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Feature Identify, Predict, and Prevent Employing this three-fold precautionary measure will help minimize consumer bankruptcy risk. By Rosie Biundo, Senior Director of Product Marketing, Equifax A ccording to the U.S. District Court's administrative offices, from March 31, 2012, until March 31, 2013, there were more than 1.1 million consumer bankruptcies and since 2009, there have been more than 6.5 million personal bankruptcies filed in the United States. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed, preventing consumers from abusing bankruptcy laws. This resulted in a steep decline in the number of bankruptcy filings from 2005 to 2006, and its effects are still being felt today as more people are forced to file for Chapter 13, as opposed to Chapter 7. In a Chapter 7 bankruptcy, assets are liquidated and given to creditors, and the remaining debt is canceled, giving the debtor a "fresh start." A consumer must now pass a "means test" to determine Chapter 7 eligibility based on income and expenses. A Chapter 13 bankruptcy gives debtors the opportunity to become current with their delinquent accounts while still retaining ownership of their property. The debtor is then placed on a repayment plan of up to five years, and any debts not paid back during that timespan are discharged. The ongoing fluctuations in consumer bankruptcy volumes—with an uptick again in 2010 and a gradual decline since then—have left lenders, servicers, and investors with serious pain points in identifying at-risk consumers for bankruptcies. In a highly regulated environment, lenders need to be able to achieve consistent processes and decisioning, and servicers and investors need to leverage predictability to identify consumer bankruptcy in advance and protect portfolio stability. Bankruptcy risk scores should be fueled by the most up-to-date scores to improve profitability and predictability, but how can servicers, lenders, and investors protect themselves and their businesses from the potential risk of consumer bankruptcy? Not So Ordinary H istorically, lower consumer credit translates to an increase in bankruptcy filing rates. This simultaneously decreases consumer confidence in spending and the ability to save. But something one doesn't often think about: Even those consumers who do qualify for credit are often still at risk of eventually filing for bankruptcy should they be subjected to a "bump" in their financial road. Having specialized insights into a consumer's wallet and financial health provides a better defense to the immediate, longterm, or surprise risk of bankruptcy. Optimally, the likelihood of consumer bankruptcy must be analyzed over a span of 24 months, leveraging analytics and integrated risk insight throughout the entire customer lifecycle to pinpoint potential customers. A typical consumer may be current with payments and exhibit no immediate threat of default; however, certain characteristics on the account may highlight the potential for future bankruptcy. Historical data may identify an atrisk consumer months in advance, enabling servicers, lenders, and investors to take precautions and mitigate the risk before it comes to fruition. Certain behaviors—multiple credit cards, high credit limits, zero balances on credit cards, utilization of credit cards but no received payments—are the typical characteristics lenders should identify in customer profiles when evaluating bankruptcy risk. Once, Twice, Three Times the View B ankruptcy models that are tri-bureau enabled allow lenders to pull standardized views of consumer credit information across any of the three major credit reporting agencies (CRAs) to drive more confident, consistent credit decisions and maximize business performance. Score ranges that distinguish potentially profitable consumers from those who are likely to cause significant losses enable lenders to independently evaluate bankruptcy risk and improve decisioning stability. The M Report | 21