Auriemma Announces Bankruptcy Loss Outlook
Payment experts at Auriemma Consulting Group (ACG) suggest that by mid-year, bankruptcies should settle back to 2004 levels, thus significantly lower than the 2005 experience. So much for the good news. The firm is also convinced that overall bad debt levels are unlikely to decline simply because of stricter bankruptcy tests.
The surge in bankruptcies in the fourth quarter of 2005 has left many lenders wondering about the impact the new bankruptcy reform will have on future losses. In 2005, consumers took advantage of the then-existing law, as they rushed to file for a full discharge of their debt under Chapter 7 proceedings, which grew by 46% in 2005 after a 3% decline in 2004.Two outstanding questions keep many in the industry guessing: When will normalized bankruptcy trends emerge so lenders can begin adjusting models accordingly? How much, if any, of losses will shift from bankruptcies to write-offs?
After considerable analysis and innumerable conversations with clients on the long-term effect of the legislation, ACG believes that more of these insolvent debtors will simply wend their way through the delinquency process. This premise is especially convincing when factoring in oil prices, interest rate hikes, housing appreciation and changes in minimum payment policy to name just a few adverse conditions.
"Nearly everything we see leads us to this conclusion" suggests ACG Managing Associate Tom LaMagna. "We don't think lenders will be any worse off after the legislation, but neither do we think that it will have the long term desired effect."
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