Bankruptcy filings on rise

A record number of Americans are filing for bankruptcy to get out from under a crush of unpaid bills. But some are finding that their debts aren't so easy to leave behind -- stiffed creditors are trying new ways to convince them to pay up even after their debts have been erased in court proceedings.

"It's like the night of the living dead," said San Jose, Calif., bankruptcy attorney Ike Shulman. Debtors "think these debts are dead and buried and then they come back to life and scare people."

Some tactics are subtle, like the credit card solicitation that comes with the promise of restored credit. Only the fine print reveals that in signing up for the card, the debtor is voluntarily agreeing to pay off thousands of dollars of debt that's already been erased in bankruptcy court.

Others are more aggressive. In a few cases, debtors have been sued by creditors for money that was forgiven several years ago in bankruptcy proceedings. More frequently, debtors tell tales of dunning notices and harassing telephone calls from creditors or bill collectors -- even though federal bankruptcy laws bar creditors from contacting debtors to collect debt discharged in bankruptcy. Debtors also have received intimidating letters threatening lawsuits to repossess jewelry, furniture or stereo systems unless they pay up.

Post-bankruptcy communications are "a real problem right now," said James McMillen, a lawyer in Corpus Christi, Texas. This summer, for example, both Mr. McMillen and Mr. Shulman got complaints from clients who had just received dunning notices and telephone calls from Discover Card for debts discharged two years ago.

One was a Texas paralegal who owed Discover about $5,000 before her debts were erased in Chapter 7 bankruptcy proceedings in 1996. "They called me at home first and then sent me a letter two days later," said the paralegal, who did not want her name published. "I can't get them off my back."

Mr. McMillen and Mr. Shulman said they heard from several debtors who, like the paralegal, filed for protection under Chapter 7. They also received complaints from clients who filed Chapter 13 bankruptcy petitions in which they agreed to repay part of their debts over several years. In all the cases, Mr. McMillen and Mr. Shulman said they had to remind Discover of the bankruptcy filings and bankruptcy law barring contact with the debtors before the company quit calling.

Discover Card spokeswoman Beth Metzler said the recent bills were mistakenly sent to "a group of people who had filed under Chapter 13" instead of to their employers, which were deducting money from the debtors' paychecks as part of their financial reorganization plans. "It was inadvertent and not an attempt to get people to pay," Ms. Metzler said.

Company officials said they were not aware of any bills going to Chapter 7 debtors.

Bankruptcy attorneys say that for every post-discharge complaint they see, there are likely to be dozens they don't know about because debtors no longer are represented by counsel after bankruptcy and often don't have the funds to seek additional legal help.

Creditors are "taking advantage of debtors' ignorance," said New York University Law Professor Karen Gross. "The debtor has no informed way to assess what he or she gets."

Bruce A. Markell, a law professor at Indiana University in Bloomington, Ind., said when he initially heard of creditors trying to recapture discharged debt, he thought the attempts were "innocent" mistakes. But as he learns of new cases, he said, "it's pretty clear what's going on. It's harassment, if you want one word for it."

Attorneys suggest that the aggressive pursuit of discharged debt stems largely from the sharp rise in consumer bankruptcies. For the year that ended June 30, bankruptcy filings in U.S. federal courts rose by 8.5 percent to an all-time high of 1.4 million. In 1986, by comparison, there were 500,000 filings. Last year's increase was due to a 9.2 percent rise in personal bankruptcies; business bankruptcies fell 17 percent. About one of every 70 U.S. households now files for bankruptcy, according to the American Bankruptcy Institute, a nonprofit research group.

For companies affected by bankruptcy filings, the costs are staggering. Consider Sears, Roebuck and Co., the nation's second-largest retailer, which was named as a creditor in one out of every three bankruptcies filed in 1997. "That was more than a half a million bankruptcies -- 515,000 -- where Sears was involved," said spokeswoman Jan Drummond. "We wrote off $1.8 billion in bad debt, bankruptcies and uncollected non-bankruptcy debt; that was more than our net income of $1.1 billion."

Also fueling creditor demands is the relatively new but rapidly growing business of buying and selling bad debt, including discharged debt. Creditors, tired of the hassle involved in pursuing uncollected debt -- or unwilling to deal with all the required paperwork and record-keeping -- are increasingly selling their bad accounts to third-party companies for pennies on the dollar.

Last year, sales of bad debt were about $13 billion, more than three times the $3 billion sold in 1993, according to the Debt Marketplace Inc., a California consulting firm that helps companies buy and sell debt. Industry experts say accounts more than 180 days old typically sell for 10 to 12 cents on the dollar; for older debts, it's even less money, with only a couple of pennies at most for discharged debt. Discharged debt makes up just a small fraction of the total business, experts said.

For companies buying the bad debt, they "don't have to collect very many debts" to cover their costs, Gross noted. What's more, she said, these accounts can prove to be a lucrative mailing list. Even if debtors do not agree to repay discharged debts, they could sign up for future credit card solicitations or purchases. Having just been through bankruptcy, these customers are free of debts -- and can't file for protection again for another seven years.

One of the companies aggressively buying uncollected debt is Credit Store Inc., a two-year-old South Dakota financial services company that markets credit cards to consumers who, in its words, "previously had an interruption in repayment of their debts."

Rhode Island resident Roger Levesque started receiving Credit Store solicitations in 1996, two years after his debts of $34,000 were erased in Chapter 7 bankruptcy proceedings. The Credit Store promised to restore Mr. Levesque's credit rating and to give him a new, $1,400 line of credit, he said. The offer sounded great until Mr. Levesque read the details and realized that by accepting the new credit card, he would voluntarily be agreeing to pay $1,000 of an old credit card debt that had already been discharged.

Mr. Levesque turned down the offer. "I didn't believe I should be paying back a loan that was cleared in bankruptcy," he said. Besides, Mr. Levesque said, he was getting plenty of other credit card offers despite his bankruptcy.

But the Credit Store's offer tempted many other debtors, with 6,439 signing up for its special bankruptcy credit card program before it was dropped in late 1996. The reason it was dropped: A lawsuit accused the Credit Store of deceiving debtors into paying discharged debt.