This question relates to Retail Credit Classification. I've always been confused about when to charge-off a loans when bankruptcy is involved that is reaffirmed. Retail Credit Classification says:

"If an institution can clearly document that the delinquent loan is well secured and in the process of collection, such that collection will occur regardless of delinquency status, then the loan need not be classified. A “well secured” loan is collateralized by a perfected security interest in, or pledges of, real or personal property, including securities, with an estimated fair value, less cost to sell, sufficient to recover the recorded investment in the loan, as well as reasonable return on that amount. “In the process of collection” means that either a collection action or legal action is proceeding and is reasonably expected to result in recovery of the loan balance or its restoration to a current status, generally within the next 90 days."

We do classify these loans, but at what point do you or are you required to chargge-off?

Any help would be appreciated.

These are our criteria for charge-offs.

• Any loan classified Loss

• A bankruptcy filing in which the Bank is an unsecured creditor or deemed virtually unsecured by lack of collateral equity or lien position and the borrower has no realizable equity in assets and prospects for recovery are negligible.

• Debtor is deceased and the estate is insolvent.

• Statutory bad debt (over one year past due on interest or principal), unless well-secured and in the process of collection.

• Violation of state and/or federal regulations which preclude the Bank's full recovery of the loan.

• Any deficiency where market value of the collateral is less than loan balance and the borrower has no other assets or income to support repayment of the loan.

If management determines the loan to be uncollectible and deemed a loss, then the loan should be charged-off (regardless of the borrower's bankruptcy status). If your bank is a secured creditor and/or expect to receive future collections on the loan, then you should charge-down the loan to the net realizable value of the future collections.

Thanks everyone for the help. Reading the Retail Credit Classification somehow made me think it was required to charge-off bankruptcy because of all the unknowns on future collections, whether well-secured or not. In addition, with too many of these being secured by vehicles, it's too hard to charge-down a vehicle loan, not knowing that the auction market will bring.

Again, I appreciate your comments.

We have a somewhat related situation. We charged off a unsecured loan right after we rec'd notice of the BK. Now the borrower has paid off a car loan and we were wondering if we can keep the title as security against the loan we charged off since it was not included in his BK?

Thanks for your help.

Bankruptcy laws and mixing loan collateral with unsecured loans are sticky topics. You may want to consult your bank's attorney.