Tuesday, Nov. 07, 2006, 07:00 PM UPDATED 11:59 AMBy Nick Zulovich
WASHINGTON, D.C. -- The American Bankers Association recently disputed some commonly held myths about the new bankruptcy law, which reached its one-year anniversary not long ago. Additionally, the association also discussed second-quarter late payments, including both direct and indirect auto loans.
Commenting on the new bankruptcy law, the ABA said, "Bankruptcy reform has created a more balanced system that better matches the level of relief with the filer's ability to repay their debts. Debtors who are unable to pay their debts will receive a full discharge through Chapter 7 bankruptcy protection. Those who have significant income will be required to repay some of what they owe. The new system will help eliminate abuse and filings of convenience, while protecting those in need."
As for the myth that bankruptcy filings are on the rise, proving that the reform isn't working, ABA responded by saying that bankruptcy is still available for consumers who need it, so it should not be surprising that filing rates are increasing again.
"Divorce, job loss and illness - the most common causes of bankruptcy - will continue to drive bankruptcy filings," according to the association. "And it's important to remember that rates were artificially low following the law's enactment as more than 500,000 people rushed to file in the weeks before the law took effect.
"Many of these fillings would have occurred in late 2005 or early 2006," officials continued. "Overall, filing rates are only one part of the bankruptcy picture. Experts will consider a number of factors, including the ratio of Chapter 7 to Chapter 13 cases, to judge the long-term effects of the law."
Dispelling another rumor, ABA responded to the myth that the new law has made bankruptcy too expensive for low-income debtors.
"The new law allows courts to waive filing- and credit-counseling fees for low-income debtors. Many attorneys, however, have increased their fees. But fees vary and some attorneys offer free bankruptcy consultation sessions, so consumers should around when seeking legal advice," the association reported. "Overall, the cost of bankruptcy is still relatively low compared to the financial relief that filers receive."
Another myth the ABA commented on was that the new law's credit counseling requirement is an unnecessary burden that does little to help debtors.
"Professional credit counseling is always a good idea, especially considering the lack of financial education in this country," the officials responded. "For many debtors, the pre-bankruptcy credit counseling is their first experience with credit education. Even after their debts are discharged, bankruptcy filers have the same expenses and, in many cases, the same bad habits.
"The credit counseling and pre-discharge financial education requirements can help debtors avoid the same missteps that may have led them to bankruptcy in the first place," executives added.
Referring to the rumor that there are no consequences for creditors who make bad lending decisions, the ABA said this is also incorrect.
"Bankruptcy is still readyily available for those in financial distress," the ABA stated. "In fact, the new law has expanded the system, authorizing 28 additional bankruptcy judges. Moreover, no bank will make a loan that they think will go bad. But circumstances will cause some defaults, which is why banks have reserves and why our country has a bankruptcy system. Banks have to be 99 percent right on judging credit risks or they would be out of business."
Late Payments Remain Flat in Second Quarter
The ABA's Consumer Credit and Delinquency Bulletin recently reported that late payments for consumer loans remained steady for the second quarter.
"It's the same old story," explained James Chessen, ABA's chief economist. "High gas prices and Federal Reserve interest rate hikes have left consumers with less money in their pockets. As a consequence, consumers have less money leftover to meet all their expenses, including paying back their loans."
ABA's quarterly survey of more than 300 banks throughout the nation found a slight increase in the percentage of consumer loans that are 30 days or more past due during the second quarter.
More specifically, late payments in eight types of closed-end installment loans, called the composite ratio, grew slightly to 1.96 percent from 1.94 percent of accounts in the first quarter. ABA noted that this ratio is seasonally adjusted.
"The financial squeeze may ease a bit in the third quarter, as the Fed has stopped raising rates and prices at the pump are down more than 17 percent since the end of June," Chessen pointed out.
Continuing on, Chessen said homeowners are reporting that they don't feel as wealthy due to the cooling housing market.
"A dark cloud is forming over the housing market and threatens to dampen expectations of gains from rising home prices," he said. "Up until now, rising home values have increased wealth, been a source of liquidity for borrowers and allowed consumers to spend out of savings. It's a different world now, and consumers will need to be more careful in managing their finances."
According to the ABA, a breakdown of composite ratio delinquencies shows:
-- Direct auto loan delinquencies decreased to 1.72 percent from 1.78 percent
-- Indirect auto loan delinquencies increased to 2.14 from 2.04 percent
-- Recreational vehicle loan delinquencies grew slightly to 0.79 percent from 0.78 percent
-- Marine loan delinquencies were up to 0.98 percent from 0.94 percent
-- Personal loan delinquencies inched up to 1.86 percent from 1.81 percent
-- Home equity loan delinquencies fell to 1.89 percent from 1.94 percent
-- Property improvement loan delinquencies increased to 1.48 percent from 1.42 percent
-- Mobile home delinquencies expanded to 3.61 percent from 3.37 percent