Wall Street Journal: Some Creditors Abuse Bankruptcy System

Saturday’s Wall Street Journal had a short article about debt collectors who try to circumvent bankruptcy of borrowers. These debt collectors do not actively pursue debt collection after people filing bankruptcy as that would be a serious violation of federal bankruptcy law. The article states that some debt collectors intentionally do not remove the debt for credit reports. They find that some debtors eventually pay the debt on their credit reports when they recover financially in order to qualify for large loans, or some debtors pay out of a moral obligation to repay debts. In any event, the article says that creditors can sell debts incurred by their debtors even after the debtors filed bankruptcy because of the significant chance that the debtors will eventually repay the debt voluntarily.

Technically, failure to remove a discharged debt from a credit report is violation of federal law, specifically, the federal fair debt collection laws. The practical problem for debtors is that they have to hire an attorney to bring an action against these debt collectors. The legal action is in federal court and most attorneys are inexperienced in this area of the law. Also, few qualified attorneys will take such work on a contingency fee basis. Debtors probably find it easier to pay the debt when they are able financially. The Journal says that these debt collectors are "gaming the system" by not taking active steps to properly handle discharged bankruptcy debt on credit reports.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida