A second wave of increased personal bankruptcy filings this year is underway and is expected to push U.S. credit card chargeoffs higher through year end, according to Fitch Ratings. This latest surge comes as consumers rush to file ahead of implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was signed into law in March. In light of the recent results, Fitch now expects full year filings to outpace 2004 totals by more than 6% and for credit card chargeoffs to increase measurably in the coming months and into 2006. In addition, any fallout from Hurricane Katrina — such as a postponement of the implementation date of the reform measures — could potentially exacerbate filings and would worsen the effect on chargeoffs.
‘Filings have picked up considerably in the past six weeks as it appears many overburdened consumers who may have been on the fence are now rushing to file ahead of the October deadline,’ said Michael Dean, Managing Director, Fitch Ratings. ‘This will lead to higher chargeoffs in the coming months as credit card issuers recognize those receivables as defaulted, or uncollectible within 90 days of notification.’
Through February, personal bankruptcy filings were running 9.6% below 2004’s pace. Since that time, filings increased 12% year-over-year and are now 7% ahead of 2004’s year-to-date pace through the first week in September.
Year to date, chargeoff results have been stable as improving delinquency measures have helped offset the impact of increased bankruptcy filings. That said, these improving trends have stabilized recently and Fitch expects seasonal factors will push delinquencies higher in the coming months. This, coupled with the late summer surge in bankruptcy filings, will result in chargeoffs trending higher throughout fourth quarter and into 2006. ‘While chargeoffs are expected to increase over the near term, the outlook for credit card ABS ratings remains stable given overall macroeconomic conditions and the positive performance metrics of other variables, including excess spread and monthly payment rates,’ added Dean.
Impact of Hurricane Katrina on Bankruptcy Filings:
In addition, the devastating personal and economic loss caused by Hurricane Katrina in Mississippi and Louisiana will take its toll on consumers forcing many individuals in these affected regions to file for bankruptcy irrespective of more stringent laws. It is also possible that Congress could amend the new bankruptcy law granting individuals either a temporary exemption from the effective date or postpone the date of implementation. On Sept. 1, the ranking Democrat on the House of Representatives’ Judiciary Committee, Michigan Rep. John Conyers, pledged to introduce legislation to provide flexibility for victims of natural disasters in bankruptcy proceedings.
While economic fundamentals remain sound, chargeoff levels are likely to remain at elevated, particularly for subprime consumers. Due to low interest rates and more affordable/accessible credit options, such as adjustable-rate mortgages (ARMs) and other newer loan/mortgage products, both revolving and non-revolving debt to consumers has escalated leaving borrowers, particularly subprime, vulnerable to higher monthly payments as interest rates rise. Moreover, the impact of rising interest rates and higher energy prices, together with the possibility of slower home price appreciation and real wage growth may begin to erode consumer purchasing power. The combined effects of these will be to push up consumer debt burdens leaving individuals already feeling squeezed with few options other than to declare bankruptcy.
Fitch will monitor on-going issues related to the implementation of bankruptcy reform, the impact on filings and on performance in the ABS sector.