Bankruptcy Reform Expected To Improve CUs' Collections
As the bankruptcy reform bill nears the finish line of a nine-year race, observers are trying to determine what tangible benefits credit unions can expect from the bill.
While the majority of credit union executives see the issue of bankruptcy abuse as a moral one, they also hope to see financial benefits from increased collections on bankruptcy-related charge-offs, now accounting for as much as half of all charge-offs at many credit unions.
Final passage of the bill, expected as soon as next week, comes as the number of credit union members filing for bankruptcy continues near record highs-255,000 last year-while the amount of credit union loans subject to bankruptcy continues to soar to new levels-$2.3 billion in 2004, according to NCUA.
While nobody regards the proposed bill as a panacea, experts believe credit unions will be able to improve their collections by barring those bankruptcy filers with some financial means from Chapter 7, which allows them to erase all of their debts, and requiring them instead to file a Chapter 13 to reorganize their repayments.
"Had this bill been in effect last year, and had this bill been in effect for several years, credit unions could have improved their collections by at least $60 million a year," said Bill Hampel, chief economist for CUNA.
Hampel, who has been studying the potential effects of the bill for several years, used several assumptions in coming up with his estimate.
First, he concluded that about 40% of all credit union charge-offs are bankruptcy related.
Then, he estimated that three-fourths of bankruptcy-related losses are those from Chapter 7 filers.
The rest are those in Chapter 13, in which only some debts are erased. The new law will require many of the Chapter 7 filers to repay their debts, even if it requires many years to do so.
Since the most optimistic of bankruptcy reform advocates project a 10% to 19% improvement in collections, Hampel said he figures that comes to around $65 million, on the low end.
Of course, some opponents of the bill, suggest collections will not increase by that much, but are more likely to increase by no more than 3%, bringing in less than half of the projected $65 million.
There are several variables that will affect both the number of filings and the collections over the next few years, emphasized Hampel. The first is that once the bill becomes a reality, bankruptcy lawyers and debt counselors are expected to encourage debtors to file before the bill becomes law, which it will do six months after it is signed by the president. This is expected to immediately increase the number of bankruptcy filers.
But then, some people might see the new law as more difficult, deterring them from filing, noted Hampel. "For the next year and a half the numbers are going to gyrate all over the place," he said.