Cengage Advantage Books: Fundamentals of Business Law 9th Edition by Roger LeRoy Miller

Exercise 6

The Debt That Never Goes Away-It's Discharged in Bankruptcy but Still on the Debtor's Credit Report
Bankruptcy, especially under Chapter 7, allows a judge to discharge certain debts. When these debts are discharged, they are no longer supposed to appear on the debtor's online credit report. For Dan Rathavongsa, a factory worker in Raleigh, North Carolina, however, the discharged debt did not go away. A bankruptcy judge discharged a $9,523 debt that he owed to Capital One Financial. Nonetheless, Capital One continued to report Rathavongsa's debt to the various credit bureaus as a "live" balance. When Rathavongsa tried to obtain a mortgage for a new house a year after the debt had been discharged, the would-be lender told him that he would have to either pay the Capital One debt or prove that the debt had been discharged. When Capital One refused to revise his credit report, Rathavongsa gave in and paid Capital One for a debt he no longer legally owed.
Discharged Debts Attract Buyers
Capital One is not alone. Many credit-card companies and other creditors have been keeping debts active even after they have been discharged by a bankruptcy court. Consequently, some aggressive entrepreneurs have founded companies with names such as Max Recovery and eCast Settlement that purchase discharged debt obligations at pennies on the dollar. Then, they pursue the debtors and pressure them to pay the debts, even though the debts have already been discharged in bankruptcy. Some of these companies have been successful enough to become publicly traded on a stock exchange.
The billions of dollars' worth of debts that have been discharged in bankruptcy should have a zero-dollar value, yet the fact that there are buyers for these debts indicates that some consumers have been paying them. Indeed, as the number of bankruptcies rose as a result of the recent economic recession that swept the country in 2008 and 2009, the price of discharged Chapter 7 debt actually increased. Certainly, one reason why consumers have paid debts that they did not owe is because they found themselves in the same situation as Rathavongsa-their credit reports still listed the debt as active.
A Federal Judge Issues an Order That Changes the Reporting of Discharged Debt That situation may change now, however, thanks to an order issued by one federal district court. A class-action lawsuit was brought against the three major credit-reporting agencies-Equifax, Experian, and Trans-Union-all of which have a major online presence. The plaintiffs included consumers from across the country. They claimed that the agencies violated the federal Fair Credit Reporting Act by failing to follow reasonable procedures to ensure the accurate reporting of debts discharged in Chapter 7 bankruptcies. The court agreed and ordered the agencies to revise their procedures. a Ultimately, damages were awarded to the class of plaintiffs in the amount of $45 million, and in 2011, the court granted the plaintiffs more than $11 million in attorneys' fees. Previously, the credit bureaus would remove debts incurred before bankruptcy only if the creditors updated their accounts-which often was not done. Today, the credit agencies are required to automatically report all prebankruptcy debt as "discharged," unless the debt is nondischargeable. Although the purchasers of discharged debt may still attempt to pressure consumers into paying debts that they do not owe, the change in the credit bureaus' procedures gives consumers help in their efforts to rebuild their lives after bankruptcy.
FOR CRITICAL ANALYSIS
About five years ago, one could buy debt that had been discharged in bankruptcy for less than five cents on the dollar. Why do you think the price increased to seven cents on the dollar?