Capital One Has Not Counted Chapter 7 Filers As Charge-Offs Previously; Auto Charge-Offs Surge By 50%+ Sequentially

Tyler Durden's picture

A humorous observation emerges from reading the fine print of Capital One's Monthly Charge Off And Delinquency Statistics. While the overall net charge off rate increased to 10.14% in December from 9.60% previously, a rather substantial jump, what jumps out of the page is the surge in Auto Finance net charge-offs which surged from 3.67% to 5.68%, a 50%+ move in one month.


...And December

What is the reason for the sudden surge? Let's read the fine print:

December Auto Finance charge-offs reflect an accounting change in the recognition of charge-offs related to certain customers who have filed Chapter 7 bankruptcy, have not specifically reaffirmed the loan, but have chosen to remain current on their auto loan. Previously, the Company did not recognize these loans as charge-offs if customers remained current on the loan. Following the change, the Company now charges off these loans to the estimated net realizable value within approximately 30 days of receipt of bankruptcy information, unless customers specifically re-affirm the loan. This change resulted in a one-time increase to charge-offs of approximately $24 million, or approximately 153 basis points.

So let's get this straight: you are a CapitalOne borrower, and you have filed Chapter 7 bankruptcy protection. In other words, you are dunzo with paying off credit cards, revolving loans, non-revolving loans, yacht and country club payments, fired the butler, got rid of the underage nanny, cut up the Centurion, and are waiting for the repo men to come and take your outhouse and two donkeys, even as the third wife and kids are garnishing your wages, and the IRS is doing a full-blown tax audit. Yet because of some fluke the check to COF was in the mail, and while the bank was fully aware your FICO score was essentially 0, they still would not count you as a "charge off"...WTF!!!???

Can anyone please advise if this is standard practice? How much leeway do banks get by counting Chapter 7 cases as "current payors." Is this an auto-finance quirk specifically, or is the bottom about to fall out of the entire market as comparable such "adjustments" hite the global domestic card metric vertical? Does this mean charge offs are really about 50% higher than presented by the likes of Capital One, Discover, AXP, JPM, etc? Or is this merely yet another GAAP gimmick designed to obfuscate and extend-and-pretend the total mockery that lender balance sheets have become?

We would truly appreciate readers' feedback on this one cause we really are stumped by this lunacy.

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justrichard's picture

Even deadbeats need transportation.  Many if not most will probably find a way to stay current on their auto payments.  They get current utility.  It's not the same as an old debt.

Mad Max's picture

Yes, exactly.  I'm not sure there's any smoke here, much less fire.

glenlloyd's picture

Time to invest in Repo Depot?

Anonymous's picture

haha your fucking NUTS !!!

pbmatthews's picture

I am a CPA.  GAAP requires that once a receivable is deemed to be uncollectible, it must be written off to a net realizable value immediately.  How that process is to occur is up to discretion of management. 

That said, any respectable accountant or auditor should not allow for a receivable to be valued at par if the receivable is from a customer who has filed for bankruptcy.

The company has now adopted a correct posture:  "the Company now charges off these loans to the estimated net realizable value within approximately 30 days of receipt of bankruptcy information, unless customers specifically re-affirm the loan."

The key here is the phrase net realizable value.  That might be zero if the customer walks 100% away from the loan and the car has no value other than scrap or it could be anything in between (up to par) if the customer decides they will continue to make all payments so as to keep their access to transportation.


OrganicGeorge's picture

The banks continue to cooking the books, by delaying the write offs they can make their balance sheet look better, and help with the bonus checks.

RoastingBankers's picture

fried? baked? grilled? roasted? or broiled?

OrganicGeorge's picture

The banks continue to cooking the books, by delaying the write offs they can make their balance sheet look better, and help with the bonus checks.

dnarby's picture

Thanks.  On a humorous note, I think you should sign all your comments with:

"I am a CPA." to balance out Chumbawumba signatures.

