Credit Analysis: Not All Public Filings Are Equal

When we look at a loan listing, one of things we see is the number of public filings. What is a public filing and is it good, bad or something you can ignore when evaluating a listing?

What is a Public Filing?

Public filings are filings made in public records and include the following items:

Federal and State Tax Liens

Bankruptcies

Judgments

Collections

These all sound really really bad but again, not all public filings are equal.

Bankruptcy & Judgments

Bankruptcies and Judgments are the worst of the public filings as bankruptcy means they had to file for personal bankruptcy and start over. If they have successfully re-established credit afterwards then the risk goes down but I wouldn't want to be the first to extend credit to a previous bankruptcy, regardless of the interest rate I could charge. The most common types of personal bankruptcy are Chapter 7, 11 and Chapter 13.  Bankruptcies affect us the most as investors as with a BK, we would have to get in line with all the other creditors and our chances of getting any money back is virtually zero.

A judgment is a court judgment against our borrower individually issued by a court whether it is local, municipal, county, state or federal. It could be a civil suit like damages from a car accident or a breach of contract or many other things but it is the result of a trial and our borrower is found guilty.

What we don't find out from the loan listings is whether the Bankruptcy was recent or not or if it has been discharged or not.  A bankruptcy stays on a personal credit report for 10 years. Judgments stay on a personal credit report for 7 years.

Federal and State Tax Liens

Federal and State tax liens are what they sound like, liens filed by the federal or state gov't. They are issued for lack of payment of income taxes. Sometimes this can be misleading as there can be a dispute between the gov't and the tax payer as to what the tax liability actually is and any time the gov't thinks they are owed, even if they aren't, then a lien is issued.

Collections

A collection is when someone, usually a business like a credit card issuer, believes they are owed money that hasn't been paid so the amount goes to collections and is sometimes sold to a collections service who specializes in collecting on these types of debts. Credit card debt is by far the most common debt that goes into collections.

The last few years and the craziness of our health insurance system and the way insurance companies bill and pay for services as part of our health policies has led to a very very high number of medical collections from hospitals and medical groups. This includes everything from an expensive hospital stay to a small $150 test that was thought to be covered and then was not, which all of a sudden is sent to collections.   Anyone who has ever been sick, had a hospital stay or had to deal with a health insurance mess knows that there are some screwed up things about our health care system and this includes the payment delivery systems. No one knows when or how much insurance will bill for the procedure and all of a sudden 60 days goes by and now we have a medical collection.

Numerous places including Bankrate.com report that half of ALL collections that show on a personal credit report are medical and that a full 17% (1 out of 6) credit reports have a medical collection on them.

For this reason, I often discount medical collections as opposed to other collections and the other items on this list. Since we cannot differentiate the collections in our loan listings, we can either ask the borrower and see if they answer or you can just disregard all collections.  If I like the rest of the credit profile aside from the collection then I disregard it.

Conclusion

While all the filings have something in common by being public filings, by far the most important, and the most potentially confusing and misleading of all of these is Collections. They are very potentially misleading thanks to medical collections. Some people prefer to avoid any public filings altogether, and that's certainly an understandable position. Some like to dig a little more into it and see if its a $150 medical collection type filing or a personal bankruptcy last year type of public filing and invest and price accordingly.

 

 

 

 

 

 

 

 

 

 

 

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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