Bankruptcy Management as a Credit Union Line of Business: An Oft-Missed Opportunity

Dennis Dollar
May 11, 2010 | COMMENTS

It is very rare that I, as a committed credit union proselytizer, find an area in financial institutional management where for-profit banks' do a better job than credit unions. Driven by satisfaction levels of their member-owners rather than stockholder returns, credit unions have a focus on service which is their driving motive and consistently results in higher scores in almost every measure of institutional satisfaction by those who utilize the services of the financial institution. This focus, which is consistent with the credit union structure as not-for-profit financial cooperatives, is the primary differentiator between credit unions and their traditional banking competitors.

However, recently my experience has exposed an area where banks are proving to be better performers than credit unions, both in the service arena and in financial performance. The area where credit unions need to step up their game is bankruptcy management. It is in this area that credit unions are missing a true opportunity to help their members, while at the same time enhancing the financial position of their institutions.

Basically, banks treat bankruptcy as a line of business. Some credit unions do as well. But many credit unions basically write off bankrupt members, take whatever they can recover through an occasional re-affirmations, pay whatever the attorneys say they should pay to cover the filings, and then move on to other areas of operation—taking whatever comes from the minimal recoveries and being thankful for the small victories.

There is much more to bankruptcy management, both from a business perspective and from a member's point of view.

First, we should recognize that it benefits all credit union members when those who declare bankruptcy re-affirm and make payments to the credit union. Likewise, it certainly benefits the members who re-affirm and now have at least one source of future credit that they will inevitably use the next time they need a car to get to work or a debit card with which to buy groceries.

When credit unions take a non-focused approach to managing bankruptcy both the bankrupt member and the rest of the credit union members could very likely suffer. The bankrupt member could miss a chance to keep credit at a trusted financial partner that could be important in the years to come, and the remainder of the credit union members can benefit from the increased savings rates, lower lending rates and enhanced services that can result from their member-owned credit union receiving income, rather than losses, from their bankrupt fellow member.

Effective bankruptcy management has member service ramifications, as well as financial performance considerations. It deserves more attention than we often provide it.

Most credit unions have not been treating their bankruptcy portfolio like a book of business. Even though bankruptcies have considerable potential income and member service opportunity, few credit unions expend the resources that they do in managing their investments, lending, collections, or even fee income.

While credit unions manage their investments, lending, collections and fee income down to the penny, most could not validate the effectiveness of their current bankruptcy management. Are all of the filings done timely? Are all of the filings necessary? Does the credit union have unnecessary legal expenses in working its bankruptcies? What is the return on investment? Is the credit union maximizing its re-affirmations? How do can you prove it? These are questions that are rarely, if ever, asked by many credit unions, many with bankruptcy portfolios in the millions of dollars.

I've had credit union CEOs tell me when they took the time to conduct an audit of their bankruptcy legal expenses, they found hundreds of thousands of dollars in legal filings that were not even necessary under the 2005 bankruptcy reform laws. One CEO shared with me that he didn't realize, until beginning to track the results, that over 40 percent of the credit union's bankrupt members who had re-affirmed were sitting without a single penny having been paid toward their re-affirmed debt.

Since most credit unions have more bankruptcies to manage today than they did prior to the bankruptcy reform legislation, this is a real missed opportunity. While the 2005 bankruptcy reform act was intended to make the process more productive for creditors and harder to beat for debtors, the reality is that some larger credit unions are averaging 50 to 100 new bankruptcy filings per month.

While the current economy is undoubtedly driving much of this growth in bankruptcies and the number of bankruptcy filings could actually move downward somewhat when the economy rebounds, we are nonetheless in an era where bankruptcy filings will never go away. In fact, they may not even decrease if the growing number of attorneys advertising for bankruptcy business is any indication.

Managing a bankruptcy portfolio of hundreds of thousands, perhaps millions, of dollars cannot be treated lightly. Banks realized this long ago. And, their bankruptcy returns have been better than those of credit unions in most instances.

Any credit union with a sizable bankruptcy portfolio should look carefully at ways to more effectively manage that portfolio and treat it like a line of business, either in-house or with experienced and proven third-party bankruptcy management support. We've seen some impressive results from those credit unions that increased their focus on bankruptcy management. It should be an increased focus for all credit unions.

There are, frankly, too many dollars and member service considerations involved for us to treat bankruptcy management as anything other than one of the few credit union opportunities during these challenging times.

Dennis Dollar is principal partner in a full-service credit union industry consulting firm, Dollar Associates LLC, based in Birmingham, Alabama. Contact him at ddollar@dollarassociates.com or by phone at 205-991-1525.