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Bankruptcies up CUs in maintenance phase CUNA
MADISON, Wis. (1/6/10)--Personal bankruptcy filings hit 1.41 million last year--an increase of 32% over 2008. And credit unions can expect more chargeoffs during the post-recession, say Credit Union National Association (CUNA) economists.
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CUNA economist Steve Rick pointed out that the numbers will continue to go up because bankruptcies and chargeoffs lag behind a recession. "During a recession, people are existing for a while on their savings, and when that's used up they begin charging more, getting into debt." They make it through most of the recession. Then, it catches up and chargeoffs occur, he noted. According to the National Bankruptcy Research Center, which compiles and analyzes bankruptcy data, 2009's bankruptcy filings are at their highest level since 2005 (The Wall Street Journal Jan. 5). More people filed for Chapter 7 bankruptcy, which liquidates assets to pay off some debts and absolves the filers of other debts. Chapter 7 filings were up more than 42% as of November 2009, compared with November 2008. Chapter 13 filings increased by 12% and accounted for less than one-third of the 2009 filings as of November, the latest month statistics were available. "You could see the increase coming with the last quarter's data," Mike Schenk, CUNA senior economist and vice president of economics and statistics, told News Now. "There naturally would be more bankruptcies after the recession than before."
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He noted that consumers rushed to file bankruptcies in 2005 before new bankruptcy laws took effect that October. The laws make it more difficult to file for a Chapter 7 bankruptcy. Filers are required to under go a means test to determine if the filer can pay back at least a portion of the debt after it is restructured. Rick agreed that credit unions could anticipate the losses and be prepared for them. "Credit unions for years have been in the building phase, building their allowances for loan losses (ALL) provisions in anticipation for an increase in chargeoffs. Now they're in the maintenance phase, where they will see a drop in provisions for ALL." For credit unions, chargeoffs are still a small number, said Schenk. Both delinquencies and net chargeoffs remain substantially lower than bank norms, according to the U.S. Credit Union Profile's Third Quarter 2009 results. In 2005, before the new law, credit unions experienced four bankruptcies per 1,000 members. That number tapered off to 1.4 bankruptcies per 1,000 members in 2006, followed by 1.8 in 2007, then 2.6 in 2008 and 3.7 as of September 2009. The average number of bankruptcies per credit union has increased slightly from 39.3 in 2005 to 43 as of in September 2009, according to the profile report. Half of credit unions' chargeoffs are due to bankruptcies.
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