New Bankruptcy Law Leaves More Bad Debt For Asta To Collect
biz.yahoo.com
Investor's Business Daily
Thursday October 12, 7:00 pm ET
Marilyn Much
Until recently, financially strapped consumers could pretty much wipe out their credit card debt.
They'd file under Chapter 7 of the bankruptcy code, which erases most debts. That changed last October with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which makes it harder to file under Chapter 7.
Among other things, the law imposes a means test to make sure people with assets repay some or all of their debts.
The act requires individual debtors who have the financial means to enter into a repayment plan under Chapter 13 rather than having their debts canceled under Chapter 7. The Chapter 13 plan requires part of the debt to be repaid within three to five years.
Collects Debt
Asta Funding (NASDAQ:ASFI) is one company that stands to benefit from the act.
Asta buys, collects and manages portfolios of bad debt, mainly credit card, telecom and consumer loans. Bad debts are those that the lender has written off after failure to collect.
"The new act bodes very well for our company," said Asta Chief Executive Gary Stern. "There's a trend toward less bankruptcy filings, which is attributable to people being under more scrutiny to file or not."
And a greater percentage of those people who are filing are doing it under Chapter 13, adds analyst James O'Brien of Ryan Beck & Co. About 70% of individual bankruptcy filings are now under Chapter 13 and 30% are under Chapter 7 vs. the reverse ratio last year when people rushed to file under Chapter 7 before the new act, he says.
"More of the filings are under Chapter 13, and that unsecured debt is still collectable," he said. "That allows Asta a greater chance to collect on (instruments such as) credit card debt, whereas before when most filings were under Chapter 7 they or anyone else had virtually no chance of collecting on unsecured debt instruments."
The new bankruptcy law isn't the only factor that's helping Asta's business. For one, U.S. consumers continue to amass credit card debt at a steady clip.
And while the amount of such debt has been growing slowly, it's been edging up of late.
The amount of credit card debt outstanding stood at $840.8 billion in July, up 4.5% from last year, according to the latest data from the Federal Reserve Board. That's up from a 3.1% year-over-year-rise in July 2005 and July 2004.
The growth rate in the amount of credit card debt has started to accelerate amid the housing market downturn, says Mark Zandi, chief economist at Moody's Economy.com. Consumers, he says, are turning back to credit cards because they can't borrow as aggressively against the equity in their homes.
Also, in the second quarter credit credit card, payments 30 days or more past due rose 4.41% from the prior year, up slightly from a 4.40% year-over-year gain in the first quarter, according to a survey by the American Bankers Association.
The reason for the slight rise: Higher gas prices and interest rate hikes left consumers with less disposable income to meet expenses, including paying back their loans, the group's chief economist, James Chessen, said in a statement.
"The amount of debt has been growing very slowly, but the proportion of that debt that's going to go bad will start rising significantly," Zandi said.
Low Delinquency
Delinquency rates have been low in part due to a good job market and up until now the good housing market, Zandi says.
Now housing prices are declining for the first time in more than a decade, and in the last six months job creation has slowed to a monthly rate of about 125,000 from a rate of 170,000 last year.
"We'll have higher rates of delinquency going forward," Zandi said. "For (Asta), the amount of bad credit card debt outstanding will rise and it will (do so at a strong pace) over the next year and even more so in the next two years."
Ken Mayland, president of ClearView Economics, sees some credit problems resulting from the softening in housing prices.
"The bursting of the home-price bubble will result in a step-up in bankruptcies and increases in bad debt," he said.
So foreclosures should rise, says CEO Stern. "We have purchased some small mortgage portfolios in the past," he said. "If there are mortgage portfolios available at the right price we would buy those."
However, Stern and his team haven't seen attractive pricing for such portfolios.
Meanwhile, Asta is doing well with its current lineup. In the fiscal third quarter, earnings grew 36% to 80 cents a share. Revenue climbed 39% to $26.4 million.
"Not only for the company, but in general, cash collections have been very strong and have been driving results for the industry the past several quarters," said analyst O'Brien.
In the third quarter, Asta's cash collections climbed to $60.8 million from $43.5 million the prior year.
For the first 11 months of this fiscal year, Asta's purchased portfolios valued at $4.7 billion, up from $3.5 billion for all of fiscal 2005.
Also, Stern says increasing consumer debt levels have helped fuel the company's rapid growth.
Total consumer credit grew to over $2.3 trillion in July, up 83% from December 1997, he says, citing Fed data.
And the Nilson Report newsletter, which tracks consumer payment systems, expects consumer credit market to grow to $2.8 trillion by 2010, he says.
Analysts polled by First Call see Asta's earnings for the full year, which ended Sept. 30, growing 39% to $2.98 a share, then 11% to $3.31 in 2007.
"This industry isn't tied to the economy," O'Brien said. "In good times, people will pay back debt, which drives cash collections, and in a slowing economy and recession, more bad debt is created to be purchased hopefully at lower prices."
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