The term “future flow agreement” sounds like a complicated derivative product Wall Street cooked up. It probably is, but in practice it’s really just a mechanism for banks to make money when debtors file bankruptcy. That should sound weird because once a debt is discharged it can’t be collected. Normally such debts take up lines on banks’ ledgers until they can charge them off and cover the loss.
Instead of waiting for that to happen though, banks just enter into an agreement to sell a debt to a third party once the debtor files bankruptcy. It’s not an insurance plan for the lender, but it certainly functions like one. The practice raises the question of whether it’s legal to sell a debt that can’t legally be collected. The answer is, yes it can, just like worthless baseball cards.
What creates ethical problems with future flow agreements is that the lender entering into it should probably realize that the buyer can only make money on the debt if it tries to collect on it, even though that would violate the discharge order and be illegal. In other words, once sold, discharged debt becomes a kind of zombie debt, which is debt that shouldn’t be collectable because it’s been paid off, settled, or discharged.
The benefit to the lender for making these kinds of agreements is threefold. One, once the debtor files bankruptcy the lender has very little hope of getting much from the distribution. It will probably be at the bottom of the list of non-priority, unsecured creditors. The future flow agreement allows it to recover some of the money it lost. How much? Maybe 5 to 25 cents on the dollar depending on the chapter the debtor filed in. Two, the agreement gets the discharged debt off the bank’s books sooner rather than later. Three, because future flow agreements are often entered into years in advance, the bank can value the debt more highly than it otherwise would be if the bank expects a default or bankruptcy.
As a zombie debt, the future flow agreement can create problems for debtors in two ways. One, as mentioned above, the new creditor may try to illegally collect on it. Two, the new debtor might try to sell the debt onto another lender that doesn’t know about the bankruptcy for some reason, and then it tries to collect on it. Sometimes the original lender might receive a commission for every payment the former debtor makes on an account sold through a future flow agreement.
Like all zombie debts, people are discouraged from paying them. If a creditor contacts you and claims you owe it money on a debt that was discharged or paid down in bankruptcy, then contact an experienced New York bankruptcy lawyer to deal with the creditor immediately. Violations of the discharge order can result in monetary or statutory damages for former debtors and attorney’s fees.
For answers to more questions about zombie debts, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy law firm Bruce Weiner for a free initial consultation.
