One of the largest issuers of small business credit cards in the U.S., Advanta Corp. on Sunday filed for Chapter 11 bankruptcy protection. The filing comes only five months after the company froze all further lending on its more than 1 million customer accounts.
The bankruptcy filing comes on the heels of a bankruptcy petition filed by CIT Group, another leading small business lender, only seven days earlier. In the case of Advanta, a deepening recession, astronomical loan defaults, and numerous lawsuits appear to have contributed to the company’s troubles. According to Bloomberg, the company’s loan write-offs shut up to an astronomical 56.95% in June of this year, dwarfing the then industry average for other credit card lenders of 10.4%.
While the troubled economy initially triggered the company’s woes, Advanta may also have digged its own grave. The first signs of trouble came in September 2008, when the company jacked up interest rates on its small business credit cards to 25% or higher. The rate hike left many small business owners in the lurch, and could have contributed to the staggering annualized default rate reported in June, with almost one out of two cardholders walking away from their debt. In May, Advanta abruptly cut off all the credit card lending on its 1 million customer accounts and stopped all future charges, while seeking to collect as much as possible of the outstanding $2.7 billion due on its credit card portfolio.
Advanta’s stock has skydived from over $30 in 2007 to pennies today. Credit card woes is just one of the troubled company’s numerous headaches. In July it settled a charge with the FDIC for “deceptive and unfair practices” and agreed to pay $35 million in restitution to small business card holders, who had seen their interest rates hiked unfairly. The company continues to be beleaguered by lawsuits. According to the Philadelphia Business Journal, a shareholder lawsuit accuses Advanta for aggressively granting credit to small business owners without verifying their ability to pay, and then later concealing from shareholders millions of dollars in mounting losses from credit card defaults.
The division of the company issuing credit cards, Advanta Bank Corp, is not part of the bankruptcy filing. In a statement issued by the company, Advanta Corp. notes that Advanta Bank Corp.’s capital is below regulatory capital requirements and that the subsidiary will likely be turned over to the Federal Deposit Insurance Corp. for receivership. According to the statement, Advanta Corp. made the decision not to put more money towards covering credit card losses in order to preserve value for the senior retail note holders and other stakeholders in the mother company.
Before its current plight, the 59 year-old company prided itself of being an innovator in the financial services industry and a great charitable force in the Greater Philadeplphia area where the company is mainly based.
Advanta’s Chapter 11 filing comes at a time when small business owners are still struggling to get the credit lines they need to keep operations going. Unfortunately, the bankruptcy filings of Advanta and CIT Group may cause other small business lenders to be increasingly cautious and signal that the credit tightening, which triggered the current economic recession to begin with, is not about to let up anytime soon.