Magazine article American Banker

Industry Suffers a Rise in Loans Soured by Bankruptcy Filings

Magazine article American Banker

Industry Suffers a Rise in Loans Soured by Bankruptcy Filings

Article excerpt

The first time since 1993, a slowing economy and growing consumer debt have increased credit union holdings of loans tied up in bankruptcy proceedings.

Industry observers don't expect this trend to slow down.

Outstanding credit union loans to people who have filed for bankruptcy protection stood at $420 million as of last June, up 21.7% from a year earlier, according to call-report data culled by the Credit Union National Association. The ratio of loans in this category to total loans was 0.22%.

In last year's first half, 75,031 credit union debtors filed for bankruptcy protection, 17.2% more than a year earlier, according to the data.

The problem mirrors a national trend, according to figures from the Creditors Bankruptcy Service, a Dallas-based newsletter. There were 417,534 new bankruptcy cases filed in the first half of 1995, up 6.5% from the year- earlier period.

"The economy was not doing as well as it had been," said Keith Peterson, an economist for CUNA, which is based in Madison, Wis. "And there are some pretty clear signs that people are taking on a lot of debt and some are getting in over their heads."

Wayne Winegarden, an economist for the rival National Association of Federal Credit Unions, said that maturing loan portfolios also played into the increase, and that 1996 will bring more of the same.

"The trend seems to be rising," he said, "but I don't expect ... levels that are very high."

Indeed, the numbers are shy of June 1992, when the outstanding balance of credit union loans in the bankruptcy category hit $446 million. But that's all looking at the big picture: On the ground, credit union executives are tearing out their hair over what they see are an increasing number of irresponsible consumers and the credit card issuers that cater to them.

"The economy certainly has a lot to do with it, but I think that lawyers advertising the fact that bankruptcy is something you should take advantage of doesn't help," said Brian McDonnell, executive vice president of Navy Federal Credit Union, Vienna, Va. …

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