By AMY LONG
The Utah State Attorney General announced last Wednesday that a settlement has been reached in a consumer fraud case against Sears.
The Consent Judgement filed resolves claims against Sears for violating the bankruptcy and state consumer protection laws, according to Jeff Gray, the attorney who worked on the case. Gray is affiliated with the Utah Attorney General’s office, Consumer Rights division.
Jan Graham, Attorney General for Utah, detailed the settlement terms in a press release, which stated that Sears must: forgive up to approximately $125 million in consumer debts improperly obtained by Sears, repay at least $125 million in compensation to affected customers including interest, and pay $35 million to each of the State Attorney General offices for use in consumer protection as well as $5 million more to benefit consumer education. Additionally, Sears has agreed to change its collection practices.
“(the) News release represents the culmination of a story that began in April,” Sears, Roebuck & Co. representative Jan Drummond said.
According to Drummond, the company admitted it was at fault last April.
Sears was in the practice of extending offers of reaffirmation agreements to consumers who had filed Chapter 7 bankruptcy.
According to Cheryl B. Preston, Professor of Law at the J. Reuben Clark Law School, a reaffirmation agreement is a contract between a debtor and a creditor entered into after the debtor has filed Chapter 7 bankruptcy and is no longer liable for accrued debts.
To be enforceable, the agreements must be filed with the court, Drummond said. She remarked that not all agreements had been filed.
The agreements are legal if they are filed at the same court that handled the bankruptcy, Gray said. He added that Sears failed to file them.
There were many customers indebted to Sears through charge cards, Gray said. When they filed bankruptcy, those debts should have been discharged, he continued.
Sears pressured customers to sign the agreements which were not obligatory, Gray said. The department store told bankrupt customers that it would repossess
goods purchased on credit that were not entirely paid off when bankruptcy was filed, unless customers signed the agreements.
In practice, repossession does not happen very often, Drummond said.
Sears does have the right to repossess, but would prefer to extend a “new but very modest line of credit,” Drummond said.
Preston holds that Sears does not always have the right to repossess. Credit card debts do not carry security of payment past bankruptcy. Sears tried to reaffirm personal responsibility for the debt through reaffirmation agreements, she added.
Sears faces several options when a customer files for chapter 7 bankruptcy with an unpaid balance on credit card purchases, according to Preston.
The company could take back the item. It could also eat the cost of the item. A third option would be to work out a payment agreement with the debtor, Preston said.
Sears would rather sign reaffirmation agreements with customers than take back their purchases, Drummond said.
A debtor may choose to enter into a reaffirmation agreement for valid reasons, Preston said. After bankruptcy, few individuals have the money to pay the balance remaining on their possessions at once, Preston said.
If debtors want to keep the items, they must either pay them off or agree with a creditor upon a payment schedule, according to Preston.
Debtors choosing to pay the balance on their possessions must only pay what the object is worth, Preston said.
For example, if a debtor bought a car worth $10,000, but their payment plan requires interest bringing the total payment to $15,000, the debtor would only need to finish paying the $10,000 in order to keep the car, Preston said.
A fair reaffirmation agreement would take into account the fact that debtors are only required to pay what the object is worth, Preston said.
According to Gray, Sears must “… re-vamp their collection practices …” especially with regard to reaffirmation agreements.
Drummond noted that Sears has been carefully observing reaffirmation agreement law since April 1, 1997.
Sears must also make monetary restitution to the customers who had signed invalid reaffirmation agreements, Gray said. The department store must pay back all money collected unlawfully, adding interest at a rate of 10 percent annually.
Sears is currently searching more than 5,000 records kept in various places to find customers who might be affected by the settlement, Drummond said.
The company has so far located 146,000 such customers nationwide, and that number is expected to increase, Drummond said.
“We’ve got several different initiatives ongoing to help consumers,” Drummond stated.
Drummond said that Sears is attributing the fact that they did not file affirmation agreements with the court to “…flawed legal judgement.” The companies’ lawyers are now at work to make sure that they fulfill all the requirements of the settlement, Drummond said.
“(Our) Lawyers are working hard to defend the company, cooperate with the Attorney Generals’ offices and pay the penalties,” Drummond affirmed.
She further noted that Sears has been carefully following the law governing affirmation agreements since April 1, 1997.
The unlawful collections settlement covered all 50 states and a time period from January 1992 to April 1997, Gray said. There were probably some cases dating from before 1992.
Utah will receive an estimated $120,000 from the settlement to pay for consumer protection programs, according to the press release.
505 affected Utah consumers have been located so far. Their total repayment will be approximately $425,000, the press release stated.
The settlement will be disbursed by a Settlement Administrator. According to Gray, the administrator is a neutral, third party office fulfilling the same function in a related class-action suit against Sears.
The case was first initiated by the Massachusetts State Attorney General, Gray said. He also named Tennessee and California as being key states in this action.
Gray suggests that consumers who think they may be one of those who participated in the invalid affirmation agreements call a hotline run by the Settlement Administrator for help in filing a claim. The number is 1-800-529-4500.