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Monopoly ... Without a Net


Stuck paying?


Monopoly . . . without a net

With respect to the real estate piece noted earlier by Toddo, I have spent the better part of the morning attempting to decipher the changes to the Bankruptcy Code proposed in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The core of the proposed amendments is to oblige debtors to repay a portion of their outstanding unsecured debts based on their income means.

This could create havoc in the "me too" real estate crowd, because it means that those who do give back the property to the bank, would be stuck paying for at least part of any deficiency from their post-bankruptcy income. In other words, the BAPCP would put a serious dent in the plans of those treating debt as "other people's money".

Changing focus, I started looking into the BAPCP to see how it would affect companies such as Portfolio Recovery Associates (PRAA), whose business is to acquire defaulted loans at deep discounts and then collect on them. It seems to me that the BAPCP is a nightmare scenario for companies like PRAA.

On one side, with the new collection leverage offered by the BAPCP, primary credit holders are likely to command higher sale prices for defaulted loan pools, because even if the debtors file for bankruptcy, the creditors may still obtain some recovery. So PRAA loan acquisition costs will almost certainly go up, and my guess is, they will go up significantly.

On the other hand, and this might be a one time event but a very painful one nonetheless, the PRAA debtors might decide that it is time to pull the plug on their repayment efforts by filing for bankruptcy now, while they can still discharge their debts 100%. This could wipe out a bunch of the receivables on the PRAA balance sheet.

I am still looking into this line of thinking and if any Minyan has any insight it would be very welcome.

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