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Bankruptcy Reform: Sweeping Changes, Limited Long-Term Impact

Bankruptcy Reform: Sweeping Changes, Limited Long-Term Impact

Aite Group expects that the Bankruptcy Abuse Prevention and Consumer Protection Act, an overhaul of U.S. bankruptcy law, will not fundamentally change how bankruptcy functions, nor will it dra¬matically improve financial results for credit lenders.
By Eva Weber

Boston, MA, March 6, 2006 – According to a new report from Aite Group, despite the hype surrounding the Bankruptcy Abuse Prevention and Consumer Protection Act, the long-term impact on banks and other financial institutions will most likely be limited. Shifts in credit practices, if they occur, will not be driven by the new rules.

"For the most part, consumers aren't thinking about the possibility of bankruptcy when they run up their credit cards," says Eva Weber, Analyst, and author of the report. "So the connection between the new rules, changing consumer behavior, and an improved lending climate is tenuous at best."

Banks and credit industry players are seen as strong proponents of the new reform as they seek to protect profits from costly credit charge-offs. Over the past 15 years, the top 100 commercial banks have charged-off an enormous amount of credit card debt. Charge-offs are an accepted part of the credit industry, viewed by some as a sunk cost. But the losses to the industry are massive in absolute dollars. (See figure.)

"The result of the active credit culture in the United States is that a small but growing percentage of consumers accumulate debt they cannot repay. This fact has become accepted by consumers, and it means that institutions must account for charge-off losses in their lending strategies."

Weber adds, "The credit industry hopes the abuse of bankruptcy is curbed by the new reform. The intended effect is also the reduction of Chapter 7 filings and the minimization of abuse of the bankruptcy process. But the most immediate and obvious impact of BAPCPA has been the glut of filings that took place immediately prior to the enactment of the new law in October, 2005. Once those filings have made their way through the system, a return to normal in terms of bankruptcy filings seems likely."

This is a 28-page Impact Report. Clients of Aite Group's Retail Banking service can download the report.