A recent article in Business Week reported on a bed trend discovered in creditor (especially credit card creditor) behavior. Bankruptcy Judge Thomas Small, from North Carolina, had an opportunity to learn about the practice of creditors selling discharged debt to third parties. Discharged debts are obligations which were included in a bankruptcy case and were discharged, or eliminated legally, at the end of the bankruptcy case. Creditors who sell discharged debts do so understanding that the debts cannot be collected. What is unclear is whether the buyer of the debt also knows the debts were discharged, and therefor non-collectible.
In the case before Judge Small, one debtor paid a $9,000 discharged debt to the collector in order to close on a home refinance. The debtor then asked Judge Small to require the collector to return the money and to be sanctioned for its conduct. Capital One was the offending creditor, and made the debtor's problem worse by also noting the debt as still due and owing on the debtor's credit reports. Judge Small ordered Capital One to return the $9,000 and pay the debtor $14,000 in fines and attorneys fees. Capital One's spokesperson said that Capital One would pay the money in order to put an end to additional expenditures in thie case and avoid an appeal.
Interestingly, for Capital One to be so willing to pay the money back suggests that it must find the collection of discharged debt very profitable. Capital One's behavior is not unusual. Judge Drain, a New York Bankruptcy Judge, heard a case in which Chase sought to collect discharged debts by the improper reporting of those debts on credit reports. Although Chase denied any wrongdoing, it is difficult to understand why creditor like Chase do not property update credit reports to reflect that the debt was included in bankruptcy, the debt was discharged, and that there is a "0" balance on the account.
Watch for this creditor misbehavior in the future! Our office intends to sue creditors who sell and try to collect discharged debt. If you think you are a victim of this creditor misbehavior, call us for an appointment to discuss your options.