Credit Card Defaults Increase

This is an extension of the post below addressing the issue of increasing levels of credit card losses, from the WSJ. According to the article a lot of the increase is due to higher levels of bankruptcy in recent quarters. Looks like the effect of the 2005 law have already worn off.

With more Americans filing for bankruptcy again after last year's hiatus, credit-card-default rates are rising.

Though the percentage of payments being written off as uncollectible isn't as high as it was a couple years ago, the conditions are ripe for it to catch up. Bankruptcy filings keep pouring in, home prices continue to fall and energy prices remain high.

According to data from Moody's Investors Service, credit-card companies wrote off 4.58% of payments between January and May, up nearly 30% from the same period in 2006.

"In 2007, we expected an increase, as bankruptcy filings returned to more normal levels," said Jay Eisbruck, managing director in Moody's Investors Service Asset-Backed Finance Group. He called this year's resurgence in bankruptcy filings the primary reason credit-card default rates have soared.

In mid-2005, when home prices were still on the rise, the default rate was around 6%, and in 2004, it was even higher. What ended up bringing the default rate down to about 3% in late 2005 and early 2006 were changes in U.S. law that made it more expensive and more difficult for individuals to file and qualify for bankruptcy. Bankruptcy filings surged in late 2005 before the law took hold, and then dropped off.

Now, bankruptcy filings are flooding back in. According to the Administrative Office of the U.S. Courts, the nation's bankruptcy filings jumped 66% in the first quarter. That's causing default rates to soar, because getting bankruptcy protection usually means you're released of your credit-card obligations.

Part of the reason more people are filing for bankruptcy is falling home prices. When home prices depreciate, it makes it harder for many homeowners to access cash through refinancing their mortgages. Some homeowners, especially those who got stuck with high rate loans, can't make their mortgage payments.