Wednesday, October 26, 2005

Secured Creditors Win In 'Bankruptcy Bubble'

The New York Times has an article on the 'bankruptcy bubble.' "Bankruptcy filings were supposed to snowball in the months before the tough new law went into effect on Oct. 17. But the avalanche of petitions, and the lines of debtors streaming out the courthouse doors caught even the credit card issuers who supported the new law by surprise."

"In recent days, the five biggest bank issuers of credit cards have said that the unexpectedly large flood of filings shaved hundreds of million of dollars off their earnings in the third quarter. 'We thought it would cause a bubble,' James Dimon, the president of J. P. Morgan Chase, said last week. 'The bubble is just bigger than we thought.'"

"More than 500,000 Americans filed for bankruptcy protection in the 10 days before the law took effect on Oct. 17. That is roughly a third of the total number of bankruptcies filed in 2004. 'The banks are saying that we expect bankruptcy-law-related losses will subside because of the rush to file,' said David A. Hendler. 'But the undertone of credit quality is worsening.'"

"Even before bankruptcy filings began rising this spring, an American Bankers Association survey of 350 member institutions found that credit card delinquencies had been increasing when measured by the number of accounts past due. (When measured by dollars lost, it has declined). In September, it reported that the rate rose to a record of 4.81 percent during the second quarter, driven in large part by the higher price of gasoline. And it is not expected go down anytime soon."

"Under a so-called cram-down provision that was woven into the code, secured creditors like auto lenders get a big advantage in collecting Chapter 13 bankruptcy debts. Under the new law, debtors will be obligated to make payments on the purchase value of a car they bought up to two and half years before the bankruptcy filing. In the past, a debtor was required to make payments only on the current depreciated value. That left more money on the table for credit card companies to collect."

"'What is going to happen to the distribution to unsecured creditors that traditionally goes to the credit card people in Chapter 13?' asked Judge Keith M. Lundin of the Federal Bankruptcy Court in Nashville. 'There is no more money in these cases. It is only going to be shifted to the pockets of the car lenders, who all of the sudden have a much bigger claim.'"


At 12:09 PM, Blogger Ben Jones said...

Mortgage lenders will also fall into this provision, it would seem.


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