Anonymous's picture

+1 PB.... The auditors should have applied the "substance over form" principle and written down the loans in question to net realizable value

John McClane's picture

Management has a tremendous amount of discretion to determine the appropriate time to mark the assets down to net realizable value. Some banks mark the loans upon the initial notice of bankruptcy while others wait until the bankrupt borrower stops paying. The Ks have some info about critical accounting policies, but the banks are careful to leave the 10-K wording up for interpretation in order to avoid future lawsuits when the banks decide to switch accounting policies during the year. We still have years until the banks fess up to their bad, non-performing loans.

perpetual-runner-up's picture

Call crazy, but COF is not a TBTF in my opinion, and I could see, in an effort to gather more populus support, the gov jerking the rug out from under COF...

The world would not miss this company, and everyone hates them, so the politicians could gain some serious brownie points and deflect some eyes away from what is really going on by sacrificing this company....

Not to mention the executive compensations plans and heavy reliance on stock earnings could be played to look really bad and "greedy" in the press...

It has all the makings (in appearence only) of an enron or worldcom type thing that the press and public could latch on to to channel some anger...just an opinion and I am not insinuating anything specific about their books or anything like that...

Waterfallsparkles's picture

I happen to like Capital One.  The upped my rate from 9.9% to 18.9% so I paid the Card off.  They then gave me Zero percent interest for a year with the 3% up front fee.

What a great deal.  I was paying 9.9% they raised the interest I paid it off and they relent it to me for 0% (except for the 3% up front fee).

I think they are a great company.

just.a.guy's picture

This line of thinking is exactly what led me to buy a decent sized pile of Capital One puts almost a year ago.  Instead of "too big to fail", they are "too small to save and too easy to hate."

I still agree with the logic, even though today is actually the day those puts are going to expire worthless.  Oh well... being early is functionally equivalent to being wrong!


ghostfaceinvestah's picture

Stop paying on your mortgage, you can still live in your house for 18 months (minimum).

Stop paying on your car and it probably gets taken pretty quickly.

Easy choice.

deadhead's picture

i agree with ghost and note that this is certainly a change in the paradigm.

previously, one always paid the mortgage first, then car.

now, not the case due to bank balance sheet matters.

Anonymous's picture

Comment on PBS a few months ago by a car repo guy "We like to see our job as getting people back on their feet."

bugs_'s picture

Whats wallet?

Anonymous's picture

start of the mass default for cash for clunkers? getting in front of that next wave...

Surf's Up man!


Anonymous's picture

A very high percentage of borrowers continue to make car payments even when defaulting on everything else as they need their car to go to their job, visit their girlfriend whatever.

Transor Z's picture

Most debtors will reaffirm at least one auto loan. Technically, equity in a vehicle is an asset in the Chapter 7 estate but you can usually shield much or all of that -- and prevent forced liquidation -- by applying exemptions.

dnarby's picture

Equity in a used car?  HA HA HA.

They let you keep it if you pay on it because it's a usually a PITA and a loss to run it through the car auction.

Assetman's picture

I think the recognition varies widely in the credit card sector.  I do know that many banks with significant credit card portfolios have remained quite conservative, and have eaten the losses appropriately.

With COF, I'm sure they were doing whatever they could to remain viable so the executives could get paid.  I'm not sure to what extent COF has been playing catch-up in building excess reserves-- but they've had their opportunity.

COF should have been recognizing Chapter 7's all along, and the change implies to me that they are more "ready" to absorb portfolio losses.  The question is a good one to being up-- and I wonder to what extent larger credit operations within bank holding companies are doing.

Stoploss's picture

When filing chapter 7 ( liquidation bankruptcy ), your credit file is pulled and automatically scanned for student loans and auto loans. If you have student loan or loans, they will have to be paid, and are not subject to liquidation. The reason for that is those loans are backed by the govt, so if you default on the student loans, the govt will show up at your door one day and seize any and all property they deem fit to satisfy the loan requirements. Most of the student loans are placed in forebearance, and when you make your 12 monthly payments, on time and in the proper amount, then they are taken out of forebearance and re-established as a good loan, but they will not report you are paying as agreed on your credit report.


