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Sears to Pay $100 Million in Settlement

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From Reuters

Sears, Roebuck & Co. will pay about $100 million to 200,000 consumers who were illegally forced to pay the company money after having declared bankruptcy, the government said Wednesday.

The Federal Trade Commission said this was the first of several sanctions Sears could face for forcing consumers to pay money they did not owe, a problem that dates back at least to 1985. Sears had said Tuesday that it reached a tentative agreement to settle the issue with state and federal regulators.

“Our settlement has two primary purposes: to ensure that Sears does not engage in the practice ever again and to give the FTC a tool for ensuring that Sears gives full refunds to the more than 200,000 customers this practice likely affected,” said David Medine, associate director for credit practices at the FTC.

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Sears told the agency it has excellent records going back to 1992 but will have trouble contacting consumers victimized earlier.

“It will have a very liberal claim process” for the years before 1992, said Lucy Morris, assistant FTC director for credit practices. “You will not need every piece of paper.”

The FTC said consumers who got into financial trouble and declared bankruptcy found themselves confronted by Sears, which told them they could keep merchandise they bought--such as a refrigerator or a television--and their credit card, but only if they agreed again to pay off their full, pre-bankruptcy debt.

Such “reaffirmation agreements” are legal only if filed in Bankruptcy Court, and the judge must approve them if the consumer lacks a lawyer.

“Sears did not file these agreements in court even though they told the consumer who signed them that they would,” Medine said.

Bankruptcy laws are designed to free consumers of debt and give them a fresh start, except for payments granted by the bankruptcy judge. By failing to file the agreements in court, Sears violated rules designed to keep creditors from going too far in trying to collect debts from consumers, experts said.

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“There are reasons why these agreements should be run through the courts,” said Steven Resnicoff, a law professor with DePaul University in Chicago. “The reason is creditors shouldn’t be allowed to overreach.”

The problem came to light in March when a consumer complained to Bankruptcy Court Judge Carol Kenner in Boston that he was unable to feed his children because of his new, binding promise to pay Sears. That came as a surprise to the judge, who had never seen the “reaffirmation agreement.”

“The judge was horrified and called in Sears,” said Medine. He added that Sears has been cooperative.

“Sears didn’t stonewall, they didn’t delay,” Medine said. The company may still face legal troubles from the Justice Department and state attorneys general and may owe court costs or punitive money, Medine said.

Judge Kenner today will receive the FTC settlement, which Medine said has been coordinated with a settlement of a class-action lawsuit against Sears.

Sears stock fell 25 cents to close at $49 on the New York Stock Exchange, where it was one of the most active issues. Analysts cited concerns about how much Sears will have to pay.

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“We thought the outside limit was $160 million,” said Thomas Tashjian of Montgomery Securities. “It’s really not a settled issue.”

A Sears spokeswoman said the company would not discuss the settlement until after today’s hearing.

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