One year after the passage of a sweeping revision to the federal bankruptcy law, some small companies are prospering at the expense of overburdened consumers.The new law, which the major credit-card companies and banks long lobbied for, makes it more difficult for consumers to walk away from their debts. Among other things, the measure requires consumers to receive credit counseling before filing for bankruptcy, and makes the overall bankruptcy process much more onerous for individuals. In the months leading up to the law's enactment, there was a spike in individual bankruptcy filings, as debt-laden consumers tried to beat the clock and qualify under the old law. That led to many banks, such as Bank of America ( BAC), reporting a significant spike in consumer loan defaults and taking hefty charges against earnings. But a year later, the law is starting to do what its backers had hoped. There's been a marked decrease in Chapter 7 bankruptcy filings (so-called liquidation proceedings) and a surge in Chapter 13 filings (bankruptcy restructurings for individuals). That's meant more work for companies that specialize in collecting and processing accounts receivables from consumers with checkered payment histories. Companies in the accounts receivables sector, such as Asta Funding ( ASFI) and AmeriCredit ( ACF), have a better class of consumer debt to buy, thanks to the new law. Audrey Snell, an analyst with ThinkEquity Partners says that under Chapter 13, the court mandates the debtor settle with the creditor.
"You have to work out a payment plan," she says. "Very little debt is discharged. It not only protects the creditors who own the debt, but it also enables
them to collect more and collect better over time. It has enabled the emergence of a new asset class for companies like Asta Funding and Portfolio Recovery Associates." Gary Stern, Asta Funding's CEO, also says the new law has had a positive impact on the industry. "I think it's created more receivables for sale," he says. Asta Funding is an asset management and liquidation company based in Englewood Cliffs, N.J. In its most recent quarter, the company posted income of $11.8 million, or 80 cents a share, up from $8.5 million, or 59 cents a share, a year ago, and beating Wall Street's estimates of 77 cents a share. In October 2005, Asta Funding was trading at about $31 to $32 a share, and the company's stock got up to about $43 a share in May. The stock was trading at $34.53 Monday. A year ago, automobile finance company AmeriCredit, which specializes in providing financing for used cars, was trading at about $23 a share, rising to about $31 a share in May. It is currently trading at about $25.89 a share. In the most recent quarter it earned $78.8 million, or 55 cents a share, compared with $76.9 million, or 48 cents a share, a year ago.
Analysts polled by Thomson First Call were expecting earnings of $76.8 million, or 55 cents a share. Fourth-quarter revenue rose 23.7% from a year ago to $487.8 million as against analysts' expectation of $481.8 million. Portfolio Recovery Associates ( PRAA), which provides outsourced receivables management, has gotten a lift from the bankruptcy law. The company was at about $40 a share a year ago, reached $52 a share in February and May, and was trading recently at $43.32 a share. James O'Brien, an analyst for Ryan Beck & Co., says the bankruptcy law is becoming a long-term positive for the accounts receivables industry, even if it means fewer bankruptcy filings. "The pie has shrunk," O'Brien says. "But the composition of that pie is something that people should be paying attention to. There is value in those accounts, provided you work closely with those overseeing the service of the account."