CREDIT CARD MISTAKE SLAMS SEARS
Byline: Sidney Rutberg / With contributions by Vicki Young
NEW YORK — Sears’s credit card business, long considered the best-run credit operation in the country, has goofed big-time and will have to repay millions of dollars to credit card customers who went through bankruptcy.
Filing for personal bankruptcy allows a consumer to get a discharge of credit card debt, relieving the bankrupt of any legal obligation to pay the debt. It also blocks creditors from acting to collect those debts.
However, the bankruptcy laws also allow a debtor to voluntarily “reaffirm” any debt that has been discharged in bankruptcy. In a reaffirmation, a debtor agrees to repay and again becomes legally liable for the debt. These reaffirmations must be filed with the bankruptcy court.
Sears, in what it called “flawed legal judgment,” concedes that it did not file all the reaffirmations with the bankruptcy courts, and has agreed to repay all money collected, with interest, under unfiled reaffirmations throughout the country from 1992 until April 31, 1997.
It has also agreed to give each debtor a $100 Sears gift certificate.
Sears stock slumped 3 5/8 to close at 47 1/4 Thursday on the New York Stock Exchange, reflecting the credit problem and sluggish March sales.
A Sears spokeswoman said that at this point, Sears doesn’t know how much money would be involved, but in a statement, Sears said the payments “may have a material effect on 1997 annual earnings.”
The spokeswoman noted that in the District of Massachussets alone, Sears has identified 2,733 debtors with unfiled reaffirmations for the two-year period of l995-1996. She added that Sears is in the midst of a full-scale audit to determine how much is involved.
In an order issued by Bankruptcy Judge Carol J. Kenner, Sears is ordered to show cause why the retailer should not be fined $500 for each unfiled affirmation agreement, or a total of about $1.4 million for the 2,733 Massachussets debtors identified.
The order noted that Sears’ “conduct appears to constitute a willful attempt to collect a debt that was subject to discharge in this case.” On Wednesday, Sears filed a motion withdrawing opposition to the court order and agreeing to repay all funds collected on unfiled reaffirmation agreements.
In its motion to withdraw opposition in Boston bankruptcy court, Sears said the issues “were just recently brought to the attention of Sears senior management.”
“The company no longer intends to contest the Court’s order to show cause,” the Sears filing stated. “While a significant majority of reaffirmation agreements were timely filed by Sears, it is now plain that in some cases the company has exercised flawed legal judgment and execution in failing to file some reaffirmation agreements.”
In addition, Sears said in its court filing that it has retained Professor Lawrence P. King of the New York University Law School to perform an audit of Sears’s procedures on reaffirmation agreements and “is committed to following Professor King’s recommendations to assure future compliance” with bankruptcy law.
Furthermore, Sears will stop billing any former debtors who signed unfiled reaffirmation agreements and will move quickly to complete an audit by its internal staff and the accounting firm of Deloitte & Touche to identify all debtors with unfiled agreements from 1992 to April 1, 1997.
A class-action suit by two debtors who signed reaffirmation agreements with Sears and say they repaid their debt to Sears under the agreements were filed in Bankruptcy Court in Boston.
Douglas Brioso of Somerville, Mass., said he repaid $387 at $13 a month to Sears under a reaffirmation agreement, and Eileen Reynolds, also of Somerville, said she repaid $423 at $10 a month.
The suit charges that “Sears has threatened debtors with objections to the dischargeability of their Sears debt in order to coerce” them into signing reaffirmation agreements, adding that the agreements were not filed “to avoid the Court’s scrutiny of and likely invalidation of these agreements.”
Sears will refund all payments made under the unfiled agreements, with interest, and will continue to honor the unused credit lines of those debtors.
According to Harvey R. Miller, a leading bankruptcy attorney, section 524 of the bankruptcy code lays out the specific requirements for debt reaffirmations. Among the requirements are that the debtor fully understands the consequences of the reaffirmation and that the reaffirmation be filed with the bankruptcy court. “Otherwise,” said Miller, “they are unenforceable.”
Another veteran bankruptcy practitioner said that all credit card companies try to get bankrupts to reaffirm their debts and their tactics often border on trickery.
Leon C. Marcus, bankruptcy attorney at Phillips, Lytle, Hitchcock, Blaine & Huber, said that one method is to offer the debtors improved terms on the old debt plus promises of new credit.
“They might propose easy payment of $50 or $25 a month instead of much larger payments due under the original payment schedule,” Marcus said. “If the debtor agrees to the new deal, there is small print that includes a reaffirmation of the old debt.
“The debtors may not even know what they’re signing.”
A third bankruptcy attorney, Lester Lazarus, said, “I never heard of such nonsense. Who would agree to pay a debt after getting a discharge. In all my years of practice, too many to even talk about, I never heard of one of my clients signing a reaffirmation agreement. Once they were discharged, they stayed discharged.”
The Sears spokeswoman said Sears obtains affirmation agreements by having its representatives talk to the debtors in bankruptcy court. “He or she will tell the debtor that a reasonable payment plan can be arranged and the debtor is also offered a new small credit line, maybe $100 to $200,” the spokeswoman said. “Once the debt is paid off, the debtor then becomes a credit card holder in good standing.
“If the debtor agrees, he or she is asked to sign a reaffirmation agreement, and in most cases the agreement is filed in court.”
The Sears credit card business is huge. Last year more than 30 million customers use their Sears Card to make purchases. Receivables outstanding in l996 came to $26.7 billion and gross credit revenue came to $4.4 billion.
Last year, the credit business was plagued by increased bankruptcies with the fourth-quarter provision for uncollectible accounts rising by $133 million to $328 million. However, Arthur C. Martinez, chief executive officer, said in a statement, “Credit continued its strong performance despite increased uncollectibles.”
For the year, Sears’s net income rose 24 percent to $1.27 billion, or $3.12 a share, from $1.03 billion, or $2.53.
David Poneman, retail analyst for Sanford Bernstein & Co., who follows Sears closely, said he is “still flying blind” on how much this will cost Sears. His estimate for this year’s earning remains at $3.60 pending more information on the cost of the reaffirmation problem.