November 28, 2007
Worser and Worser for Consumer Debtors
Posted by Fred Tung

With the subprime mortgage meltdown, things are looking pretty bleak for many homeowners and consumers.  Bankruptcy is becoming a more common option.  As if things weren't bad enough, it turns out that the bankruptcy discharge ain't what it used to be.  In particular, creditors are routinely collecting on discharged debt.  Often illegally.  This much is not news.  But what is news is that the practice is sufficiently common that there is now an active market in discharged debt

Hounding debtors for repayment post-discharge, an age-old strategy, is clearly illegal.  Another device some creditors appear to be using is the failure to report to credit bureaus when debt has been discharged.  Eventually, the debtor may need to clean up her erroneous credit report to, say, qualify for a mortgage.  If the creditor and credit bureau are not responsive--a relatively common problem, according to some bankruptcy judges--the debtor may have no choice but to pay off the discharged debt. 

According to FTC opinion letters, creditors are required to report discharged accounts as zero balance.  But the legal force of those opinion letters is apparently ambiguous.  Some bankruptcy judges are holding that a lender's failure to update is an improper collection attempt in violation of the discharge.  In any event, the existence of an active market for discharged debt speaks volumes about creditor leverage in consumer credit.

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