Disciplining Debt Buyers

In the last several years, rumors have flown that a substantial fraction of the debt discharged in consumer bankruptcy cases is sold to a third-party after the bankruptcy. It is perfectly legal to sell debts. But why would someone buy debt that a debtor was under no legal obligation to pay? Aren't these debts worthless?

A recent action by the Federal Trade Commission gives an answer. Debtors sometimes pay debt that they do not owe. Debtors are either misled into thinking that they still owe these discharged debts or they pay up to get the debt buyers to quit harassing them. The complaint in US v. Whitewing Financial Group alleges that after purchasing the debts (often for a few cents on the dollar), the debt buyer would contact debtors and threaten to take legal action if the debt was not paid. The bankruptcy discharge is essentially an injunction that prevents the collection of the discharged debts. This alleged threat then would be an "action that could not legally be taken," which violates the Fair Debt Collection Practices Act. A consent judgment was entered to resolve the dispute. More details are available from the FTC news release about the case.

In an ironic twist, all but $30,000 of the $150,000 civil penalty was suspended based on the defendants' alleged inability to pay. As the comments to a recent post by Elizabeth Warren at TPM Cafe demonstrate, debt collection is apparently a hard way to make a buck. This must be especially true when you aren't actually owed the money you are trying to collect!