Today I learned about a robust industry trading in consumer debt that has been discharged by bankruptcy courts. Business Week explains how firms collect on debts that the debtors have no obligation to pay:
In the 1990s, businesses adept at tracking and trading consumer debt expanded their reach to dabble in accounts enmeshed in bankruptcy. That dabbling has grown into a robust market. Some of the trade in so-called bankruptcy paper involves debts that remain collectible. What’s troubling is that the market now also includes billions in discharged debts, which ought to have no dollar value. 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.
How does this work? The creditors simply refuse to update the credit file of the consumers who filed for bankruptcy, so that it looks like a debt that has been legally discharged is still in collections. If the consumer wants to get a new loan, they have to pay up. In other words, it’s extortion.
You may not have much sympathy for people who wind up filing for bankruptcy, but I find it worrying that there are industries built around pushing people around by manipulating their credit reports. Right now, they’re using these tactics against people who’ve filed for bankruptcies but they’re no reason why they can’t employ those tactics against others as well.