Many of the usual metrics that measure credit risk were counterintuitive during COVID. Delinquencies dropped, write-offs plunged, and consumer credit fell. Recently published numbers indicate that bankrupts are holding a steady pace, which bears well for creditors as we look forward into 2022.
Bankruptcy is a consumer right, as explained in the 2021 Credit Card Data Book, Part Two. The United States Code allows consumers to re-organize their personal affairs under two different options, one as a wage earner under Chapter 13 of the Bankruptcy code and a liquidation plan under Chapter 7.
Bankruptcies directly impact credit card profitability. Once a notice hits the credit card issuer, they must reclassify the account and remove the asset from the balance sheet. This action diminishes earnings immediately, and all collection activities must cease. The creditor may have a right to collect but rarely succeeds unless there is a fraud-related issue.
The recently published numbers by EPIQ, a research firm specializing in bankrupt tracking, indicate that Chapter 7 filings were down in July, falling nearly 10% from 23,524 in June 2021 to 21,540. Chapter 13 filings rose slightly, but the critical issue is that the aggregate number was flat.
Filings are substantially lower than during the Great Recession. For example, 1Q2009 filings for Chapter 7 were 228,285, and in 1Q 2010, they were 254,895. For the same period, 1Q2021, the metric was 76,552.
Many factors can disrupt the trend, but there is usually a lag between events and bankruptcy filings as people try to work their way through this last option. Unemployment sits at 5.2%, a relatively healthy metric. Consumer credit is steady, but the inflation rate is bubbling at 5.4%, up from 1.4% in January 2021.
Forecasting credit losses into 1Q22 and 2Q22 should continue to be conservative, and hopefully, the trend will last through FYF2022.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group