Debts Go Bad, Then It Gets Worse

By JESSICA SILVER-GREENBERG : WSJ : 23 DEC 2011

A personal bankruptcy is supposed to cut borrowers loose from lenders and debt collectors, but Capital One Financial Corp.—one of the nation's largest credit-card issuers—sometimes doesn't want to let go.

Leila Torres, a 35-year-old waitress who lives in Hawthorne, N.J., concluded her Chapter 7 bankruptcy case in 2009. She was stunned when she got a letter notifying her that Capital One was suing her for $4,266 in credit-card debt.

"I was trying to move on, and this whole thing has sucked me back into a nightmare," she says.

Capital One dropped the suit after Ms. Torres accused the company in a separate lawsuit filed in September of flouting bankruptcy law. Capital One asked a bankruptcy judge to throw out her suit, but he refused.

It wasn't the first time the company went after its customers for debts that had been snuffed out in bankruptcy, even though the practice is illegal. A court-appointed auditor concluded earlier this year that Capital One pursued 15,500 "erroneous claims" seeking money previously erased by a bankruptcy-court judge.

More than 800 of those borrowers have filed lawsuits or other legal actions against Capital One, the auditor said in a Dec. 6 court filing. Without admitting or denying wrongdoing, Capital One agreed to reimburse about 130 borrowers, lawyers and bankruptcy trustees for legal costs incurred trying to fend off Capital One.

A spokeswoman for the McLean, Va., company said: "It is our policy and practice not to collect on discharged debt."

In a court filing earlier this year, Capital One disputed the auditor's finding of 15,500 erroneous claims but didn't disclose what the company thought the correct tally should be.

Associated Press

Debt collection is a major component of Capital One's business.

The auditor is scrutinizing Capital One as part of a 2010 settlement between the company and a U.S. bankruptcy trustee in Massachusetts.

Separately, David W. Houston III, chief judge of the U.S. Bankruptcy Court in Aberdeen, Miss., said he plans to demand that Capital One show up in his courtroom to explain its debt-collection practices.

In October, the judge rejected the company's request to throw out a lawsuit that alleged Capital One tried to collect $43,396.59 that was legally erased in an earlier bankruptcy case filed by the same person.

"I want some proof from the company that this was a legitimate error and not a conscious, malevolent effort to go out and collect a debt that's been discharged," Judge Houston said in an interview.

Capital One said in a court filing that it didn't know about the previous bankruptcy.

Once the company found out, it abandoned its claim, saying it made a mistake that was "neither willful nor intentional," according to the filing.

Capital One is the 10th-largest U.S. bank by assets, best known for the credit cards pitched in its "What's in your wallet?" ads. The company's banking unit has grown to nearly 1,000 branches, and federal regulators are reviewing the proposed $9 billion acquisition by Capital One of ING Groep NV's U.S. online-banking business.

Debt collection is a major component of Capital One's business that gets little attention from analysts and investors. As of Sept. 30, Capital One had $2.7 billion in net income so far this year on revenue of $12.22 billion, but it also was forced to write off $2.9 billion in uncollectible loans.

As a result, like most lenders, Capital One invests significant resources into trying to collect from customers who are behind on their bills. But unlike most others who outsource their debt collection, Capital One largely relies on employees.

If a customer files for bankruptcy, the company often lines up with other creditors to collect whatever assets are left. This is entirely legal, up to the point that a customer's debts are officially erased by a bankruptcy judge.

Capital One is accused of filing claims to get debts that were previously discharged in some cases.

There is a lucrative niche in collecting even small amounts from debtors in the window between when a bankruptcy proceeding is filed and when it is completed.

About $120 billion in debt will wind up in Chapter 7 or Chapter 13 bankruptcy proceedings this year, estimates Sean McVity, a debt broker in Harrison, N.Y. Portfolio Recovery Associates Inc., based in Norfolk, Va., bought $1.52 billion of bankruptcy debt in the first nine months of 2011, paying nine cents on the dollar, according to a securities filing.

Buyers are hungry for bankruptcy debt because they often wind up doubling their initial investment, according to Mr. McVity.

William Weinstein, chief executive of Weinstein & Riley, a debt-collection company in Seattle, said he proceeds carefully when buying bankruptcy-related debt because some firms "aggressively pursue payments in violation of the law."

