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How are you fighting the rise in bankruptcy?

Credit union executives figure there's no use waiting for the government to solve the bankruptcy problem. They've taken the initiative to cut bankruptcy losses themselves.

"Education is an essential tool in lowering our bankruptcies. Too many people are led to believe bankruptcy is a cure-all and a quick way out," says Bob Teachworth, president/chief executive officer (CEO) for Denali Alaskan Federal Credit Union in Anchorage. "Education will more than pay off in lower charge-offs. It's also a credit union philosophy issue. We're helping members."

While Congress has considered bankruptcy reforms, credit union managers won't hold their breath for results. Many recently have stepped up efforts to screen out bad risks and to get those who have slipped through to make good on their debts.

"Most credit unions are in the same boat we are," Teachworth says. "We're all looking to educate members. Bankruptcy isn't a quick and easy way out. It's something that affects people's future finances and their peers' and neighbors' cost of credit."

Many credit union leaders blame the flood of credit card solicitations for tempting members to bor row beyond their means. "It's not unusual to see $50,000 to $60,000 worth of credit card debt on the average debtor's bankruptcy file," says Alan Stabler, vice president and general counsel for America's First Federal Credit Union in Birmingham, Ala. "I've seen as much as $200,000 in credit card debt. Truthfully, these unbridled credit card solicitations really negate sound underwriting practices. We scrub our member pretty well to qualify for loans, and within a year they load up with credit card debt."

America's First Federal cut its losses from 346 bankruptcies for $2.3 million in 1997 to 305 bankruptcies for $2.17 million in 1998. But Stabler still smarts over the mounting bankruptcy losses of the 1990s.

"Since 1993, our bankruptcy charge-offs have risen from 12% to 62% of total charge-offs-a 650% increase. The scary part of all this is that the economy has been good. If the economy goes south, I shudder to think what would happen to our bankruptcy filings."

Stabler says the credit union takes a hard linebefore loans are made and after bankruptcy is filedto avoid problems. "Our lending department has gotten very aggressive in trying to avoid bankruptcies. Our loan committee reviews every application with a high debt ratio. We review our lines of credit annually, including credit cards, by running them against credit bureau scores. We cut out the ones we think are problems. And we use bankruptcy predictor programs from the credit bureaus.

"We have a very aggressive bankruptcy procedure to cut off bankruptcy filers as quickly as possible. And if they don't reaffirm, we hit them with everything we have," says Stabler.

The credit union tries to reclaim its money in court if necessary. "The most important thing credit unions can do to fight bankruptcies is to build a presence at the hearings. The debtor's lawyers will find out who you are and they'll come ready to cut deals with you when they know you're going to be there.

"That's one of the most important things you can do because the Section 341 hearings are probably the only time the lawyer and the debtor are together-and that's the only time you'll be able to cut a deal. If you wait until later, you've lost that opportunity because you can't do anything without their attorney," says Stabler.

Despite the aggressive posture, Stabler emphasizes that the credit union recognizes that members who get into trouble can get out of it with the credit union's help. "We encourage members to contact us when they have problems. But they have to admit they have a problem before they'll come in and see us. A lot of times that's difficult because everyone likes to think they can manage their own money. A lot of times they can't."

Bernie Ray, CEO of Tucson (Ariz.) Old Pueblo Credit Union says even longstanding members get into financial trouble. "We've had some bankruptcies by members who were very good for 20 to 25 years. The bankruptcies are mostly middle-aged folkssomewhere between their mid30s and late 40s. The loans we're charging off due to bankruptcy have been on the books anywhere from two to 10 years; most of them five to six years.

She says job loss rarely is the reason for bankruptcy. "Most charge-offs and bankruptcies have been due to divorce and bad money management. A lot of times it's medical, or members' kids get into trouble and it costs a fortune to get them out."

Ray says different debts bring different outcomes. "About 95% of our bankruptcies are Chapter 7 and about 5% are Chapter 13. Many of the Chapter 7 filers reaffirm-but 99% of the reaffirmations are on automobile and real estate loans. Few reaffirm on unsecured Visa or signature loans.

"I'm not sure we should allow them to pay on one loan and charge off the other, but we do. We allow them car and real estate loans even though we charge off their unsecured loans. Occasionally, we'll get them to reaffirm later, usually when they want another loan. Our policy is that if members cause the credit union a loss, there are no more loans. We don't grant any more loans until they've paid everything off.

"Some people reaffirm with us and not elsewhere. We go as far as we can legally to get reaffirmations. My collector is effective in that area. She attends the hearings and works closely with attorneys. We've been able to save some, but there are those hard-core few that just absolutely want to wipe those slates clean.

"Most members don't choose bankruptcy because they're unhappy with the credit union or they're playing a get-even game," Ray says. "Many members reaffirm. It's a hard call for loan officers becauseeven with all the analysis we've done-there's no way you can tell five years in the future what someone's situation will be."

If possible, credit union officers may try to talk a member out of declaring bankruptcy. "Sometimes it's not as bad as they think and we can prevent it just by providing some counseling," Ray says. "We attempt to do that first and let members know there are alternatives to bankruptcy. Maybe they can make arrangements with a creditor and maybe we can help them make arrangements. We can look at their budget to see if there are some changes they can make.

"It's tough because every person is different. Some of them look at it as a moral obligation as well as financial obligation to repay-and others don't look at it that way at all. It depends on the person. That's why we have several people who can work with and talk to members. Prevention is 99% of the cure."

To that end, Denali Alaskan Federal recently began free, confidential counseling for members in financial trouble. The credit union will begin marketing the service to members and eventually expand it to nonmembers.

For now, "if a collection or loan officer sees a problem, they'll refer the member to our program," Teachworth says.

Getting members to take responsibility is part of the strategy, he adds. "A lot of people think bankruptcy affects only them and some faceless institution. But in a credit union, filing for bankruptcy affects every member."

In 1998, 33% of Denali Alaskan Federal's chargeoffs ($416,881) were due to the credit union's 107 bankruptcies. During the first quarter of 1999, 27 bankruptcies made up 41% of charge-offs for nearly $126,000.

Attorneys promote quick and easy ways to get out of debt. "That's not the way we need to move in terms of the legislation or the individual's view of bankruptcy," Teachworth says. "We need to educate people that bankruptcy affects more than just them.

"If someone is drowning in debt, we're throwing them a lifeline through financial education and counseling. We're not just throwing them to the sharks."

Finally, credit unions can prevent a lot of problems by paying closer attention to members' overall financial well-being, Teachworth maintains. "Along with the financial counseling program we're offering, we're making every effort with underwriting to look at members' full financial picture and not add debt unless the member is able to take it on. We also explain to members that it's not always in their best interest to grant their loan requests."