A few months back, we had the problem of the fraudulent debt collector, but more recently The New York Times Dealbook blog gives us the menace of the bank that neglects to report debts canceled in New York bankruptcy as properly discharged to credit reporting bureaus. Apparently the U.S. Trustee’s office is so concerned that it’s investigating JPMorgan Chase, Bank of America, Citigroup, and others for violating discharge orders in numerous bankruptcies. A handful of bankruptcy judges among those looking into the problem.
Why are these banks not fulfilling their obligations under the discharge order? The article suggests two reasons.
One, keeping a discharged debt “live” on a credit report effectively “holds the credit report hostage,” as the article characterized it. Debtors must pay on the debts to improve their credit scores even if they don’t legally owe them. The consequences are denial of apartment or mortgage applications, and in the case of one person interviewed, employment. Some people don’t realize the practice is illegal and pay the debts anyway. When the banks are reminded that the debts were discharged, then they back down. It’s bullying, but it can squeeze money out of people who don’t owe it while giving the bank an excuse if it’s caught.
Two, the banks are hoping to encourage debt collectors to keep purchasing their bad accounts. The situation here is that the banks know that some portion of the debts they sell to collectors will go into bankruptcy at some point, so they promise to not report the discharge so the buyer can collect on the debt. It’s quite common: Sixteen percent of one collector’s accounts are discharged debts. Alternatively, banks can be selling debts without diligently verifying their discharge status. The arrangement is mutually beneficial: The collectors get to collect on discharged debts, which at this point are zombie debts, while the banks know that they’ll keep their customers.
The banks, of course, claim the “inaccuracies” in the credit reports are all clerical errors and not systemic practices. Bankruptcy judges are more skeptical and are allowing lawsuits against the banks to go forward. Indeed, the documents produced in court show contracts between banks and debt collectors that distribute any payments made on discharged debts.
The Dealbook article can be found here.
A bank that doesn’t report a debt as discharged to a credit bureau is in violation of the discharge order. The same goes for a debt collector trying to collect on a discharged debt. If this happens to you, hiring an experienced New York bankruptcy lawyer can help you resolve the question quickly, even if it means taking the creditor to court and demanding damages for breaking the law.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy automatic stay Bruce Weiner for a free initial consultation.
