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You might be the victim of ‘debt parking’ and not know it

On Behalf of | Dec 21, 2020 | Bankruptcy |

As you prepare to file for bankruptcy, you want to get copies of your credit reports so that you have a clear picture of who your creditors are and how much you owe them. What happens if you see a debt you recognize? Maybe there is a large overdue medical bill you don’t recall.

Don’t assume that it’s a legitimate item. You may be the victim of something called “debt parking” or “passive debt collection”. You wouldn’t be alone. 

What is debt parking?

These rather innocuous-sounding terms refer to an illegal practice where a collection company places a fake debt in someone’s credit file. The goal is to wait until that person applies for a loan, apartment or job and discovers this debt on their credit report. Anxious to get rid of it, they pay the collection company as much as they can of the bogus debt without thoroughly researching it. People have paid a total of millions of dollars on debt they didn’t owe.

The federal government is aware of this practice. It was addressed in a 2014 report by the Consumer Financial Protection Board (CFPB). However, they don’t have a good idea how widespread the problem is. They rely on consumer complaints to go after the culprits.

The FTC settlement with Midwest Recovery Systems

One big offender was taken down recently by the Federal Trade Commission (FTC). The agency announced a settlement with a company called Midwest Recovery Systems. It reportedly “parked” almost $100,000 of debt on numerous credit files across the country and was able to collect almost a quarter of that amount. The FTC reported that nearly all (97%) of the debts it investigated based on customer complaints in this case “were inaccurate or not valid.”

While the company didn’t admit guilt in the settlement, it agreed to stop the practice. It claimed to be unable to pay the $24 million fine, so that fine was suspended.

An important lesson for anyone, whether you’re facing bankruptcy or not, is to keep an eye on your credit report. Further, don’t assume that every item you see – particularly those that could negatively impact your credit score or ability to get credit or even a job or housing — is accurate. This might require a bit of time and research. If you’re preparing to file for bankruptcy and have suspicious items in your credit file, your bankruptcy attorney can help you.