Industry Counters BusinessWeek 'Prisoners' Portrayal

Purchasers and collectors of bankrupt debt continue to push back against the portrayal of their industry in the "Prisoners of Debt" cover story that ran in BusinessWeek magazine Nov. 12. Experts told insideARM.com this week that the article blurs the procedures and activities in the collection of bankrupt debt (“Bankruptcy Collectors Say BusinessWeek Paints Fuzzy Picture,” Nov. 14).

Prisoners primarily focuses on the interaction between creditors and credit reporting agencies, using anecdotal evidence to suggest some banks and card issuers are not accurately reporting debt discharged in consumer bankruptcies, and that they continue to go after the debt even after it has been discharged. The article also singles out debt purchasers who target these accounts as complicit in credit reporting errors.

In response, industry association ACA International in a statement last week said, “The law clearly prohibits collection on such accounts from the filing date, during the automatic stay period, and after the date of discharge.” (The automatic stay on collection takes effect immediately upon a bankruptcy filing petition.)

ACA said it has lobbied since 2004 to amend the bankruptcy code to require the court to notify collectors when a consumer’s case is filed, a notice that already is filed with creditors. “Any attempt to deceive consumers into paying a debt they do not legally owe violates the laws regulating the industry, including the FDCPA,” said ACA.

But according to companies engaged in working bankrupt accounts, the process that they commonly use to liquidate the accounts was misrepresented.

A spokesperson for Bear Stearns, owner of eCast Settlements and Max Recovery — two companies that BusinessWeek mentions — told insideARM.com that the firms work with the court to ensure they are on the dispersal list when assets are found. “We deal with the court-appointed trustee,” the spokesperson said, “we never deal directly with the debtor.”

Muddying the waters further is the fact that eCast deals primarily with chapter 13 bankruptcy cases where debtors are required to set up payment arrangements with creditors. Prisoners focused on chapter 7 bankruptcy, where debts are entirely discharged with the debtor released from his obligation to pay creditors.

The BusinessWeek article also reports that major debt purchaser Portfolio Recovery Associates (Nasdaq: PRAA) is a player in the bankruptcy market, purchasing more than $6 billion in bankrupt accounts since 2004, according to its 2006 Annual Report. The company details in the report that it manages its bankrupt accounts in a method that attempts to convert Chapter 7 cases to Chapter 13 under the federal bankruptcy rule enacted in October 2005. (The law established a “means test” which imposed strict income criteria for the filing of a Chapter 7 bankruptcy petition. If a debtor’s income exceeds the median income for his or her state, he or she may be required to file for Chapter 13 bankruptcy.)

The more accounts filed under 13 should mean more opportunities for Portfolio Recovery. However, the company does not break out Chapter 7 vs. Chapter 13 accounts acquired in its annual report. Portfolio Recovery did not return several insideARM.com requests for comment.

Industry experts note that a Chapter 7 filing is typically a much quicker process than a Chapter 13 filing, and its not uncommon for bankruptcy trustees to miss certain assets that a debtor may have failed to list in his bankrupcty filing, whether deliberately or by mistake. Many trustees continue to investigate suspicious cases even after discharge and find these assets. Experts said that these assets can be sold, or in some cases the discharge order may be vacated and the bankruptcy process ended altogether.