By Chris Kramer
Filing for bankruptcy is meant to provide protection from creditors, immunity from debt collectors, and relief from worry. Unfortunately, a trend in the credit industry is ruining all three of these for some bankruptcy petitioners.
Business Week reports on the alarming practice of companies buying and selling debts discharged during bankruptcy filings.
Basically, according to the article, some companies are buying the rights to debts that bankruptcy judges have eliminated in court by ruling that the bankruptcy filer no longer has any obligation to pay them.
This elimination of debt is one of the central functions of a bankruptcy filing.
By excusing a debtor from debts he cannot afford, the judge offers an opportunity to start fresh, with no money owed. And the practice of reviving discharged debts can be disastrous to your credit score, particularly if you're working to rebuild your credit after filing bankruptcy.
To illustrate the problems this practice causes, Business Week presents the case of a North Carolina man who successfully completed a bankruptcy filing in 2002. One of the debts excused by his bankruptcy judge was a bill for more than $9,000 due to Capital One.
But, when the man checked his credit report, he found that the debt was listed as a current outstanding obligation. This proved problematic when he later tried to get a mortgage loan-the lender refused to offer money until the late charge was removed from the man's credit report.
Despite phone and mail contacts from the man's lawyer, Capital One refused to remove the late charge from his account, and the man ended up paying the $9,000-plus, so that he could buy his house. Unfortunately, his case is not unique.
Many people with incorrectly-revived debts on their credit reports end up paying money they don't owe, simply because that's the fastest way to improve their credit score. And for those waiting on approval for mortgage loans, time is of the essence.
Perhaps the most frightening part of this trend is how common it has become. Even large, publicly-traded companies like Bear Stearns and Lone Star Funds reportedly own businesses that buy debts dismissed in bankruptcy.
According to sources, bankruptcy judges are often shocked and confused by the buying and selling of discharged debts. Legally, nobody has an obligation to pay them, and all collection efforts are prohibited.
But the disheartening truth remains: as long as companies report discharged debts to credit bureaus, consumers will pay them to improve their credit scores.
And not every company acts in the same way. Business Week notes that some companies will actively demand payment from customers, and others will just refuse to stop reporting the debt to credit bureaus until payment arrives. Either way, the customer loses.
But there is hope. The North Carolina man mentioned above decided to take legal action against Capital One. The bankruptcy court to which he brought his case ruled that Capital One return the $9,000 payment plus $14,000 in attorney's fees.
While no definitive statistical evidence exists on how frequently companies buy debts discharged in bankruptcies, anecdotal evidence suggests the practice is on the rise.
Keep in mind that your lawyer who's handling your bankruptcy case is an invaluable resource.
If you suspect any foul play on the part of your creditors, be sure to talk to your bankruptcy lawyer right away.