Auto loans are a toss up, you can have a voluntary repo done, or, reaffirm the loan, or simply just keep paying until it is paid off. Again this will not be reported on the credit file that you made any payments on time. They have to report the vehicle is paid for, but give no payment history.

Anonymous's picture

Repo the crapper with two donkeys....sooooo damn funny!!!! Lots of revelations coming after the bonus checks are cashed and invested in gold?

Anonymous's picture

In prior years, I think many banks would not classify an auto loan if the borrower is current on payments but has filed a Chapter 7. Their auditors would allow it given the bank could show how many of these borrowers reaffirm the loan in the bankruptcy, plus the loan was secured by the vehicle. My guess is that the auditors have gotten more conservative and told them they need to charge it off unless the debtor reaffirmed the loan in the bankruptcy - with all the job losses, my guess is that more borrowers will not reaffirm the loans, so the auditors figured the risk was greater.

Anonymous's picture

and CapitalOne ads are displayed on you website...LMAO

What a nice way to mint money Tyler, I'm supporting you...

300+ Clicks in 2 days..Everyone click on gold and bank ads and support pay the homage.

Marla Singer's picture

One perk of being "behind the scenes" at Zero Hedge is the knowledge that your scathing article will not only take several layers of skin off of your target and leave them with one of the better steel-wool exfoliations of their lives, but that Google's use of highly targeted key-word context algorithms is nearly certain to mean that the target will be paying for the privilege. I just chuckle when people accuse us of selling out.

Mad Max's picture

Devious.  Extremely devious.

Ripped Chunk's picture

Anon 194975 you need to listen to "Hooker With a Penis" by Tool

Selling out?  That's almost funny.  Point that finger up your ass.


Dburn's picture

I was under the impression that banks had to charge off credit card receivables that are 6 months past due. That doesn't mean they do. In related bankers are scumbags" news, There is a real healthy and growing business in selling credit card receivables that have been discharged in bankruptcy to third party collectors.

Initially 7 Million would get you 7 Billion in Discharged receivables. I think the banks got smart and started holding extensive auctions as more companies crowded into the lucrative field. One example I read was a 5% collection rate on the 7 Billion for a 350 Million gross profit with a 7 million investment. The company's name is Sherman Financial.

That was in 2002. The company then started doing that quarterly by 2008. There is one company that was taken public who does that but the name eludes me right now. The now billion dollar firm and growing chose smartly to keep a low profile as it is somewhat illegal to collect on on discharged bankruptcy debt. One judge remarked that the auction of the receivables should be illegal but it isn't. That's the loophole the banks use to get some bonus money for the C-Suite.

Sherman Financial bought a tiny bank in 2005. Their collectors would call people who had filed bankruptcy and ask them if they wanted a credit card. "sure" they would reply. Then the collectors would talk the target into putting 50% of their discharged debt on the credit card to "get his credit back". The amount was now a new debt, at a nosebleed interest rate and no credit line.

They make huge money. They have 15-20 operating subsidiaries and even use law firms to threaten former debtors. Where they are real successful is the snake in the grass approach. They put the debt on a persons credit card as past due. They apply for a mortgage a few years past their discharge date and find everything is ok but this one debt. Rather than fight it,  as they are time compressed, they just pay it.This should be a simple matter for law enforcement, but like most things now-a-days, law enforcement is really a local matter with expensive take downs of marijuana dealers and 7-11 thieves who steal chocolate bars. The big stuff , the multimillion, multitrillion stuff is just a little to be strenuous for our erstwhile civil servants to undertake. Besides they never have the budget. So maybe congress is in on it too.







Plainview's picture

Could be a nice double top on the chart - a retest of $36 looks very likely to me.

