Sears’ Collection Tactics Again Under Scrutiny

Sears, Roebuck & Co. was fined $60 million and paid $498 million in settlements last year for its high-pressure tactics in collecting from bankrupt credit card holders.

Now Sears--a creditor in one-third of all U.S. personal bankruptcy cases--is accused anew of arm-twisting maneuvers that some judges say are just like the illegal actions that led to the 1999 fraud conviction for the nation’s biggest retailer.

“We feel misled,” wrote U.S. Bankruptcy Judge Francis G. Conrad of Vermont, reviewing Sears’ attempt to collect $624 from a couple trying to keep a refrigerator and washing machine. “It seems little has been learned from the [previous] fiasco.”

Sears first got in trouble for not telling bankruptcy judges about its debt-repayment agreements with customers, as required by law. Although Sears says the agreements it now reaches with debtor customers don’t require explicit disclosure, bankruptcy judges in California, New York and Vermont call that legal hair-splitting--saying that Sears is still mistreating customers.

For Sears, credit cards provide a major route to revenue. In 1999, the Hoffman Estates, Ill.-based company got $1.35 billion in operating income from credit cards, compared with $866 million from store sales.

Sears contends that it’s doing nothing illegal or unethical. The company legitimately tries to collect what it’s owed to protect shareholders, officials say. “It seems unfair to convict us of another crime when we aren’t breaking the law,” said Jean FitzSimon, a vice president of Sears’ legal department.

The credit card disputes center on the differences between the “reaffirmation agreements” that Sears reached with debt-burdened customers and “redemption agreements,” in which debtors pay a smaller lump sum to avoid repossession of household goods. In the first case, customers reaffirmed their credit card debt and established a schedule to pay it off.

Both techniques are commonly used by creditors who want to collect some of what they’re owed without going to bankruptcy court to determine which debts should be paid. Both are legal, with procedures spelled out in federal bankruptcy law.

The key difference is that reaffirmation agreements must be filed in court so judges can oversee them, protecting low-income consumers who petition for bankruptcy without the aid of a lawyer. Judges often strike down or modify such agreements in view of other debts.

For redemption agreements, the law doesn’t explicitly require such disclosure.

Consumer advocates say Sears pressures cardholders to sign the agreements by threatening lawsuits or the embarrassment of repossessing their televisions and refrigerators. The fraud conviction stemmed from Sears’ policy of advising collection agents not to file reaffirmation agreements in court to avoid the risk that a judge might invalidate them.

After the conviction, Sears changed its collection policies and now uses redemption agreements more frequently. Although redemptions have disadvantages--they yield only the depreciated market value of merchandise and not its original price plus interest--there is an advantage: Sears argues they don’t have to be filed in court.

And that’s where Sears may have run afoul of the law: Some judges say they should be alerted. In 1998, a California judge ruled in a Sears case that redemption agreements had to be disclosed; he disapproved of Sears’ attempt to collect $281 for a VCR and television.

Consumer advocates and some legal scholars also say Sears still isn’t playing fair with customers. “These redemption agreements are awfully close to reaffirmation agreements under a different name,” said Karen Gross, a New York Law School professor and bankruptcy specialist, and a longtime Sears critic. “Apparently Sears hasn’t gotten the message that it’s not OK to mistreat” bankrupt customers.

Sears officials deny that they strong-arm debtors and notes that the company wants to keep them as future customers.

“I’d say our style is aggressive and ethical,” said FitzSimon, a former Justice Department lawyer. “We handle these cases as kindly and gently as we can. But we try to leave as little money on the table as possible.”