Friday, November 4, 2005

The tougher new bankruptcy law that took effect last month is creating greater losses than expected for credit card companies as a flood of consumers try to eliminate their debt through the courts.

The companies say the new law is creating short-term setbacks for them but long-term benefits.

More than a half-million consumers filed for bankruptcy protection in the 10 days before the law took effect Oct. 17, according to estimates from financial information firm Lundquist Consulting.

“That’s the equivalent of four months in one week,” said Laura Kaster, a research analyst for the financial firm Sandler O’Neill & Partners.

Although the full effect on credit card companies won’t be known until early next year, early estimates suggest losses in the hundreds of millions of dollars.

Financial analysts are lowering their 2005 earnings estimates for the companies, largely because of the bankruptcy filings.

“I think the change in bankruptcy laws is going to be a good thing for credit card companies in the big picture as it will make it harder for people to walk away from credit card debt,” Ms. Kaster said. “In the short term, it should pressurize earnings.”

She lowered her estimate of credit card issuer Capital One’s 2005 earnings from $7.05 per diluted share to $6.70 per share, largely because of the unexpectedly large number of bankruptcy filings.

Capital One estimated bankruptcies reduced its third-quarter profit by $75 million more than expected.

Consumer groups warn against a backlash by credit card companies.

“The recent bankruptcy-filing bubble is not going to have any real impact on credit card profitability, but it could be used as an excuse to raise rates on existing customers,” said Edmund Mierzwinski, a consumer advocate for U.S. Public Interest Research Group, a nonprofit consumer group. “They hope people will just look the other way.”

He called any higher fees by credit card companies from increased bankruptcies “absolutely unnecessary.”

Justin McHenry, research director for, a credit card information organization, said increased bankruptcies before the Oct. 17 deadline are unlikely to make credit card companies raise rates and fees to make up for their losses.

“I don’t think the bankruptcy bill is going to hurt them,” Mr. McHenry said. “It’s only good for them.”

Instead of discharging debts completely under Chapter 7 of the bankruptcy code, the new law allows courts to examine the finances of debtors to determine whether they should be compelled to make small regular payments under Chapter 13 of the code.

Immediately after the new law took effect, the number of bankruptcy filings dropped to an estimated 2,500 to 3,000 between Oct. 17 and Oct. 28, according to Lundquist Consulting.

Another safeguard against bankruptcies is built into new federal regulations that take effect Jan. 1. They require consumers to make higher minimum payments on their credit cards.

Under the new rules, cardholders must pay enough each month to reduce their debt by at least 1 percent.

Bank of America, the nation’s largest bank, reported $4.13 billion in third-quarter profits but acknowledged credit card losses were up significantly from bankruptcies.

“We reported higher credit card net charge-offs of $186 million for third-quarter 2005 and $672 million for the first nine months of the year,” said Terry H. Francisco, Bank of America spokesman. Charge-offs refer to uncollectible loans.

J.P. Morgan Chase estimated bankruptcies would contribute to charge-offs in the first quarter of 2006 of $500 million.

Citigroup estimated it incurred an additional $200 million in pretax credit costs during the third quarter, largely from bankruptcies.

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