Zombie Debt: How Credit Card Companies Illegally Reanimate Your Old Debt

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.

From BusinessWeek:

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.

Prisoners of Debt [BusinessWeek](Thanks, Jason!)
(Photo:loauc)

Comments

Edit Your Comment

  1. Phildawg says:

    How long can America hold out as a world superpower as it continues to feed on its own. Personal responsibility is thrown around quite frequently, but this is a hard philosophy to live by when you have so many people trying to trip you up so they can feed off you. This nation is falling apart at the cellular level, and most people aren’t even noticing it.

  2. savvy999 says:

    I understand the larger issue, of not properly discharging debt, and reselling debt to shady collector-types who will (illegally) re-squeeze.

    But why would a guy who files for bankruptcy be allowed to even apply for (and expect) $274k worth of mortgage credit only one year later? And as far as I can tell, Wachovia let him have it?

    That a national bank would actually write that paper, for any interest rate or term, is the most horrific part in that story.

  3. warf0x0r says:

    At this I cry, “Consumers unite to form… Voltron!”

  4. Murph1908 says:

    @savvy999:
    My thoughts exactly, and expressed better than I probably would have.

  5. Mr. Gunn says:

    They do this because it continues to be profitable. In other words, too many people fail to sue.

  6. tomok97 says:

    They wrote the loan because they knew it would be some time (if ever) before he could file for bankruptcy again.

    That aside, I’ve said for years know that credit ratings are becoming a legalized form of extortion. This story is a perfect example. Regardless of how you feel about bankruptcy, he didn’t legally owe that money and they tried to force him to pay it anyway.

  7. babaki says:

    @savvy999: you cant judge him by this story. you have no idea what the circumstances are surrounding the bankruptcy. the story here is about illegal and shady practices by the creditor, not his mortgage.

  8. JiminyChristmas says:

    There needs to be some change in the system so that individuals have greater ownership of their credit reports and what goes into them. Under no circumstances should a former creditor be able to hold someone financially hostage over a discharged debt that should have been cleared from their credit report months earlier.

    Look at it from the creditor’s perspective: What direct incentive is there for them to make sure your credit report is accurate? None. I suppose in the grand scheme of things all creditors depend on, and therefore should contribute to, the accuracy of credit reports but that’s a little abstract.

  9. cef21 says:

    @savvy999: You’re only allowed to declare bankruptcy every 7 years (may be longer after the recent rape of the bankruptcy statute by the banking lobby). Wachovia knows that this guy isn’t going to go bankrupt for 7 years. Besides, mortgages are secured by the home, so the bank has some protection.

  10. alice_bunnie says:

    I don’t understand why he couldn’t just provide a copy of his bankruptcy notice and have it removed. I had a bankruptcy in 1994 and some things hadn’t come off as discharged in my bankruptcy. I sent a copy of my notice to the reporting bureau and it was removed.

  11. llcooljabe says:

    This sort of crap needs to be brought to the attention of crusading AGs like Blumenthal of CT. Spitzer’s a governor now, but his successor, Cuomo seems to be picking up where he left off.

  12. taylorich says:

    @savvy999: “But why would a guy who files for bankruptcy be allowed to even apply for (and expect) $274k worth of mortgage credit only one year later? And as far as I can tell, Wachovia let him have it?”

    ^_^ This

  13. savvy999 says:

    @cef21: Good point, this is not an unsecured loan for $275k.

    But assuming that he didn’t have a 20% down payment (why would he, he just declared bankruptcy?)… at a rather low 8% sub-prime rate just his principal & interest payments alone on that would be $2000 a month. In 4 months he could have paid back this CC debt in full.

    BABAKI is right also, we cannot assume to know all the facts behind his bankruptcy. But regardless of how he got into financial trouble, he either seemed to be in a big hurry to get back into it, or wasn’t really all that broke to begin with. Something doesn’t add up.

    In any case, the focus is on the CC companies, who should be managing their customer’s records better. ‘Administrative errors’ affect real people.

  14. Techguy1138 says:

    @llcooljabe: Cuomo, like his father before him, is shaping up to be an excellent public servant. It seems nice to see what one looks like in the age of lawmakers and politicians.

