Zombie Debts Haunt Post-Bankruptcy Filers
When you file for Chapter 7 bankruptcy, you’re supposed to get protection from debt collectors and creditors along with a chance to start over with your finances. But a dangerous new trend in the credit industry could ruin some of the most basic bankruptcy protections.
A recent report published in Business Week documents the fairly new practice of buying and selling debts discharged in bankruptcy courts by creditors. According to the article, companies are purchasing the rights to debts that have been excused by bankruptcy judge—debts that consumers no longer legally owe!
Receiving a discharge of debts (also known as cancellation of debts) is one of the primary purposes of filing bankruptcy. When bankruptcy filers are excused from their debts by a bankruptcy judge, they are given a chance to start over on their finances with no money owed.
Reviving these cancelled debts means that companies are actively seeking payments and reporting unpaid amounts to credit bureaus as overdue. This can be harmful to your credit score, especially if you’re trying to reestablish credit after filing for bankruptcy.
As an example of the effects of debt revival, Business Week offers the story of a North Carolina resident who successfully completed a bankruptcy filing in 2002. Among the debts forgiven by the bankruptcy court was one to Capital One for more than $9,000.
When the man checked his credit report, though, that amount was listed as an outstanding obligation—and that wasn’t good. When he applied for a mortgage loan a few years after his discharge, the lender wouldn’t offer any money until the man could prove he didn’t owe Capital One any money.
When Capital One ignored phone calls and letters from the man’s bankruptcy attorney, the man paid the charge to clear his credit report and qualify for a loan. The worst part? His story is by no means unusual.
Many people who find illegally-revived debts on their credit reports decide to pay the amounts only because paying is the fastest way to improve their credit scores. Companies know this—that’s why the debt revival business is so lucrative. And when applying for loans, time can be crucial.
The most worrisome part of this trend is how common it has become. Even companies like Lone Star Funds and Bear Stearns, which are sizable and publicly traded, reportedly participate in the purchase of cancelled debts.
Sources indicate that bankruptcy judges are usually confused and shocked when they learn about the practice of buying and selling discharged debts. And with good reason: legally, nobody owes these debts to anybody, and all collection efforts are forbidden.
But, sadly, as long as companies report discharged debts as unpaid to credit bureaus, consumers who want to improve their credit scores will continue to pay.
Business Week notes that not every company handles illegal debt collection in the same manner. Some actively seek payment from customers, while others simply refuse to stop reporting the debt to credit bureaus until they receive payment. Either way, the consumer loses.
The good news is that, if you decide to take legal action, the law is on your side. The North Carolina man mentioned earlier did so, and a bankruptcy judge ordered Capital One to repay the $9,000 plus $14,000 in legal costs.
As yet, no definitive statistics have been gathered on the prevalence of the practice of reviving discharged debts. But observations by judges and bankruptcy lawyers suggest that it’s becoming more common. Remember that your bankruptcy lawyer is a priceless resource. If you have reason to believe that you’ve been victimized by debt revival, consult your lawyer immediately.