As the Oct. 17 implementation date for the Bankruptcy Reform Act rapidly approaches, a second surge of bankruptcy filings has beset the ABS market as consumers continue rushing to file before the more stringent law takes effect. Though the increase in bankruptcy filings, a repeat of the one that took place this spring, is expected to cause a proportionate increase in chargeoffs, analysts report that most credit card ABS will be unaffected.
The law requires persons filing for Chapter 7 bankruptcy protection to undergo a means test to determine which debtors meet certain minimum income requirements and thus can afford to pay off some debts. Those deemed able to pay will be pushed into Chapter 13 bankruptcy, under which a repayment plan will be worked out.
While the new law may eventually benefit credit card ABS by increasing recovery rates, the surge of bankruptcy filings in anticipation of the law has spiked chargeoffs. More recently, Fitch Ratings reported a second wave of bankruptcy filings had taken shape, registering 155,836 filings in the month of August, a 14.5% increase from July, and lifting the yearly total to 1.13 million, 6.8% over last year's year-to-date totals. Fitch says it expects total 2005 bankruptcy filings to exceed last year by 6% and that charge offs will "increase measurably in the coming months and into 2006."
Though this second wave of filings is expected to push credit card charge offs higher through year-end, analysts say credit card trusts in general have adequate enhancement levels that the chargeoffs should not cause any credit concerns. "Most master trusts currently exhibit strong and stable excess spread, 6% to 9%, providing investors with ample protection against the expected increase in chargeoffs," according to Lehman Brothers.
Lehman compared the current situation facing the sector to the Spring of 2001, when chargeoffs increased 80 basis points in anticipation of bankruptcy reform that was never passed. "Given the different macroeconomic conditions between then and now, we do not expect the spike to be as high this time," wrote Lehman analysts. Fitch also noted that despite the increase in chargeoffs, "the outlook for credit card ABS is stable given overall macroeconomic conditions and the positive performance metrics of other variables, including excess spread and monthly payment rates."
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