For example, collectors sometimes report erased debts to credit bureaus, a pressure tactic that is in violation of the law if the debt has been discharged.

About 1.4 million Americans filed for Chapter 7 or Chapter 13 bankruptcy-court protection in the fiscal year ended Sept. 30, down 8% from a year earlier but nearly double the number of bankruptcy filings in 2007.

In 2008, a U.S. bankruptcy trustee in Massachusetts accused Capital One of illegally trying 5,600 times to collect debts already wiped out by a bankruptcy judge.

The trustee, who declined to comment, said the wrongful claims were the result of Capital One's failure to keep track of bankruptcy filings by its customers. The trustee began investigating the company when it allegedly sought $5,542.50 from a couple 14 years after the debt was erased.

Capital One denied any wrongdoing but agreed to turn over internal records detailing 2.2 million filings of bankruptcy-court claims between 2005 and 2010.

The company also agreed to supervision from a court-appointed monitor that will last until the auditor has completed a review of the bankruptcy-collection records.

So far, the auditor has identified 15,500 allegedly erroneous claims.

The Capital One spokeswoman wouldn't comment on the allegations, settlement or ongoing scrutiny. In a court filing, Capital One said it beefed up record-keeping procedures before being prodded by the bankruptcy trustee.

5 Signs That You’re Borrowing Too Much

Source : Time :DAN KADLEC : December 14, 2011 

Consumer debt figures show it: we're getting tired of being so darned frugal. Here are five guidelines to keep you from borrowing too much.

They’re ba-ack. Like the ghosts in Poltergeist, shoppers have returned this holiday season and they are threatening to stir up a familiar demon—debts they can’t repay.

Black Friday sales set records. Cyber Monday sales were torrid too. Personal spending accounted for the vast majority of third-quarter growth, and spending has been up three of the past four months, reports the Wall Street Journal. The savings rate has fallen to 3.5% from 5.3%.

This is a marked turnaround from the austerity that has gripped the economy since 2008, and while this burst of consumerism seems likely to persist through year-end, it also seems likely to saddle many with a debt hangover. Things just aren’t that good out there. Household net worth is declining; unemployment is high, and German-led fiscal restraint throughout Europe all but guarantees continued headwinds.

I get it: We’re tired of being so darned frugal. Letting go a bit may make some sense.

 But before you go any further, now would be a good time for a debt checkup.

 How much debt is too much? Here are some guidelines:

• Mortgage Not so long ago, lenders thought nothing of stretching your budget to obscene levels in order to put you in a house. They might have allowed you to commit as much as 36% of your income to a mortgage and as much as 50% of income to total debt service. More traditional limits are in force today—and should be adhered to even in the unlikely event your banker suffers a flashback. That means a mortgage payment that does not exceed 28% of take-home pay and total debt payments that do not exceed 36%. One in three mortgage holders today is above the recommended threshold, reports consulting firm Strategic Business Insights. 
• HELOC Closely related to your first mortgage is your home equity line of credit or possibly a home equity loan. Recognize this debt for what it is—an extension of your first mortgage. How much you can safely and smartly borrow with a HELOC or second mortgage depends on how much home equity you have. Your total mortgage-related debt should add up to less than 80% of your home’s value. You’ll get the best interest rate that way, and you’ll be able to tap cash in an emergency. 
• Student debt You’ve heard all about it: Student loans now outstrip credit card borrowing and total nearly $1 trillion. The typical grad leaves campus owing $25,000. But some owe five to 10 times that figure. Indeed, SBI reports that 2.3 million have outstanding student debts of $50,000 or more—and that includes some 21,000 who have carried this debt into retirement. A good rule of thumb is to leave campus with no more total debt than your first year’s pay, or to keep your monthly student-debt costs to less than 10% of income.
• Credit cards Any balance that you carry from month to month constitutes excessive debt. Credit cards should be valued for their convenience and cash-back rewards as well as for the ready access to cash they afford in an emergency. If you must carry a balance, keep it under 30% of available credit on any given card to avoid a ding to your credit score.
• Auto loans Many people overspend on a car, which they mentally place in the category of a need when it is really a want. Of course you need wheels. But you do not need a new BMW. According to Edmunds.com, the average consumer pays 11% of monthly income to own a car, which leaves little wiggle room for other borrowing—especially if you intend to buy a house. Think of 8% as a ceiling, less if you have credit card balances and student loans too.