WASHINGTON – The Bankruptcy Abuse Prevention and Consumer Protection Act was supposed to deter bankruptcy abuse, but the Senate's failure to pass bankruptcy reform legislation this year means credit unions once again are left to their own devices to find ways to deal with abusive bankruptcy filings among their members. Nationally, in 2001, bankruptcy filings among credit unions were at their highest point since 1998 – an average of 2.85 bankruptcies per 1,000 members. The same was true for total bankruptcies per thousand loans outstanding. Nationwide among all consumers, the numbers are even more stark: According to the American Bankruptcy Institute (see story page 6), 1,452,030 consumers filed for bankruptcy in 2001, accounting for 97.31% of all filings. That's the highest consumer bankruptcy filings have been in over 10 years, and it makes it all the more important for credit unions to work with members before they reach the point when they might declare bankruptcy. "CUNA would be the first one to say that the Bankruptcy Abuse Prevention and Consumer Protection Act will probably affect only 8-10% of filers because most people who go into bankruptcy do so for reasons beyond their control such as divorce or illness," said Kathy Thompson, senior VP and associate general counsel for CUNA. "That means at least 90% of filers will go into bankruptcy whether the bill passes or not." Thompson is optimistic Congress will look at the bill again in 2003 since "it's the same bill they've been looking at for the past five years," she said. "The bankruptcy act that CUNA pushed for is not intended to reduce filings, but rather to address bankruptcy abuses," Thompson added. That's why, she said, it's so important for credit unions to do their due diligence before a loan is approved and especially afterwards when a member files for bankruptcy. But even that has no quarantees. "There are times when you can work with a member and you're able to nurse them and bring them along so you can recoup some of the money owed you and the member is able to restore some of their creditworthiness," says Mark Wilburn, SVP, chief lending officer, 66 FCU. There are also times when a credit union has to know to walk away from the member. If, for example, a member has an upside down auto loan – the balance, say $10,000, is more than the vehicle is worth, say $5,000 – and the member also owes $5,000 on their credit union Visa card, "if you as the credit union decide to play hardball, you risk losing another $5,000 and wind up biting your nose to spite your face," says Wilburn. But if you tell the member you're not going to let them reaffirm their car unless they also reaffirm their Visa then you can break even, he explains. "There are times when you have to know when to play hardball with the member," says Wilburn. Then there are those times when even working with a member on debt management doesn't prove helpful, and in those cases when 66 FCU stands to lose money because of the member's outstanding debt, the credit union threatens to shut down the member's access to CU services. Wilburn said these members aren't happy with what the credit union does, but 66 FCU figures "if they didn't pay we were going to have to drop them from the CU anyway," said Wilburn. Thompson pointed out that it is totally within a federal credit union's authority to do this. She said NCUA has stated on several occasions that a federal credit union has the right, in the case of a member who causes the credit union a loss, to limit the member's access to all the CU's services, except for the share account for voting purposes. Wilburn said he was disappointed the Senate failed to pass the bankruptcy bill and let it get tied up with the Schumer amendment. "To try to make the bankruptcy bill into something it shouldn't be is wrong," he said. "Bankruptcy reform should stand on its own." Wilburn said he doesn't have a problem with a member who has tried to manage their debt but who experiences hard times and winds up falling behind on their debts. But, he said, "I take objection to someone who makes $80,000 a year and runs up $50,000 in credit card debt." Year-to-date, bankruptcies have caused about 57% of 66 FCU's losses. Wilburn admits that's higher than he'd like it to be, but it's still lower than it was a couple of years ago, at 65% to 70%. The credit union has been able to bring that number down since it began using Equifax's "ready review" product that evaluates and identifies those members who are running into debt management problems and are good candidates for filing for bankruptcy. But using a system like that isn't a sure thing. The problem, says CUNA Economist Mike Schenk, is that increasingly the factors that precipitate a bankruptcy filing aren't necessarily something that's predictable. "Under the old mode of operation, it was somewhat easy for a credit union to look at their members' delinquency numbers, pick out those who have been increasingly delinquent and those would be the red flag. But increasingly credit unions are seeing members who were never delinquent suddenly declaring bankruptcy. So it's become more difficult for credit unions to identify which of their members will declare bankruptcy," said Schenk. Still credit unions say the key to keeping bankruptcy filings in check is anticipating and reacting quickly to members' needs. US FCU in Burnsville, Minn. has had to go through this exercise several times because of the characteristics of its field-of-membership. Chartered originally as Minneapolis Postal Employees FCU to serve postal employees in the city, US FCU merged with Republic Airlines CU in 1985. The credit union currently counts among its more than 78,000 members 400 select employee groups including Northwest Airlines employees, 11% of whom are former Republic Airlines employees who now work for Northwest Airlines. Executive VP Phil Bachman said Northwest Airlines announced in October that it plans to close one of its maintenance hangers in Atlanta in January 2003 where about 1,200 company employees work. "As soon as news of the closing became official, we asked the airlines for permission to attend one of their meetings so we would have the opportunity to tell the employees who are our members that we understand they'll be going through a difficult time and the credit union is here to assist them," said Bachman. Taking initiative like this, said Bachman, has allowed US FCU to keep its charge-off rate at the same level – .53 bp – it's been since 1997 and its delinquency rates relatively stable. The credit union also participates in the Balance credit counseling service that members can use for budget and debt management assistance. Of course that doesn't mean US FCU hasn't had its share of members filing for bankruptcy. Bachman said the credit union always encourages members to reaffirm their debts with the credit union, but even the CU's best powers of persuasion don't always work. "If we have collateral on their loan, they reaffirm. Otherwise they walk away from the debt," said Bachman. Thompson said she'd like to see more credit unions get involved with offering financial counseling – only about a third of CUs currently offer members this service. Regardless if credit unions do it on their own, as a group, or by supporting independent local counselors, "it's a good expenditure of a credit union's resources," she said. She's also adamant that credit unions should attend the first meeting of creditors. Thompson said most credit unions take the attitude that the member's debt isn't enough to warrant the cost of sending someone from the credit union to the meeting, but "the credit union should show up for no other reason than to show the debtor's attorney that the credit union isn't a push over," Thompson said. "Credit unions shouldn't be so quick to take what they can work out with the member just to save attorneys' fees," she added. Credit unions should push for reaffirmations. "Don't look at it as one debt-by-one debt, but what your overall policy is on bankruptcy," said Thompson. Without passage of any bankruptcy reform legislation, Thompson said credit unions can expect to have to settle more bankruptcy cases in court. "They will have to show up in the first meeting, push for reaffirmation, and consistently apply for it," she stressed. "Credit unions are going to have to start spending some money and take on lawsuits challenging their reaffirmations. These cases can add up and establish good law and policy in a way we would want bankruptcy reform legislation to do," she said. -

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