Prisoners of Debt

November 4 2007 BusinessWeek.com A fresh start with bankruptcy? Big lenders keep squeezing money out of consumers whose debts were canceled by the courts. In a financial version of Night of the Living Dead, debts forgiven by bankruptcy courts are springing back to life to haunt consumers. Fueling these miniature horror stories is an unlikely market in which seemingly extinguished debts are avidly bought and sold. One of the debts the judge canceled, or "discharged," was $9,523 a factory worker owed to Capital One Financial, the big credit-card company. But Capital One continued to report the factory worker's discharged debt to credit bureaus as a live balance. This kind of failure by creditors to update credit reports happens with some frequency, consumer lawyers and court-employed bankruptcy trustees say. And it can have consequences: In September, 2003, when the facttory worker tried to close on a $274,650 mortgage for a new house, his would-be lender, Wachovia, said he would either have to pay Capital One or show proof from the credit-card company that the debt had been discharged. Despite several calls and a letter from his attorney, he says, Capital One never revised the credit report.

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