"A means-tested program is needed for near- bankrupt consumers who do not have sufficient resources to enter a consumer credit counseling service debt management program but possess enough cash flow to repay a portion of their unsecured debts, even though they could file for consumer bankruptcy," the report said.

Manning believes that his program counters the lack of an objective, empirical algorithm that precisely estimates the repayment capability of consumers and that explicitly recognizes differences in cost of living, household structure and after-tax income.

"Clearly, both creditors and consumers would benefit from a negotiated repayment program that offered near-bankrupt households the option of repaying between 20% and 60% of their unsecured debts over three years," he said.

The first component of the RDR assessment distinguishes "worthy" from "unworthy" debtors by identifying those households that qualify for a debt relief concession from lenders. The RDR algorithm classifies consumers into three distinct categories of debt repayment capability:

Low--Chapter 7 bankruptcy is the most realistic option (the debtor can repay only a small fraction of their unsecured debts).

Medium--The debtor's estimated after-tax income qualifies for substantial debt concession (the debtor can repay 20% to 60% of unsecured debt over three years).

High--The debtor can achieve full balance payment through an accredited debt management program.

The second evaluation phase of the RDR assessment is a statistically precise, means-tested validation of an individual's need for a specific debt concession in order to avoid filing for personal bankruptcy.

Although the RDR algorithm estimates--in percentage terms--the capability of all applicants to repay their unsecured debts, only those consumers eligible to file for consumer bankruptcy are considered for what Manning calls the "Responsible Choice" program.

"The most financially distressed consumers who cannot repay a minimum of 20% of their unsecured debts do not qualify for the Responsible Choice program and are referred to consumer bankruptcy professionals." Similarly, consumers who are able to repay more than 60% of their unsecured debts over three years are referred to a consumer credit counseling program. "Only those consumers who can repay between 20% and 60% of their unsecured debts over three years qualify for a consumer debt relief concession of the Responsible Choice program," explained Manning.

For creditors, he added, the precision of the RDR grading system ensures that only the most worthy financially distressed households are qualified for consumer debt relief. The Responsible Choice plan specifies, moreover, that the costs of administering the program are paid by those who are fortunate enough to receive debt concessions. Lenders do not incur any collection-related expenses, which maximizes the net return on their delinquent accounts.

Credit unions interested in piloting the Responsible Choice service are invited to contact Manning at [email protected].

[email protected]