  15. DeeJayQueue says:

    Just for the sake of example:

    My brother in law co-owned a gas station. His partner ended up screwing him and he not only lost the gas station but had to file bankruptcy. Immediately subsequent he got a great job and was making good money, and rebuilding his credit, and soon after he and my sister were able to buy a house. The interest rate isn’t great but they were able to do it.

    The point is that he’s not a financially irresponsible guy, but he took a risk that didn’t pay off. Sometimes things like this happen and you end up having to file bankruptcy.

    The guy in this story obviously wasn’t broke, since he was able to just break down and pay the CC debt off in short enough time so as to get his mortgage approved, and he must not be too bad off if he can afford a $2000/month house.

    It’s not just your FICO score that goes into getting approved for a mortgage. It’s also your income, your debt to income ratio, and a host of other things. If he’s had most of his other debt expunged and makes a decent living, his D:I would be low, and since he just filed for bankruptcy, he can’t do it again for at least 7 years. That to me would represent an acceptable risk for a mortgage.

  16. pavelgigov says:

    Now, here is my question…
    The guy files for bankruptcy a year earlier. Meaning…he’s broke. Has no money to pay his debt. Yet he can afford a mortgage payment on a quarter of a million loan, one, and two, has 9K laying around to pay off the credit card? Come on!!! I know Capital One and almost every other credit card company out there are a bunch of criminals, but this f*ing hick is no better either.

  17. mrmaxmouse says:

    @savvy999: It’s rather easy to fall in to a very large financial trouble very quickly. Based on unforseen circumstances. This is why we have bankruptcy laws. They are there to protect people from becoming financial prisoners to their creditors.

    A good example would be someone who needs heart surgery who doesn’t have medical insurance. That surgery would cost $60,000+ for just the surgery. Then you have the post op care bills to worry about too. A lot of the more extreme cases of medical bills, especially with the skyrocketing cost of medical bills and the sharp rise of people who are uninsured, those medical bills can be $500k or more. This would ruin someone making a 6 figure salary.

    What about the thousands of people affected by Katrina who lost their homes, but their homeowners insurance refused to pay?

    About 1/2 of all BKs in america are caused by medical bills…About another 20% are caused by true life emergencies, like katrina, death of a spouse, etc. only about 1/4 BKs are caused by someone being truly financially irresponsible.

    Those numbers are probably shifting a bit now because of the housing bubble…I would consider people not reading/understanding their mortgage papers to be financially irresponsible. But the lenders are partially to blame here, so while I carry no sympathy for the people losing their homes, I have no sympathy for the lender either…they knew what they were getting in to.

    And for the people who are filing because of a mountain of credit card debt: The lenders probably hold at least a part of the blame on that one as well. Default APRs, universal default, shifting and shrinking due dates, increasing late and over-limit fees, climbing APRs, etc. It’s all in an effort to extract more fees from people. But for the people who were doing okay before, it might be enough to push them over the edge and be forced in to BK.

    The fact of the matter: the extremely large majority of people who file BK never got in to debt with the intention of filing. The extreme majority of people filing for BK only did so as a last resort. The majority of people filing for BK never “bought” anything at all and are simply discharging medical expenses.

    As far as the $8000 in credit card debt: He could have paid it, however, the BK court would consider that to be a preferential payment to a creditor, they would have undone the payment, and distributed the money between all creditors. So, his attorney probably advised him not to pay them. The BK court also requires that you list ALL debts on your BK…You can’t simply discharge just your medical bills and not your credit cards.

    Granted, a factory worker will probably have a hard time making 6 figures, unless he is a member of upper management, but to be blunt: you don’t know this guy’s income, or the circumstances that cause his BK in the first place. Someone making enough money to buy a $275k house but declaring BK for only $8000 in credit card debt sounds suspiciously like someone declaring because of an insane medical bill or other life catastrophe.

  18. davidc says:

    Hmm … seems like Capital one finally got their money.

    I am not a big fan of companies having to pay for a persons irresponsible financial decisions just cause they decided to file a piece of paper with the courts.

