Why Discharged Debts Are Lingering after Bankruptcy
By Foreclosure-Fighter staff writer
When a bankruptcy petitioner is excused from certain debts by a bankruptcy judge, the filer is granted an opportunity to restart financially, with a clean slate and manageable financial obligations. The debts forgiven in the bankruptcy court are no longer the debtor's responsibility.
But some creditors are making people pay.
The alarming trend of selling debts discharged in bankruptcy court is gaining popularity across the nation, according to a recent Business Week article. And it can wreak havoc on your credit score.
Most borrowers applying for a mortgage loan these days are more concerned with the potential for foreclosure than the potential for an incorrect credit report affecting their credit scores. But, according to reports, faulty credit reports should be on everyone's mind.
Besides the honest mistakes credit bureaus and the companies that report to them sometimes make, your credit score can be affected by malicious activity on the part of the credit industry—and, if you've ever filed bankruptcy, it very well may be.
People file for bankruptcy protection for a variety of reasons—as foreclosure prevention, as a means of dealing with unexpected medical expenses, as a reaction to identity theft. No matter the cause, the effect of a successful bankruptcy filing is the discharge—or cancellation—of significant amounts of debt.
But with the practice of buying discharged debts, many people are finding that their post-bankruptcy credit reports still contain some of the debts excused during their case.
Basically, according to sources, companies buy the discharged debts and continue to report them to credit bureaus. This report of outstanding debt lowers your credit score, which can hurt your potential to get loans, mortgages, and credit cards.
One North Carolina man apparently experienced the revival of discharged debts firsthand. After his bankruptcy filing, the man found a charge for more than $9,000 to Capital One on his credit report that had been discharged by the judge. Though his lawyer tried contacting Capital One via phone and letter, the company refused to stop reporting the charge until it was paid.
Because he was trying to get a mortgage loan, the man reportedly ended up paying the bill, even though he had no legal obligation to do so—and all the collection efforts made on that charge were illegal! He realized that paying the debt was the quickest, most certain way to clear his credit rating.
Apparently, many companies have had the same realization.
One bankruptcy judge was reportedly both shocked and confused when told about the practice of selling discharged debt—and with reason. Legally, the debts have no value whatsoever. Sadly, companies across the country are making money by resurrecting discharged debts. And consumers are paying.
Sources say that not all illegal collection efforts are the same: some companies will actively hound consumers until the debt is paid, while others simply continue to report the debt to credit bureaus until they receive payment.
The good news is that this practice, while frustrating to deal with, can be effectively fought. Business Week reports that the North Carolina man decided to bring his case before bankruptcy court. The court allegedly made Capital One pay back the $9,000, plus $14,000 in attorney's fees.
Checking your credit report annually may be your best option to prevent and correct errors on your credit score.