You probably think the bank takes a total loss when you file for bankruptcy. You’re wrong. In fact, the banks make money when your bankruptcy case hits the courthouse door. In some cases, the money changes hands automatically. Devious shell game? Abusive activity? You decide.
Credit card issuers and consumer lenders routinely take their credit card accounts and sell them to third-party debt buyers. This isn’t a surprise – at least, it shouldn’t be. Often the debt is sold at the point of charge-off, the time when the creditor moves the amount due from one column to another for accounting purposes.
But most people don’t realize that some of these debts aren’t sold until you file for bankruptcy. That’s right, the minute your bankruptcy case is filed the ownership changes hands.
I’m not talking about asset securitization, the means by which accounts are cut up into little pieces and sold on the open market through a series of complex transactions that most people can’t explain.
No, this is an outright sale of accounts through the use of agreements that are, in some cases, up to a decade old or more.
These transactions – whether involving charged-off accounts or those involved in consumer bankruptcy cases – are negotiated years in advance in documents called future flow agreements (they’re also called “forward flow agreements” from time to time). These agreements are typically seen by only a few select top-level officials within the company, and by nobody else.
Why? Because the creditors don’t want you to know how much money they make when you file for bankruptcy. Depending on the type of bankruptcy case you file, the debt buyer may pay as little as $0.07 on the dollar or as much as $0.25 on the dollar.
Selling debt once you file a Chapter 13 bankruptcy case makes some sense because you’ll be entering into a court-order payment plan. The creditor wants to get paid today, and the debt buyer is willing to take some risk that your case craters.
But future flow agreements are also in place for Chapter 7 debt. You know, the kind of debt that gets wiped out. In fact, well over 95% of all Chapter 7 cases provide for no payments to creditors through asset liquidation.
Why would anyone enter into a future flow agreement to purchase Chapter 7 debt?
Do the debt buyers sit on the debts for long enough to begin collection at some time long after your Chapter 7 bankruptcy is discharged?
Do the people end up paying these discharged debts because they remain showing as due and outstanding on their credit report?
Do debt buyers re-sell the accounts to other companies, who may or may not even have actual notice of the bankruptcy case?
Do the credit card issuers get paid a commission when the consumer pays them for an account that’s already been sold through a future flow agreement?
Let me do what my grandmother did when I was a child – allow me to answer a series of questions with a question.
Do you think this would be a multi-billion dollar industry if the answer was no?
Other Lawyers Playing The Bankruptcy Alphabet Game:
- F Is For First
- F Is For Fresh Start, says Cate Eranthe
- Fresh Start – Chicago bankruptcy lawyer Dan Winter
I’ve worked all sides of the fence, and I’ve worked for debt buyers with future flow agreements. In my mind, there’s nothing wrong with selling these debts. My local car dealer doesn’t ask whether I’m planning to obey the speed limit when I want to purchase a car. If the buyer pursues collection illegally, it’s a another revenue opportunity for a good consumer lawyer. If the buyers get hit often enough and hard enough, they’ll stop . . . maybe. If they don’t, maybe statutory penalties need to be increased.