Know What You Are Getting Into

Posted by Kevin on January 2, 2012 under Bankruptcy Blog | Be the First to Comment

Credit card debt is almost always discharged in bankruptcy.  That means that you do not have to pay the debt.  If a creditor tries to collect a credit card debt while the bankruptcy is pending, that is called a violation of the automatic stay.  If it happens after the bankruptcy discharge and close of the case, it is a violation of the bankruptcy injunction against collecting discharged debts.

But there is another way to get a debt “discharged”.  That occurs when a credit card company does not sue you before the statute of limitations runs.  This is sometimes referred to as “expired debt”.   In NJ the statute of limitations  is usually 6 years.  In the past, if a credit card company did not sue before the statute of limitations ran, they were SOL.

Not so now.  Hedge funds and collection companies are teaming up with credit card companies to collect expired debt.  How do they do it?  They offer the debtor a credit card with a modest line of credit (say $300-500) in return for paying off the expired debt.

Now, there is nothing wrong with this as long as the marketer tells you that you are paying off past debt for which the statute of limitations has run.  In other words, no problem if full disclosure.  However, many companies involved in this business stress the availability of credit or the moral obligation to pay past debts and somehow neglect to mention that the consumer is not legally on the hook for the debt.  That can be a violation of Section 5 of the FTC Act or a violation of the Fair Debt Collection Practices Act.

If all your credit cards have been cancelled, and you are approached by a company that wants to “give” you a credit card, make sure that you get all the facts.  Are you going to be paying expired debt?  What are the credit limits?  What is the interest rate?   It may be a good deal for you under the circumstances.

Most expired debt credit card providers are looking at people with marginal credit who, for the most part, have not filed bankruptcy.  Approaching discharged debtors could lead to problems with the bankruptcy injunction.  Moreover, at least up till now, discharged debtors could usually expect to receive solicitations for new credit cards within months of their discharge.  Why?  Because all of the past debt is discharged and money should be available for paying the new credit card.  So, if you have filed, there is no need to get involved with expired debt collectors unless you really want to re-affirm the debt involved.