Bankruptcy Collectors Say BusinessWeek Paints Fuzzy Picture

Members of the collection industry are crying foul against the Nov. 12 cover article in BusinessWeek magazine that paints some collectors as aggressively, and sometimes illegally, contacting bankrupt consumers to squeeze from them a penny or two of revenue.

The article claims that some creditors and collection agencies have gone after debtors whose accounts have been discharged through bankruptcy by a court, a violation of the FDCPA. These consumers are not obligated to pay the discharged debt, but some do after being hounded by the creditors and collectors, according to BusinessWeek.

That might make a great cover, but it doesn’t work that way, several industry experts tell insideARM.com

“A claim against a bankrupt estate is different from a claim against a debtor. The article blurred that,” said Samuel K. Crocker of Crocker and Niarhos, a Nashville-based law firm, and long time bankruptcy trustee. Bankruptcy trustees work with the courts, creditors and debtors to determine the distribution of any assets from a bankrupt estate.

Crocker said that anyone owning a claim on the debtor’s estate at the time of the bankruptcy filing has a right to participate in a distribution from the estate. Some firms are in the business of buying claims against that debtors account at the time of the bankruptcy filing. That company owns the claim against the estate, but doesn’t have any claims against the debtor, said Crocker.

BusinessWeek mentions Seattle-based B-Line LLC as one of the firms that focuses solely on the purchasing and servicing of bankrupt accounts. Rui Pinto-Cardoso, president of B-Line, told insideARM.com that Business Week mischaracterized his company’s role in the process of recovering assets from a bankrupt account.

“We have no contact with the debtor in any way, nor do we have contact with credit reporting agencies,” he said. “We deal with the [bankruptcy] courts to recover money from these accounts.” B-Line is one of a very few companies that work chapter 7 accounts, purchasing them during the bankruptcy process and working with the trustee to find assets that can be liquidated, said Pinto-Cardoso.

Central to B-Line’s process of managing bankruptcy cases is a proprietary software system that tracks bankruptcy case movement. Pinto-Cardoso said that B-Line’s system allows it to monitor thousands of cases currently in bankruptcy courts to create the economies of scale that are required to be profitable. 

Money can be recovered from Chapter 7 accounts in a wide variety of ways. For example, a single person that has had his debts discharged through chapter 7 may be able to keep such assets as his house, furniture, and car to commute to his job 30 miles away. But a second car might be sold with the proceeds going to creditors. In addition, any assets that were hidden prior to filing and later found by the trustee could also be liquidated.  

Crocker, who is also president of the National Association of Bankruptcy Trustees, said the organization’s board plans to meet today to discuss its response to BusinessWeek. Crocker said he is in favor of setting the workings of the bankruptcy debt business straight with the magazine.