PCS Credit Risk Assessment & Analysis 3 — Questions and Answers
Question 1: Under the Fair Credit Reporting Act (FCRA), how long can a Chapter 7 bankruptcy remain on a consumer's credit report?
- 5 years from the filing date
- 7 years from the discharge date
- 10 years from the filing date (Correct answer)
- 15 years from the discharge date
Correct answer: 10 years from the filing date
Chapter 7 bankruptcy can remain on a consumer's credit report for 10 years from the filing date under the FCRA.
Question 2: A creditor assigns a portfolio of accounts with an average age of 4.5 years past charge-off. What is the primary collection risk factor?
- The accounts are too new to collect effectively
- The statute of limitations may have expired on many accounts, limiting legal remedies (Correct answer)
- Older accounts always yield higher recovery rates
- Credit bureaus will not show accounts older than 3 years
Correct answer: The statute of limitations may have expired on many accounts, limiting legal remedies
As accounts age past charge-off, the statute of limitations for legal action may expire, significantly limiting the collector's enforcement options.
Question 3: What does a high 'utilization rate' on a debtor's credit report indicate about their financial risk?
- The debtor is financially stable and a low collection risk
- The debtor is using most of their available revolving credit, indicating financial stress (Correct answer)
- The debtor recently paid off a large balance and is improving
- Utilization rate does not relate to collection risk
Correct answer: The debtor is using most of their available revolving credit, indicating financial stress
High credit utilization (typically above 30%) suggests the debtor is heavily reliant on revolving credit, signaling financial strain and elevated collection risk.
Question 4: Which financial statement metric is most useful when assessing the credit risk of a small business debtor?
- Gross revenue only
- Cash flow from operations (Correct answer)
- Total assets listed on the balance sheet
- Number of employees
Correct answer: Cash flow from operations
Cash flow from operations reflects the business's actual ability to generate cash to meet obligations, making it the most relevant metric for collection risk.
Question 5: A collector notes that a debtor's credit report shows 'account included in wage garnishment' on a separate judgment. How does this affect risk assessment for the current debt?
- It has no effect since garnishments apply only to the judgment creditor
- It indicates a portion of the debtor's income is already encumbered, reducing available funds for other debts (Correct answer)
- It means the debtor's wages are protected from any further collection
- It signals the debtor is likely to pay all debts voluntarily
Correct answer: It indicates a portion of the debtor's income is already encumbered, reducing available funds for other debts
An existing wage garnishment reduces the debtor's disposable income, making it harder for them to service additional debts and lowering recovery prospects.
Question 6: When evaluating purchased debt portfolios, what is 'expected recovery rate' used for?
- Calculating the original creditor's loss reserve
- Determining the price a debt buyer should pay for the portfolio (Correct answer)
- Setting the interest rate for repayment plans
- Establishing the debtor's credit score
Correct answer: Determining the price a debt buyer should pay for the portfolio
Expected recovery rate helps debt buyers calculate the maximum price they should pay for a portfolio while still generating a profit on collections.
Question 7: A debtor has filed Chapter 13 bankruptcy but the automatic stay has been lifted on the collector's specific account. What does this mean for collection activity?
- All collection activity must cease permanently
- The collector may resume collection efforts on that specific account (Correct answer)
- The debtor's entire bankruptcy is dismissed
- The collector must write off the debt immediately
Correct answer: The collector may resume collection efforts on that specific account
When the automatic stay is lifted for a specific creditor, that creditor may resume collection efforts on their account even while the bankruptcy proceeds for other creditors.
PCS Credit Risk Assessment & Analysis 3
Under the Fair Credit Reporting Act (FCRA), how long can a Chapter 7 bankruptcy remain on a consumer's credit report?