Two years ago Commercial Financial Services Inc. threw the market for charged-off credit card debt into turmoil by filing for bankruptcy protection.

Many banks had routinely sold their bad card accounts to the Tulsa, Okla., company, which for a while had great success in making the accounts profitable.

A few companies were beneficiaries of its demise - most notably Creditrust Corp. of Baltimore, which won the bidding for its $546 million portfolio. But recently Creditrust dropped out of the business as well; it filed for bankruptcy in June, citing credit problems.

Now another specialty lender has emerged in this space: Credit Store Inc. of Sioux Falls, S.D., which has bought more than $4 billion of charged-off card debt from monolines and banks since 1997.

But unlike Commercial Financial, Credit Store combines collections and rehabilitation while extending new credit.

According to industry experts, Commercial Financial Services failed not because its business model was flawed, but because of financial irregularities. Its founder and chief executive officer, William R. Bartmann, stepped down after an internal investigation of claims that the company had falsified data. He was never formally charged.

Though banks have little interest in hand-holding customers who have fallen into card debt, these niche companies take a sympathetic approach that seems to have paid off, experts said.

Once Credit Store buys accounts, it uses proprietary database technology and statistical modeling to ferret out a small percentage of account holders who meet its underwriting criteria and are willing to work to improve their credit.

These consumers are given special payment plans, under new credit cards. If they maintain good payment records, new credit is extended as the old debts are paid off.

Coupling collections with counseling is not new. In fact more and more banks are touting a kinder and gentler approach to bill collecting. Bank of America Corp., for example, calls its collection associates "financial counselors" and its debtors "potentially profitable customers" who may be cross-sold additional products while paying off their delinquent accounts.

But Credit Store has found a way to rehabilitate some of the customers that most banks have already given up on.

"We're trying to find those people that want to get back into the mainstream," said Kevin T. Riordan, president and chief operating officer. "You're going to start seeing banks try to understand customers better and work with them more, and we want to help them do that."

Mr. Riordan said delinquent and charged-off accounts are generally categorized into three groups: primary, secondary, and tertiary.

Primary accounts are usually 120 to 270 days past due and have been placed with collection agencies for the first time. Secondary accounts are 270 to 360 days past due and have already gone through one collection agency.

Tertiary accounts - which is what Credit Store purchases - have already been placed unsuccessfully with two or more collection agencies.

A further twist to the company's business plan is that after the accounts are paid off and the customers have developed a solid payment history, Credit Store sells the portfolios back to banks.

Robert Hammer, president of R.K. Hammer Investment Bankers in Thousand Oaks, Calif., which brokers card portfolio sales, said Credit Store can resell its portfolios at much higher prices than it originally paid. Credit Store said it pays anywhere from 0.50% to 3% of the receivable balance of a portfolio.

When the company resells a portfolio, the "financials look closer to a performing portfolio instead of a subprime portfolio, even though they came from a chargeoff portfolio," said Mr. Hammer, who has advised the company on many of its sales.

A typical portfolio bought by Credit Store contains 5,000 to 150,000 consumer accounts, ranging from $1,000 to $6,000. Accounts are usually resold after the consumer has made eight or more timely payments on the outstanding credit card balance.

After Credit Store buys a chunk of accounts, it offers the most promising performers an opportunity to transfer their debt to a new unsecured MasterCard or Visa card issued by one of two South Dakota banks: Bank of Hoven or Fishback Financial Corp.'s First National Bank in Brookings.

After making a number of payments on the transferred balance, the consumer can begin using the card for new purchases.

The terms resemble those on other subprime cards. Annual interest rates range from 18.9% to 19.9%, with a 25-day grace period. There is no fee for the first year but a $35 annual fee thereafter.

Late fees and over-the-limit fees run $10, less than most issuers charge. Mr. Riordan said he is considering raising that to $15.

Some industry experts question Credit Store's extending credit to consumers who are delinquent, and in some cases deeply in debt.

It is wrong to give more credit to people going through debt rehabilitation, said Luther Gatling, president of Budget and Credit Counseling Services of New York. That only keeps them continuously in debt, he said.

But Mr. Riordan said offering credit to people trying to get out of trouble is a positive move.

"You can't even rent a movie without a credit card," he said. Providing one is "really trying to help people with an issue."

"They pay off the loan and then they're on the mend."

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