GE Capital May Have Acted Illegally

General Electric Co.’s GE Capital unit may have illegally collected credit card debts from more than 17,000 customers who filed for personal bankruptcy, and has made some refunds.

GE’s finance arm said it’s investigating whether it failed to file the proper court documents after persuading bankrupt credit card customers to pay debts that they could have had wiped clean.

GE Capital joins a raft of companies accused of exploiting consumers who might not know their legal rights. In June, Sears, Roebuck & Co. agreed to pay at least $178 million to wronged credit card customers in the biggest case to date. On Thursday, a judge approved an accord in which Federated Department Stores Inc. agreed to pay about $4 million to settle similar claims.

On Monday, a woman sued Costa Mesa-based Avco Financial Services in a class action in federal court in Providence, R.I., where Avco’s parent company, Textron Inc., is based. An Avco spokesman denied the allegations.

“I’d say this is the credit card industry having a field day ganging up on the poor guy who’s gone bankrupt,” said Robert Heady, publisher of Bank Rate Monitor, which tracks bank and credit card rates for consumers.

At issue is the practice of having credit card holders sign so-called reaffirmation agreements, which obligate them to repay outstanding balances on cards after filing for bankruptcy. The agreements are legal, but federal law requires creditors to include them in the debtor’s bankruptcy file.

Judges need the agreements for two reasons: to ensure that a debtor needn’t make payments if his bankruptcy petition is approved and to protect the rights of other creditors.

The GE Capital case is part of a wave of litigation spawned by Sears’ admission in April that its officials routinely failed to file reaffirmation agreements with bankruptcy courts.

Retail analysts say the practice is widespread in the industry, leading plaintiffs lawyers, state attorneys general and federal regulators to begin scrutinizing credit card collections.

On Friday, the California attorney general’s office said it was reviewing the collection practice.

“We’re reviewing this, specifically GE Capital,” said Matt Ross, a spokesman for the state attorney general’s office.

At the end of 1996, GE Capital was the eighth-largest issuer of credit cards with receivables outstanding of $16 billion, according to Credit Card News. GE Capital has 70 million cards outstanding.

GE Capital handles credit card operations for retailers such as Home Depot Inc. and Montgomery Ward through its Monogram Credit Bank in Georgia. Its credit collection operations are based in Kansas and Ohio. GE Capital acknowledged in court papers that it might not have informed bankruptcy judges in some cases that the agreements existed. The documents, filed in federal court in Springfield, Mass., are part of a federal lawsuit filed in April. GE Capital says the case is one of five nationwide accusing GE’s finance arm of engaging in the collection practice.

GE hasn’t admitted that it failed to file any of the required documents. Its officials didn’t return calls for comment on Friday.

In the Avco case, company spokesman James C. Straw said the allegations by Cheryl Bessette “are completely against company policy” and that Avco will “vigorously defend the suit.”

Bessette’s complaint alleges that she reached such an agreement with Avco, which had lent her $1,500 at 12% interest for purchases from a furniture store. Bessette filed for bankruptcy in August 1995 and had her debts wiped out, including the money owed to Avco, according to the complaint.

During the bankruptcy proceedings, Bessette pledged to pay $100 a month to Avco to retire the loan, according to the complaint. Avco violated the law by failing to file the agreement in bankruptcy court as required, the complaint says.

Straw said, however, that nothing in Bessette’s case was done without notifying the bankruptcy judge.