The jury is in. Investors can expect a lower level of consumer bankruptcy filings as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act, which went into effect on Oct. 17. The act constituted the largest reworking of the bankruptcy code since it was enacted in 1978.
While the reform prompted a surge of nearly 600,000 more filings than average in 2005 - and reached an all-time high of 314,994 during the week of Oct. 16 to 22 - this year's filings are significantly down from past years, according to Citigroup Global Markets. Personal bankruptcy filings for the week of July 31 to Aug. 5 totaled 14,389, a 59% year-over-year reduction; weekly bankruptcy filings averaged about 28,600 from 2000 up until the new law went into effect. Citigroup is estimating a new average weekly filing rate of about 20,000 per week.
Credit cards and autos are two sectors, along with student loans, expected to benefit from a decrease in consumer bankruptcy filings. A number of market players, including Fitch Ratings, anticipated the credit card industry to endure the most substantial impact from the bankruptcy reform legislation. The rating agency estimates that chargeoffs due to bankruptcy generally represent from 33% to 50% of losses within a given prime portfolio.
At only 3.2% in June, charge-offs on Citigroup's credit card index were 46% below the Oct. 2003 to Sept. 2005 average of 5.98%. Additionally, in the period from Dec. 2005 to Jan. 2006, charge-offs fell 57%. Meanwhile, Citigroup analysts expect the 2006 auto ABS vintage to display improved performance compared to older vintages, as credit losses stemming from last year's surge in bankruptcies work through the system.
On the downside, Chapter 7 filings are rising steadily as a portion of all filings. The American Bankruptcy Institute, among others, had estimated that as many as 10% of consumers that file Chapter 7 bankruptcy would be required to file under Chapter 13. The filings, which allow consumers to essentially erase their debt in exchange for the possible forfeiture of certain assets, could have a negative impact on ABS investors if the public prefers them to Chapter 13 filings, Citigroup noted.
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