    Most bankruptcy’s are because people tried to keep up with the jones. They just have to have that “bigger” house in that “better neighbor hood”. They just had to have 2 cars cause sharing a car is just tooooo hard. They just had to buy new clothes from departments stores instead of shopping at places like goodwill … and end up not budgeting for medical insurance cause of all of that.

    I don’t know the story behind this one guy and why he filed … but the fact he ended up paying it off means he probably didn’t need to file in the first place.

  19. davidc says:

    @ DEEJAYQUEUE

    You state: “He took a risk and it didn’t pay off”.

    More correctly: “He risked somebody elses money and then skipped out on the debt”.

    Bottom line is the person / company / corporation that was owed money, got stiffed … and your brother got off pretty much “scott free”.

    Well … somebody ended up eating a big bill just cause your brother “filled a piece of paper with the court”.

    That is one of the big problems with this country … lack of personal responsibility. It’s always somebodies elses fault and that somebody else ends up footing the bill.

    Lrn2TakePersonalResponsibility is about all I got to say.

  20. powerjhb says:

    @david.c:
    He also then turned around and sued Capital One and got back the money and $14k in attorney fees. So it ended up costing Capital One money.

  21. coan_net says:

    Good timing on this article. Last night, I got my car insurance bill – and included in it was a letter saying that they check credit reports to help them calculate the rate they charged me. (which happens to be about $5 cheaper then the last bill – but not the point of this note)

    Anyway, in the letter it listed 4 “bad” things – as in things like account more then 30/90 days late, and other “bad” things. Thing is I also filed for bankruptcy many years ago (2002 I think), and since then have had no debt other then house & car – which car is now paid off…. and every bill always paid on time.

    Anyway, I started the process to get a copy of my credit report through who they used to see what those charges were – now I’m afraid that this article may be what has happen to me also. Ugh.

  22. bohemian says:

    Something like 50% of the bankruptcies are for medical debt due to some major acute problem or a significant chronic health issue. The bankruptcy lawyer will usually pull all debt into the proceedings unless it is one they specifically waived in writing.

    The credit card company is ignoring the ruling of a federal court. There should be more fear, punishment and fines by the federal court for ignoring their rulings.

  23. JiminyChristmas says:

    @david.c: Most bankruptcy’s are because people tried to keep up with the jones.

    This is simply incorrect. Most bankruptcies are caused by one or more of the following: illness/disability/medical bills, divorce, and unemployment.

    Many of the people declaring bankruptcy due to medical bills even have insurance. People who can’t get good insurance can have $1000s per year in out-of-pocket costs, on top of their premiums. Add in the fact that if you’re racking up huge medical bills you may well be too sick to work, and it’s easy to run out of money pretty quick.

    Our economy has to allow for bankruptcy because otherwise it becomes too risky to borrow money. Who in their right mind would borrow to start a business or buy a house knowing if it didn’t work out they would face a lifetime of debt collectors and wage garnishment?

  24. cde says:

    @savvy999: How bout that he sold his old home and bought the new one with that money for the down payment?

  25. MrEvil says:

    Mind you, during Chapter 13 procedings (at least before the banks fucked with the laws) unsecured creditors have a chance to ensure that they get paid. All they have to do is show up to a creditor’s meeting. When unsecured debt gets discharged it’s only because those creditors CHOSE not to show up. When my dad filed chapter 13 to keep his mortgage servicer from stealing the house (long story, Google “fairbanks capital” for more info) His credit card companies were notified of the creditors meeting for chapter 13 but NOBODY showed up. Therefore the debts got discharged by the judge.

    Odds are this gentleman filed Chapter 13. My dad’s been out of Chapter 13 for almost 2 years and he’s getting refinanced. Chapter 13 is treated a tad different than chapter 7.

  26. MyCokesBiggerThanYours says:

    I am torn on this one. On one hand it’s illegal, but on the other hand this is debt people ran away from. In regards to karma-credit, they should pay back money they borrowed – especially if they out asking for more loans! Otherwise, these people have no integrity.

  27. HeroicLife says:

    The bankruptcy laws must be REAL harsh to allow you to take out a $300K mortgage a year after bankruptcy. Can you blame the credit card companies for being a little suspicious?

  28. humphrmi says:

    @savvy999: Maybe he saved up the down payment after bankruptcy. Or maybe he used money that was exempt from bankruptcy proceedings.

