Initial reports - Bankruptcy Reform

The National Association of Consumer Bankruptcy Attorneys has issued a study looking at the first batch of consumers to run the gauntlet of bankruptcy reform.

A review of the agencies reporting results in the study:

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There are only 122 CCOs (credit counseling organizations) on the current list maintained by the US Trustee. Of these 122, 69 are approved in more than one district, fifteen of them in 10 or more districts.

The six CCOs listed in the report represent 5 of the CCOs with the largest footprints:
MMI 85 districts covered
Greenpath 77 districts covered
Springboard 84 districts covered
Hummingbird 86 districts covered
Institute for Fin Lit 86 districts covered
ByDesign 4 districts covered

First blush: The report covers 10/17/05 - 2/1/05. 61k consumers served. If all became bankruptcy clients/filers, then we get 250k annual rate of filing from that number...a 85% drop from the 1.6m filings the previous year.

The report says it approached ten CCOs, the 10 that cover the largest footprints are:

Consumer Credit Counseling Services of San Francisco 74
Credit Counseling Centers of America 75
GreenPath, Inc. 77
Consumer Credit Counseling Service of Greater Atlanta Inc. 80
Credit Advisors Foundation 84
Springboard Nonprofit Consumer Credit Management Inc. 84
Garden State Consumer Credit Counseling, Inc. 85
Money Management International Inc. 85
Hummingbird Credit Counseling and Education, Inc. 86
Institute for Financial Literacy, Inc. 86

ByDesign only handles 4 districts...who else did they approach?

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Let us start off with some info regarding credit counseling from a story from Bankrate.com on March 3. Approximately 38,000 debtors filed bankruptcy from Oct 17 to the end of the year. Based on the number of people covered by the NACBA study, most (maybe 90% or more) of debtors that filed bankruptcy until Jan 31/Feb 15 were counseled by the CCOs in the study. It appears the study does accurately reflect the majority of consumers filing bankruptcy post 10/17.

So far this year we are seeing between a 70 and 80% decrease in filings over last year same time (reported by attorneys in our discussion group). Our district is 80% down from last year, 81.5% down from the 2003/2004 average. The Bankrate release claims a 75% decrease nationwide.

The study reported that 97% of the debtors could not make any payments on debt, indicating that the average consumer looking to file bankruptcy post 10/17 has less than $125 per month excess income. The report does not note if the credit counselors are using the IRS allowed expenses or not. The report also does not indicate how many of the consumers were below or above the median incomes for their areas.

The percentage of consumers facing financial difficulties as a result of events beyond their control, 79% in the study, is lower than our experience, but still higher than many would believe.

As for the increase in filings pre-reform having a significant impact on the credit card industry...well...a minor bump in the road:

NEW YORK--(BUSINESS WIRE)--March 7, 2006--The most recent Fitch Credit Card Index results indicate charge offs improving dramatically by declining 359 bps to 3.29%. Correspondingly, one-month excess spread improved in the latest period by 306 bps to a robust 8.38%, bringing the three-month average excess spread up 112 bps to 6%. Last fall's spike in personal bankruptcy filings has finally worked its way through U.S. credit card master trusts' performance measures.

'The pig in the python has been fully digested,' said Darryl Osojnak, Senior Director, Fitch Ratings. 'The outlook for charge offs is positive over the near term and master trusts should benefit from increased levels of excess spread going forward.

Isn't that nice! Do you think anyone is going to see a reduction in their interest rates?

The major banks have all reported profit decreases in the 4th quarter but this caught my eye:

<>The News Journal
<>01/24/2006

A new bankruptcy law that's been criticized as bad for consumers also turned out to be bad for Bank of America in the final months of 2005.

Bank of America, now Delaware's largest private employer following its buyout of Wilmington-based MBNA Corp., said Monday that fourth-quarter profit fell 2 percent largely because of increased loan write-offs related to the new federal bankruptcy law.

