One year after bankruptcy reform legislation passed - changing the rules for who can file for bankruptcy and how it must be done - bankruptcy filings have stayed lower for longer than analysts expected. Filings are expected to average 12,000 to 13,000 per week for the rest of the year, making the full-year average 60% behind historical averages.
"We expect performance to remain stable throughout the year and eventually normalize in 2007," read a Barclays Capital report.
For the securitization industry, that translates to better-than-average credit card ABS performance. Bank and retail card charge offs for the October distribution date were still about 30% lower than a year ago. Performance should remain stable throughout the year, on the way to normalizing again in 2007.
Bankruptcy reform legislation passed in April 2005, requiring filers to pay off a portion of their debts, instead of being completely pardoned. The new law seeks to screen individuals who want to file for Chapter 7 protection, and establish repayment programs under Chapter 13. It features means testing, which is mandatory for debtors whose family income exceeds the state median. Debtors are also required to seek credit counseling before filing for bankruptcy protection.
For several reasons, Barclays Capital expects filings to continue to lag previous years, because of those stringent requirements and among other reasons, higher costs for filing.
"Anecdotally, it appears that attorneys have pulled back from bankruptcy for various reasons, which have resulted in fewer advertisements inducing consumers to file for protection," according to the report. The new law is also very complex, resulting in a transition period for bankruptcy practitioners and judges to figure out how to interpret all of the new and intricate requirements effectively.
"The rules of the game have changed, making it more difficult to file for protection," said Barclays, adding: "therefore, the measure for normal' has perhaps been altered."
Further, the Barclays U.S. Credit Card Index (BUCCI) WA bank card charge-off rate fell to a historical low of 3.0% in February. Also, charge offs have remained low this year for longer than expected, and averaged 3.5% for the first nine months, compared with 5.6% for the same period a year earlier. On the retail card side, charge offs increased in the most recent reporting period by 33 basis points, to 5.28%. In the first nine months of the year, Barclays said, retail card charge-offs averaged 4.7%, 274 basis points lower than the year-ago average.
As bankcard charge-offs fell in 2006, one-month excess spreads topped 9.0% in March, while spreads peaked at 15% for store cards. That record level is unsustainable, Barclays said, and should return to pre-spike levels fairly soon. Although higher interest rates might affect the base rate on credit card ABS over time, putting downward pressure on excess spreads, the levels should remain robust.
On the consumer side, Americans appear to be more than willing to keep those credit card receivables coming. American households continue to post historically high levels of debt, and they are neglecting their savings. Economists expect ongoing high gasoline prices and a recent slowdown in the job market to put additional pressure on consumers in the near future.
Still solvent
For now, however, Americans continue to service their debt and are not shy about borrowing.
After the economic collapse in 2001 and subsequent surge in oil prices, Americans, instead of cutting back or slowing their spending, opted to rack up debt to support their lifestyles. Average household debt reached 134% of after-tax income in the second quarter of 2006, Standard & Poor's reported.
Fortunately, said the rating agency, much of household borrowing is tied up in mortgage debt. A record 76% of household borrowing is mortgage debt. The ratio of mortgage debt to disposable income stands at 96%. Although that is double the historical average of 47%, it reflects the increase in home ownership and housing prices, not an increase in leverage, S&P said.
Credit card debt stacks up positively in that scenario. The Federal Reserve reported that credit card balances were up 6.8%, while outstanding debt has fallen to 8.7% of disposable income in July, down from 8.9% a year earlier.
"It's likely that much of the decline in balances was from consumers refinancing their credit card dent into their mortgage to take advantage of lower rates and tax deductibility," S&P said. "While credit card debt is expected to rise in 2006 as refinancing opportunities become slim, cheaper sources of borrowing, such as home equity loans, and debit card spending will continue to dampen credit card growth."
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