    Maybe, also, this article was about how he got pushed illegally to repay a debt that was discharged, not about the bankruptcy itself.

    This is a grey market that needs government intervention. There is not enough improper paperwork done in bankruptcies to justify selling worthless paper at these rates. The collection companies know damn well that they are selling or buying the paper in order to illegally collect on discharged debts, and they count on the debtor being too stupid to call his lawyer at first contact and get a criminal contempt of court charge filed against them.

    I hate government intervention, but I’m sorry – you can’t say you operate in a legal discharged debt market. The government needs to step in and making buying and selling discharged debt illegal.

  29. BigNutty says:

    I have received collection notices from different agencies from the same debt for years. They just sell it to another company to give it a try to collect. It never shows up on my credit report anymore for me. It’s just funny to see an “AirTouch” cellular bill from about 20 years ago.

  30. joellevand says:

    I’m going through something *very* similar with Capital One right now. In 2001, I fell behind on payments and made arrangements through a 3rd party debt collector to repay Capital One. In 2003 I paid it off.

    Fast forward four years and I am served with a lawsuit from Capital One for the amount plus interest. I take it to court pro se because I’m broke from a divorce in 2003 that saw my ex get the joint bank account the Cap One card was paid under. I finally got my proof to go to court and found out that they’d managed to file a motion w/o serving me and get a judgment against me! Holy crap! Better yet, when I found out about it, the 45 days to appeal in this state had expired, leaving me with a judgment for half the amount of the debt I’d already paid on!

    Better yet, when I went to get a car loan for a new car (I’m driving a 92 Ford, okay. It’s time.) I found out that my credit was in the toilet because I had a judgment against me for $2K *AND* a *still charging* Capital One account for $4K. I’ve just sent all three credit bureaus copies of the judgment showing that I only owe $2000 to Capital One. God, I hate that company so much. I wish I could warn the world about them.

  31. RocktheDebit says:

    Fun story!

    I was on the client lines and spoke to one of our former clients who was getting harassed by a payday loan place she’d listed on her Chapter 7 with us two years ago. I ended up faxing them copies of her discharge papers and a copy of her creditor matrix to *prove* they were given full notice of the filing, the meeting of creditors, and the discharge, and told her to contact all three credit bureaus about the bankruptcy and make sure all of the debts she included were listed as discharged under Chapter 7 bankruptcy. I’m starting to think I should make it standard advice for after filing. That or the credit bureaus can set up a special department to receive bankruptcy discharge notices.

  32. RocktheDebit says:

    JoelLevand’s story is one of the reasons I fear credit cards.

  33. lainykai says:

    Credit cards are mostly evil. In college I received many offers and being that I was 18 and an “adult” I took a couple of them up on it. When they asked about my employment I truthfully told them I was a full time student with no income. I received my card a few weeks later. Since then I have stayed away from credit, until recently when I went to look at cars. They say I have no credit which gives me the same interest rate as someone with crappy credit. Now I have one card to help build it up.

  34. rptrcub says:

    @lainykai: I don’t blame you. I just got out of $14,000 of CC debt this year–after a 5-year repayment thingy. People look at me like I’ve lost my mind when I tell them that I don’t have one and I don’t want to get another one.

  35. julienne says:

    @RocktheDebit: You did it the nice way. Collecting on a discharged debt is a violation of bankruptcy law (the discharge injunction) and the collector can be hauled back into federal court on contempt and slapped with money sanctions and attorney fees. I like doing contempts for my clients because the collector gets to pay my fees!

  36. Mathusalum says:

    The bottom line is that Credit card companies have been ripping off
    consumers for years! All one has to do is look at the extraordinary
    rates as well as the fee’s. Its common knowledge that if a person ends
    up paying a minimum on a credit card debt, they would never get it paid
    off. This tactic is aimed at people who may not have much funds to
    start with.

    Protection for consumers is something that is not only necessary, but for the general health of the country.

    I definitely don’t condone people who run up debts with no intention
    of paying, as they should be made to pay legitimate debts. By the same
    token, Big Banks shouldn’t be allowed to run amoke hounding unfortunate
    consumers to their grave!