Beware of Bill Collectors Who Try to Recover Debts Discharged in Bankruptcy

Would you be surprised to learn that there are collection agencies whose main purpose is to collect debt that has been discharged in bankruptcy.  Would you be even more surprised to learn that these collection agencies are not fly-by-night operations – that five of them are traded on NASDAQ, and two of the largest of these debt buyers are owned by the respected investment firm Bear Stearns.

In its November 1, 2007 issue, Business Week published a disturbing investigative report about the very robust market in discharged debt.  Discharged debt can be bought for pennies on the dollar.  Collection agencies rely on techniques like harassment, ignorance of the law and timing (if your closing is being held up by a $500 debt that was discharged, you might be inclined to pay the debt to avoid a delay).

Here's how big – and lucrative this market is:  Norfolk (Va.)-based Portfolio Recovery Associates (PRAA on the NASDAQ) earned $44 million in 2006 on $188 million in revenue, a margin of 23%.  Portfolio Recovery said in its 2006 annual report that it had paid $55 million to buy debts with a face value of $6.3 billion that had gone into bankruptcies since 2004.

Often these debt buyers claim that they did not know about the bankruptcy as grounds to justify their collection harassment.  Others contend that the Fair Credit Reporting Act does not obligate them to update credit reports.

Some debt buyers intentionally change the account number of the discharged debt in order to make it more difficult to link the original creditor's account with the new collection account.