Is Attorney Advertising Causing
the Bankruptcy Spike?

Personal bankruptcies are being filed at a torrid pace across the United States. According to data compiled by Visa's Issuer Risk Notification Service, 458,114 petitions were filed this year during the 16-week period ending April 21, 2001, up 25.8% from the same 16-week period in 2000. Are household financial conditions deteriorating rapidly, or is something else behind the soaring filing rate? Both the U.S. House and Senate passed versions of bankruptcy reform legislation during March of this year, and both actions received substantial radio, television and newspaper coverage. The pattern of filings in March and early April certainly is consistent with the post-legislation "bounce" that might occur if consumers were being urged to file while the old statute was still in effect. Now that the legislation has stalled pending resolution in a House-Senate conference committee, the publicity has cooled as well. The "beat-the-new-law" theory of filings will be tested again when the bill clears the conference process and is ultimately signed by President Bush.

In the meantime, there is other evidence to suggest that at least some of the upsurge in filings is due to increasing financial distress. Fitch, IBCA, Duff and Phelps report that credit card chargeoffs rose significantly in February for the second time in three months and ended their string of 32 consecutive year-over-year improvements. Serious delinquencies reached their highest level in three years, signaling a further increase in chargeoffs in the coming months. The Fitch indices are based on the performance of the pools of card receivables backing the asset-backed securities (ABS) rated by the company. Interestingly, the higher chargeoff numbers are being driven by only 30% of the ABS master trusts rated by Fitch. In particular, the biggest increases in chargeoffs were found in the Associates, Citibank and First USA master trusts. Master trusts reporting lower chargeoffs included Discover, MBNA and Fleet receivables.

Also noted was a declining monthly payment rate in the pool, which fell below 15% for the first time in almost three years. The Federal Reserve Board reported that revolving credit grew in February at a 19.9% annualized rate, up from 11.6% in January. Exceptionally strong growth in card borrowing coupled with declining monthly payment rates suggests that more households may be drawing down credit lines to make ends meet.

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