Anonymous's picture

The beauty of private business. You can criticize Capital One while you generate revenue from their ads. But what will happen if you become a public cor,and you have to treate your evenue generators with kids gloves?

Anonymous's picture

TD, I think it is some fluke as far as what the debtor will pay on and what debts they accept through the bk process.

And 5 stars for the Battlestar reference.

Anonymous's picture

Why would anyone reaffirm the auto loan? I know I wouldn't. I can walk away from that car at anytime after filing BK and the lender has no recourse but to repo the car. Does the lender sometimes force the filer to reaffirm? My guess is that it depends on if the automobile is the primary mode of transportation or if it is a second vehicle for play or maybe work assignments. Anyways, I could understand not writing off the loan if it's the primary and the payments are current. Most people will keep their transportaion if they can. Same goes for the mortgage. You do not have to reaffirm the mortgage to keep your house. You simply keep paying. They don't write off that mortgage do they? If later you want to walk you just stop paying and wait to be evicted. They have no recourse aside from the eviction. The truth is that due to the current economic situation lenders should probably write off a percentage off all loans that do not have equity in the collateral.

chumbawamba's picture

They haven't written me off yet because I haven't bothered to contact them to let them know that they can take my account balance and go fuck themselves with it.

Like all credit card companies, Capitol One deserves to die a horrid death, but especially so.

I am Chumbawamba.

Stoploss's picture

Be aware that the banks sell your delinquent accounts to collection agencies, who then file suit against you to collect the debt. They will notify you 1 time by mail, that they intend to sue. The next correspondence you will recieve after that will be from the constables office, delivering to you in person, the court documents showing that you have been sued, and found responsible for the debt, with out you even being there. You then have 30 days to make good on the debt, or be hauled into court. Once in court, all bets are off and you will quickly find out that had you settled within the 30 day period, (likely for far less than the account balance) would have been the thing to do.


I say this because it happened to me, i chose to settle the debt out of court.

Had i gone to court, i would have lost, and then ben responsible for the entire balance plus fee's, court costs, attorney fee's and anything else they decided to shove up my ass.  After that, it was bk time..

Debt is not that easy to walk away from, good luck, and dont answer the door after lunchtime.

Gordon_Gekko's picture

OK, just because you are a sissy doesn't mean everybody else is. If you are bankrupt, it doesn't matter how many "fees" they slap on you. BTW, there is nothing wrong with filing for bankruptcy. In fact, considering the circumstances today, I would say it is a matter of pride. Just make sure you hide all your assets properly. This is war - the war of repudiating the bankers' debt. If we are going down, we'll take them down with us. 

WaterWings's picture

The only risk with hiding assets is the judge deciding to charge you with fraud - which is a nasty turn - so either choose Chapter 13 (which I don't recommend) or be very wise about which assets will be "undisclosed". I doubt many readers here would pass the means test anyway:

GG, no doubt you are aware of all this, so I'm just sayin' to readers in general to be wise. And I do consider bankruptcy an honorable act at this point in the game. Who cares about FICO now with no recovery of fundamentals in sight - that's how they keep you under control in this debt game.


Ripped Chunk's picture

Ask old Bob Brennan about hiding assets in a Ch 7 filing as he sits in jail. Fucking punk.

"1st Jersey Securities - Come Sink Grow With Us"

Anonymous's picture

Or, they do a check on you and find out you have no real assets, try and collect the debt by phoning you, writing you etc., pass a judgment against you, fail to intercept any income, and after a few months write it off and send you a 1099 for the amount, at which point you deal with the IRS.

You can't get blood from a turnip.

dnarby's picture

Do you work for a bank?  If not, why are you spreading this FUD?


"Yes, it is true that a creditor can take you to court to try and collect on a debt.

However when you look at the sheer volume of people who go behind on their credit cards, proportionately very few accounts actually go to court. Anyone who is behind with their creditors can receive papers to go to court as long as it is within the statute of limitations of their state, which is on average between 3 and 6 years.

