IDEX Online Research: New U.S. Bankruptcy Law Could Be Jewelers’ “New Best Friend”

The number of personal bankruptcies surged to an all-time high in the second quarter as U.S. consumers scrambled to file before mid-October when a new law takes effect that will make it tougher to erase debt obligations. 

For U.S. jewelers, who generate more than 45% of their sales via some type of monthly payment credit plan, there could be short term pain as bankruptcies surge in the third quarter.  But the long term gain could be bright for two reasons:  1) credit providers are expected to loosen their standards just in time for the all-important 2005 holiday selling season; and 2) it will be more difficult for consumers to escape their debts, under the new bankruptcy law.  This should help boost jewelers’ sales and profits. 

After a peak in the third quarter, IDEX Research predicts that consumer bankruptcy filings will fall-off dramatically in the fourth quarter of 2005, as the graph below illustrates. 

Source: American Bankruptcy Institute & IDEX Research                                                                                    

The recent sharp rise in personal bankruptcies in the U.S. has nothing to do with deteriorating household credit quality, higher gasoline prices, slack trends in the labor market, or weak wage growth.  Instead, bankruptcies have risen sharply as consumers have rushed to beat the October 17 deadline when a new, tough bankruptcy law takes effect. 

Over the past year, U.S. personal bankruptcy filings reached 14.37 per thousand households.  Said another way, about 1.4% of all U.S. households filed for bankruptcy in the past 12 months ended June 2005.  These filers were generally lower income consumers who were overwhelmed by their debts.  While the job market is stable, the potential of rising interest rates and the possibility of a slowing economy – as well as tougher bankruptcy laws – caused them to throw in the towel and file for bankruptcy while under the current law which allows them to keep certain assets while eliminating their debts. 

The new bankruptcy law represents the most sweeping rewrite of U.S. bankruptcy laws in a quarter century.  Passage of the law came after eight years of strenuous efforts by congressional backers, banks, and credit card companies. 

Here’s what all this means to jewelry retailers: 

• Between now and mid-October, jewelers are likely to see more of their customers file for bankruptcy.  There really isn’t much jewelers can do to protect themselves between now and October 17, other than to stay on top of collection efforts. 
• When the new bankruptcy law takes effect, it will be more difficult for consumers to eliminate their debts.  For example, those filers with income above the state median who can, in the opinion of the bankruptcy judge, pay at least $6,000 over five years (at a rate of $100 per month) will be ordered to file a repayment plan, rather than being allowed to erase their debt.
• The new bankruptcy law requires financial counseling both before and after the filing.  This should help keep consumers from getting into more financial difficulty. 
• It will cost consumers more to file for bankruptcy, since their lawyers will now be required to certify the accuracy of filers’ financial statements.  In an interesting twist, lawyers will be held accountable for their clients’ credibility. 
• Under the new law, bankruptcy filers must have owned their home for at least 40 months in order to protect the equity in it from creditors under the homestead exemption.
• Overall, there will be a reduction in the amount of debt to be forgiven and a corresponding increase in creditor recoveries.  Thus, jewelers who extend credit, especially on a “with recourse” basis – either through a third party or self-financed – should see a decline in the level of bad debt and the possibility of lower costs associated with their credit operation. 
• It is likely that jewelers who rely on third party credit providers may see some general loosening of credit availability.  This should happen before implementation of the new law, since creditors won’t have time to run up big debts and file for bankruptcy between now and when the new law takes effect.
• However, credit providers are not likely to loosen credit standards for lower income consumers for two reasons:

o       Debt levels are at record levels for lower-income consumers.

o       Soaring gasoline prices and higher utility costs will have a significant negative impact on low-income consumers’ cash flow; this will impede their ability to repay debts. 

The bottom line for jewelers:  expect more accounts to go sour until mid-October.  Following that, jewelers should find credit providers to be more lenient, just in time for the all-important holiday selling season.