Bank of America said it earned $3.77 billion, or 93 cents a share, compared with $3.85 billion, or 94 cents a share, in the 2004 fourth quarter. Excluding $59 million in costs related to the 2004 acquisition of FleetBoston Financial, the bank would have earned 94 cents a share.

About $20m reduction in profit, not a loss, just a minor glitch in the profit.

As for other banks:

Last week, JPMorgan Chase said earnings at its Wilmington-based credit card unit plunged 41 percent because of higher bankruptcy filings.

MBNA also saw its earnings slump in the fourth quarter, the credit card giant's last as an independent company. MBNA's net income slid 49 percent to $389 million, or 30 cents a share, as revenue dropped 11 percent to $2.5 billion.

But wait a sec, from WebBolt:

JPMorgan Chase & Co. reported 2005 fourth-quarter net income of $2.7 billion, or $0.76 per share, compared with net income of $1.7 billion, or $0.46 per share, for the fourth quarter of 2004.

And from a PPT from Bank of America with regard to MBNA:

Net income of $1,771 million in 2005 and $389 million in 4Q05

How terrible was the impact? Really?

Do the numbers reflect a significant decrease in consumers in financial trouble? From the same Fitch report:

The Fitch Credit Card index is published during the first week of each month and includes month end data from two months prior, resulting in about a 35 day lag. Fitch's Credit Card Index for charge offs was 7.52% for Nov. 2005, a 144 bps increase over the same period in 2004. February's prime charge offs of 3.29% represent an improvement of 423bps from the peak observed in the November reporting period. Fitch expects charge offs to remain below 6% for the remainder of the first half of 2006 for the majority of the prime issuers.

The acceleration of charge-offs also purged a significant percentage of receivables from the 60+ day delinquency status for many portfolios. The current Fitch Credit Card Index 60+ day delinquency rate was 2.19%, an increase of 10bps from last month, yet down 77bps from the same time last year.

The charge off rate for Nov 2005 was 7.52%, 1.44 above the previous year....meaning about 6.08% If the Feb numbers were only 3.29, then we have a better than 50% reduction in the charge off rate post-BARF. Great. Except they are not expecting it to continue. How much an impact the increased minimum payment requirement is going to have on these numbers was mentioned somewhere in a report lamenting the reduction in profitability of credit card issuers from lost interest revenue.

If the people filing now are the real hard core, those that have no choice about bankruptcy, then the idea that the new law would only impact 5% or so of filers is wrong. 15-25% of filers in the past had no choice but to file and the law has of course made it harder and more expensive. Can they still file? Yes. But at what cost?

The study, along with reporting of the impact on credit card issuers, indicates that 1) the impact of bankruptcy on the bottom line of the credit industry was negligible, 2) consumers are staying away from bankruptcy in droves, 3) consumers most likely to file bankruptcy, are the ones closest to financial bottom, 4) opponents to the bankruptcy law were basing their positions on conditions closer to the truth than were the proponents.

Here is an interesting statistic from our district:

2000 2001 2002 2003 2004 2005
Chapter 13 604 826 968 1125 1107 1123
Totals 5734 7432 8386 9371 9122 12687

Chapter 13 filings did not change AT ALL! The increase in filings was all Chapter 7.

An another:
From 1/1/05-3/1/05, our county had 68 foreclosures filed.
From 1/1/06-3/1/06, our county had 116 foreclosures filed.

Remember, foreclosures are usually filed only after consumers are more than 90 days behind in payments, meaning most of these consumers were in trouble PRIOR to the bankruptcy law changing.

The new law did nothing to stop the erosion of the financial condition of many consumers. For those with no where else to turn, the cost and difficulty of filing bankruptcy has added stress and expense when consumers can least afford them. The significant jump in bankruptcy filings did no more than cause an itch in bank profitability. With the change in credit card minimum payments and higher gas prices (fortunately a mild winter or heating bills would have been much higher), we are seeing more people in trouble and the law change is going to make it much harder for them to recover.