The Consumer Financial Protection Bureau (Bureau) released the 3rd quarter consumer credit trends report (qCCT), which describes how the volume and types of bankruptcy filings have changed throughout the period 2001 – 2018, which includes the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) and the Great Recession.

The report analyzes data from the Bureau’s Consumer Credit Panel (CCP), a longitudinal, nationally representative sample of approximately five million de-identified credit records maintained by a nationwide credit reporting company. The report focuses on consumers who filed for Chapter 7 or Chapter 13 bankruptcy between 2001 and 2018. Under a Chapter 7 bankruptcy, a debtor’s non-exempt assets are liquidated in order to repay creditors and the remaining debt is generally discharged. Under a Chapter 13 bankruptcy, debtors enter into a repayment plan to repay a portion of their debt.

Key findings include:

• From 2001 – 2004 about 75 percent of personal bankruptcy filers used Chapter 7. BAPCPA, which took effect in October 2005, restricted access to Chapter 7 by establishing a means test for those with income above a certain limit. This created a rush to file before BAPCPA took effect and increased the share of Chapter 7 filings to 80 percent of all personal bankruptcy filings in 2005. In 2015 – 2018, with the effects of the Great Recession fading, Chapter 7 filings appear to have stabilized at about 63 percent of personal bankruptcy filings.
• Bankruptcy petitions generally result in a discharge or dismissal. A dismissal occurs when the debtor does not meet the requirements set by the court. Nearly all Chapter 7 filings result in a discharge of debt, which takes about four months. Less than half of Chapter 13 filers complete their repayment plans and receive a discharge.
• Median credit scores of Chapter 7 and 13 filers one year prior to filing increased after BAPCPA but declined starting in 2010 possibly because filers experienced a negative financial shock during the Great Recession which lowered credit scores.
• On average, Chapter 7 and 13 filers had more than twice the mortgage debt during the Great Recession than in the periods before and after. This is consistent with the financial shock of the recession causing more homeowners to file for bankruptcy.
• Median credit scores increase steadily from year-to-year after consumers file a bankruptcy petition. Median scores for Chapter 7 filers recover more quickly than those for Chapter 13 filers possibly due to the much quicker and more likely discharge of Chapter 7 filings. Both Chapter 7 and 13 filers who filed in 2001 – 2004 received a second shock in the form of the Great Recession which slowed the recovery in median credit scores.

from https://www.consumerfinance.gov/about-us/blog/new-report-explores-trends-consumer-bankruptcy/

For homeowners who lost a tax break on mortgage debt that was forgiven after foreclosure, Declaring bankruptcy may be a last-ditch option.

If suddenly faced with potentially tens of thousands of dollars of IRS debt, filing bankruptcy is an incentive that might not be considered otherwise.

For a decade prior to 2018, individuals who had mortgage debt forgiven or canceled because they lost their primary residence through a foreclosure or a short sale could exclude up to $2 million of that amount from their taxable income.

The provision expired at the end of 2017, along with dozens of other temporary tax breaks. And now with Congress’s attention to end-of-the-year priorities, the likelihood of renewing those tax perks in the near term is fading.

Taxpayers can potentially turn to tax relief under other parts of the tax code. Individuals who are insolvent -they have proved to the IRS that their liabilities exceed the value of their assets—or are in bankruptcy can exclude canceled debt from their taxable income. That can prevent them from having to pay taxes on tens of thousands of dollars in additional income, maybe more.

Taxpayers will have to consider whether the tax savings outweigh the negatives. In bankruptcy, for example, individuals risk losing certain “non-exempt” assets that the court can sell to pay back creditors.

Timing is another important factor. Individuals should file for bankruptcy before tax is assessed because there are limitations and more complicated rules for discharging tax debts according to Geoffry Walsh, a staff attorney at the National Consumer Law Center.   This opportunity may have already passed for taxpayers with canceled or forgiven mortgage debt who had tax assessed in 2018.

Walsh noted that in bankruptcy individuals discharge more than just the debts associated with their mortgage. So they could have other types of debt—credit card debt, medical debt, etc.—that they may have otherwise found a way to pay if it weren’t for the massive tax bill on their forgiven mortgage debt, he said.

Renewing the tax break would be better for taxpayers, the court system, and the IRS than killing it permanently and pushing people into bankruptcies that otherwise wouldn’t happen, said Julia Gordon, president of the National Community Stabilization Trust, which works to restore vacant and abandoned properties.

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Six Major Trends in Lending for Financial Marketers this Year

The forecast for most forms of consumer credit is good. Lending volume, growth in balances, and overall performance look upbeat for the year ahead. Banks and credit unions will try new marketing strategies, explore new products, and experiment with new technologies. Over the past six-weeks, we reviewed major trends in consumer lending that financial marketers should watch closely.

#6 Plastic Just Keeps Going

“More consumers than ever before are carrying a credit card, as issuers provide greater financial inclusion,” TransUnion reports. Card credit saw seven quarters of significant growth into 2018. Part of this reflected a balancing by issuers, according to Paul Siegfried, SVP and Leader of the credit card line of business. The lenders were granting cards to more subprime borrowers, but managing the credit limits more tightly. In 2019, TransUnion expects more emphasis on issuing cards to prime consumers, to fine-tune credit quality.

Marketers will have their work cut out here, both in promoting cards as well as other kinds of consumer credit that can compete with cards.

Today’s card product designers can twirl pricing, rewards, and payments dials to vary the offers made for new card accounts. As a result, “consumers have more choices today than they have seen in a couple of decades,” says Siegfried.

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