The law will essentially make it harder to do what tens of thousands of people do every month: file for Chapter 7 liquidation that wipes out masses of credit card debt and other soured loans that aren’t secured by an asset. In the first three months of 2005, according to the U.S. Bankruptcy Court, 401,149 people filed for bankruptcy, up 8 percent over the previous quarter. And most bankruptcy experts are expecting to see an even bigger hike in the number of new cases in the second and third quarters, with roughly two thirds opting for the Chapter 7 option.
The Bankruptcy Abuse Prevention and Consumer Protection Act is intended to steer more of those filers with sufficient income into Chapter 13, where they will be required to come up with five-year repayment plans. Dealers around the country report that some bankruptcy trustees aren’t waiting for the new law to take effect, forcing more people into repayment plans. Long-term, estimates of the percent of cases that could wind up in Chapter 13 range across the board – which could have a major impact on dealers and specialty lenders who have carved a lucrative niche out of the Chapter 7 market.
For most, Chapter 7 means a fresh start – with a bad credit rating. And that’s where Prestige and other lenders have been stepping in.
Founded 11 years ago by the Larry H. Miller Group, Prestige was spun off as an independent outfit five years ago and now works with dealers in 12 states arranging sub prime loans.
“We were the innovator in pre-discharge Chapter 7 loans on a non-recourse basis,” says Dalton, “We would walk into a dealership and say were going to give you an opportunity on a non-recourse basis to sell a customer before a bankruptcy was discharged. As soon as the 20 Groups caught on that there was this lender in Salt Lake City doing this, it just spread like wildfire.”
In some cases, dealers pick up their clients from a final creditors meeting and have them in a new car before the end of the day. Others anxious to beat the competition will have new cars delivered before the meeting.
Prestige isn’t the only bankruptcy specialist to see the glint of a windfall in coming months. Tidewater Motor Credit says they’re also seeing an increase of new business. At Consumer Portfolio Services, based in Irvine, Calif., another specialty lender in the bad credit arena, the first quarter of ’05 came in at a record level, with revenue up 52 percent over the same period a year ago.
“Operationally, during the first quarter we experienced meaningful growth in purchases of new receivables, which were the highest they have been in almost three years. In addition, asset performance was strong,” said CPS CEO Charles E. Bradley.
“We typically approve about one out of three of the applications we see,” says Chris Lewis, national marketing director for Tidewater Motor Credit, which operates in 40 states. Most of the notes Tidewater approves are for cars that are two to four years old, ranging from $12,000 to $15,000 in price.
“Some are repeat offenders,” he adds, “That’s what we hope to eliminate; people who are abusing the system. A lot of people have tried credit counseling and so on, and worked hard at it. We see people also who have filed (for bankruptcy) two, three times.”
Every quarter, Prestige conducts new training sessions to help dealers learn more about the business. Trainers help dealers identify new leads, target them with an effective campaign and then determine whether they’re trustworthy enough for a new loan.
“Were not looking for credit bandits, people who are serial filers,” says Dalton. What Prestige and its competitors want to find are the people who want to pay their bills but ran into a financial stone wall that triggered a bankruptcy. That could be an illness in the family and a heap of unpaid medical bills, or a lost job or divorce.
“We will look beyond the recent past,” says Dalton. “Did they ever pay on a car? We’re looking for some stability, something that says they do have the character to make good on this commitment. We don’t buy off the score. The score has very little relevance for someone coming out of bankruptcy. And we have actual humans going over every application, hearing the dealer’s story, looking at bureaus, statements and records.”
“They’re very, very good customers,” says Paul Casilio, credit resource director at Larry Miller Dodge in Peoria, Arizona. “A lot of these folks are no different than you or I. A lot of them just had very bad times: family issues, divorce, medical. Phoenix has large corporations laying off people. Some have been on the job 10, 15 years, and then they walk in one day and they don’t have a job.”
But they still need reliable transportation.
“I’ve been doing the same thing for years and I haven’t changed it,” says Casilio, “We send out a normal, old-fashioned envelope with a little thing saying if you file, we can help you. Bad things happen to good people, and come see us. It’s very short, sweet, simple, versus all the multicolored junk mail you normally get. And that’s been very, very good for us.”
“If you steer away from the credit abusers and stick with clients who have demonstrated a real desire to keep up with their payments,” he adds, “you can also do your dealership a real service in the long run.”
“I get 25 percent of my customers that actually come back or call, and that’s with zero prospecting,” he adds. Many of the same customers willingly urge friends and family to go to the dealership. And he’s sure that he could get his repeat business from the bankruptcy sector up to 35 to 40 percent if he prospected the group more actively.
Of course, what goes up inevitably comes down, and Dalton believes the spike will hit a high point around August 2005 and then begin tapering off at the end of the third quarter, through the fourth quarter and into the early part of 2006. Several of the lenders and dealers say that this year is looking a lot like the market of three or four years ago, when a serious bid to change the bankruptcy laws led to a rush of new business followed by a lull and then a return to normal.
Others aren’t so sure.
“Some of the trustees in the area are already kicking people to 13,” says Jill Treat, special finance sales manager for Defiance, Ohio-based Integrity Automotive Group. For 10 years, Integrity has developed a good business of putting newly bankrupted residents in Ohio, Indiana and Michigan in used vehicles, averaging about 30 sales a month. Recently, she says, that’s dropped to 22 to 25 a month, and there’s rising uncertainty over just what effect the new bankruptcy law will have.
“I have no clue,” says Treat, “At first I thought it was going to affect high income people, but now I’ve seen a couple that I wouldn’t consider high income that have been forced to take the Chapter 13 route.” And that could become even more common as 2005 plays out.
Until recently, the business has been routine, she adds. The dealership could easily predict that someone would sail through Chapter 7 and line up an auto loan with Tidwater, CPS or Affiliated before they were discharged. Many were in their cars before their creditors meetings. And several lenders could be relied on after discharge if the buyer’s credit scores were high enough.
Now, she says, the dealership will have to wait until after the creditors meetings take place, and expect a number of potential sales to sour. “I don’t have anybody,” says Treat, “who wants an open 13.”
At Ed Voyles Automotive Group in Marietta, “it really hasn’t taken effect,” says Special Finance Manager Bob Walker. And he doesn’t see how it could have a huge impact. The vast majority of his bankrupt clients don’t have enough income to be forced into a Chapter 13 payout.
Walker specializes in selling autos to pre-discharge bankrupt clients in Chapter 7, and over the past 12 years that business used to reliably generate about 20 to 30 sales a month. For many, bankruptcy creates an opportunity to dump a car that they owe far more on than it’s worth. That business has dropped off recently, down to about 10 to 15 sales a month. But that’s because other dealers have been piling into the niche.
“Now everybody and their brother have heard about this and everybody is sending out letters,” says Walker.
Prestige believes that about 10 to 15 percent of bankruptcies will be affected by the new law, even though some experts are predicting it could be as little as 2 to 3 percent.
Lewis says he expects to see the new law interpreted differently in different regions. “Even now some trustees are more aggressive,” says Lewis, echoing Treat.
“We’re going to learn a lot after four to six months,” adds Lewis.
Vol 2, Issue 9