In what BusinessWeek calls “financial Night of the Living Dead” credit card companies are refusing to stop reporting legally discharged debt to credit reporting agencies—illegally forcing consumers to pay debts that they no longer owe in order to get approved for mortgages.
BusinessWeek introduces us to Van Rathavongsa, a factory worker from North Carolina who declared bankruptcy in 2002. One of the debts that was discharged by the judge was $9, 523 to Capital One, the huge (and notoriously shady) credit card company.
But Capital One continued to report the factory worker’s discharged debt to credit bureaus as a live balance, according to documents filed in U.S. Bankruptcy Court in Raleigh.
This kind of failure by creditors to update credit reports happens with some frequency, consumer lawyers and court-employed bankruptcy trustees say. And it can have consequences: In September, 2003, when Rathavongsa tried to close on a $274,650 mortgage for a new house, his would-be lender, Wachovia (WB), said he would either have to pay Capital One or show proof from the credit-card company that the debt had been discharged. Despite several calls and a letter from his attorney, he says, Capital One never revised the credit report. To obtain the home loan, Rathavongsa eventually did what many consumers in this situation do. He gave in and paid Capital One $9,523 he no longer legally owed.
In addition to shady behavior from credit card companies, BW says there are now publicly traded companies that specialize in buying discharged debt. Bankruptcy law prohibits the collection of discharged debt, so why are companies buying it ?
Owners of canceled liabilities can revive their value in two main ways: by directly pressuring consumers to cough up cash or by gaming the credit system, as allegedly happened in the Rathavongsa case.
With all this shady debt trading going around, its important to know your rights as a consumer. Mr. Rathavongsa got a lawyer, sued Capital One and won. He received his money back and $14,000 for expenses and attorney fees.