You see, it costs a creditor a good amount of time and money to take you to court for credit card debt. They have to find a law firm in your state to serve the papers, and of course they will pay legal fees to be represented in court as well as filing fees etc. Even if the creditor does try to take you to court, that doesn't guarantee that the creditor will get paid. First they have to get a judgment.

The first step in getting a judgment is to get a lawyer to serve you papers at a local court. You then have the option of responding, OR showing up in court, OR doing nothing.


If you do not respond, the creditor gets a default judgment. Basically, because you don't show up, you're guilty. The creditor receives the judgment and then has one of two options.

Option #1- In most states the creditor can try to place a lien on your house. This does not mean you have sell your house, or that you will lose it. It simply means their is now an I OWE YOU attached to the house, and IF you decide to refinance the home or sell it, the lien must be satisfied first. It is still possible to negotiate the amount of debt even if a lien has been placed.

Option #2- In some states the creditor could try to garnish your wages. While this is a possibility, the creditor still has to find out where you work, and can only take a portion of your paycheck. It is not pursued that often, unless your place of employment is easily found or already known. This is not the preferred method of collection as it takes quite a bit of time to get paid, and only one creditor may garnish at a time.

A side effect of only one creditor at a time being allowed to garnish your wages is that if you receive one judgment from a creditor in court, you will most likely not receive another.

If you are served court papers, the worst thing you can do is not respond. If you are in a settlement program at the time you are served, the good settlement companies (there are about 5 in the whole country in my opinion) should have a way to handle this. If not, you should follow the steps included in the summons to respond to the matter as soon as possible."

theadr's picture

If you have a bank account, their attorney will put a hold on your account at 3x the debt.  Of course if all you have is physical gold and silver in your home safe like Chumba, not a problem.

Waterfallsparkles's picture

You are right NEVER ANSWER THE DOOR.  Do not let anyone in the House answer the door. Put a For Rent sign outside your house and a Key Box on your front door knob (available at most locksmiths, possibly at Home Depot).  Have the number on the sign go to a Reative that will say the house has been rented.  Draw the blinds so no one can see in from the front or the back of the House.  You may even want to put one of thoes X10 video cameras so you can see on your tv who is at the door.  Have friends or Relatives call when they are comming. Otherwise NEVER ANSWER THE DOOR.

Make sure no one is sitting outside your House when you leave or come home.  Make sure to drive past your home before parking to check out anyone sitting in a car.  Especially if they have papers in their hands.  If someone is sitting outside your home leave and go to the Store or someting for an hour.  You might want to exit your home from the back entrance and park your car down the street.  Reverse when you come home, park down the street and walk behind Neighbors homes before entering from the rear.

Drop your land line and get a Cell Phone.

Have the address on all of your Bills changed to a P.O. Box in a County outside where your House is located.  Even if they get a Judgement it may be recorded outside the County where your House is located and would not affect the Title of your Home.

If they happen to get a Judgement Appeal, the Judgement.  Credit Reporting Agencys will not pick up a Judgement if it is Appealed.  The Appeal shows you as the Plaintiff and not the Defendent.

I am not an Attorney and the above information is a suggestion and not legal advise.  If they think that you are evading service they can get service in Absentia. So, be careful.

Ripped Chunk's picture

Capital One are the biggest whores in a business that is nothing but slimy crack whores.

Who cares what the fuck they do?????  The change in the bankruptcy laws a couple of years ago no longer allows discharge of credit card debt. (What a lobbying victory!!!)) So that is what they are hanging their hat on here. Accounting rules????? Doubtful collectibility?????? What the hell is that about??????? Reflect these realities on your financial statements!!!??????? That's just crazy talk!!!!!!!

Gordon_Gekko's picture

Capital One are the biggest whores in a business that is nothing but slimy crack whores.


OutLookingIn's picture

Lets face it. You lose everything. But you gotta have wheels man!

Besides, you can even live in it. Lots of car people out here. Gonna be alot more!