SquareTwo Plan Faces More Scrutiny

A federal bankruptcy watchdog has become the latest regulator to challenge the proposed reorganization plan of debt collector SquareTwo Financial Services Corp. which would eliminate its consumer liability.

U.S. Trustee William Harrington filed an objection Thursday that takes aim at provisions in the proposed chapter 11 plan that would release officers and directors of SquareTwo from potential liability arising from federal and state consumer protection laws. Regulators in Colorado and Oregon have also objected to the plan.

In court papers, Mr. Harrington said firms such as SquareTwo and its CACH LLC subsidiary often use aggressive tactics to collect old debts. If approved as is, the plan would eliminate outstanding liability against SquareTwo while providing individuals with legal claims against the company without anything in return.

Consumers are likely unaware that SquareTwo is in bankruptcy and don't understand how their right to defend themselves could be affected if the chapter 11 plan is approved, Mr. Harrington said.

SquareTwo filed a "prepackaged" chapter 11 in March and is scheduled to have its exit plan considered by a bankruptcy judge no later than June 2. Fellow debt collector Resurgent Holdings LLC has agreed to invest $405.1 million, subject to certain closing costs, to acquire the business.

"Typically, prepackaged plans that come before the court involve an exchange of a debtor's secured debt for equity with the unsecured creditors generally riding through the bankruptcy unaffected," the objection said. "Not so here, where unsecured creditors may suffer real harm by not having been given an opportunity to vote on the releases contained in the plan."

SquareTwo primarily focuses on purchasing the past-due debt of consumers and small businesses from credit card companies and loan makers. Bankruptcy lawyers representing SquareTwo didn't immediately return a message Monday seeking comment.

Mr. Harrington said the plan cannot be approved as is because unsecured creditors would be better off if SquareTwo were simply liquidated. In a chapter 7 liquidation unsecured creditors would be "would be free to pursue any causes of action they may have," the objection said.

A lawyer representing unsecured creditors said last week they don't know how much liability SquareTwo currently faces. CACH has filed hundreds of new debt collection lawsuits since filing for protection March 19, state court records show.

Write to Jonathan Randles at Jonathan.Randles@wsj.com

(END) Dow Jones Newswires

May 08, 2017 13:58 ET (17:58 GMT)