Chapter 7 Bankruptcy laws were meant to help consumers in financial crisis get a fresh start by discharging their debt. Increasingly, lenders are violating the spirit of these laws. Consumer protection groups are taking notice as this unfair practice has escalated rapidly in the falling economy.
Long after their debts were discharged by a bankruptcy court, consumers report being hounded by collectors for that canceled debt. Though lenders are advised of bankruptcy action, there is no legal requirement or time frame in which they must report a debt as "canceled by bankruptcy" to credit reporting agencies.
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Since the early 1990's, credit issuers have been motivated by the model of "profit at every turn". From escalating "over limit" or "late payment" fees to drastically raising interest rates on credit cards with no explanation, lenders have increased their profit margins year after year.
One practice by lenders is selling "uncollectible bad debt" to a secondary market. That secondary market employs high pressure collection agencies to hound consumers for payment. As these securities were sold by lenders for fractions of a cent on the dollar, even low collection rates result in high profit in the secondary market. For the original credit issuer, a fraction of a cent multiplied by tens of millions adds up to substantial profit.
Some lenders are now selling as "bad debt" loans which legally have been discharged by bankruptcy. Consumers complain of being hounded for payment years after a debt was discharged through bankruptcy. Economists who originally approved the concept of a secondary debt market are now accusing lenders of predatory practices designed to circumvent bankruptcy laws.
How can they do this? Very simply, the credit issuers fail to report the debt as "discharged" to the credit agencies. Three of the major violators are Capital One, Discover and Chase - all big name credit issuers. When challenged in court actions brought by consumers, Capital One and Discover repeatedly claimed in court depositions they had not received notice of the discharged bankruptcy. They offered no explanation as to why their collection efforts were suspended at the time the debt was legally dismissed. Chase was bolder, claiming it has no obligation to report a debt that has been discharged.
Clearly, these companies feel they have nothing to fear from the law. The rise in bankruptcy filings during the economic downturn of the past few years has yielded a windfall of secondary market profits for lenders due to the absence of federal oversight or restrictions.
The abuse is so blatant that lenders in the secondary markets will often remove the original account number and assign a new number. This makes it much harder for the consumer to link the debt to the bankruptcy discharge he was granted when he files a lawsuit.
Court cases have routinely been decided in favor of the consumer and often carry amounts for damages and for attorney's fees levied against the lender. As the damage awards are low (in the range of $1000 dollars in most cases), lending institutions will quickly pay those claims rather than contest them as quick settlement minimizes media exposure of their activities.
Until the Federal Government adds laws that require timely reporting by lenders this practice will continue. Though a few consumers will sue the original lender, many do not have the financial resources to file a lawsuit. For others, the social stigma of bankruptcy leads to an attempt by the consumer to pay a debt that should not exist.
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