For most consumers, filing bankruptcy and obtaining a discharge was supposed to mean the debts were erased off the credit report and they would receive a fresh start. Unfortunately for millions of Americans, until recently, this has not been the case. Even with bankruptcy relief, zombie debts can create havoc on consumers due to illegal reporting practices of the banking industry.
Top banks, including Bank of America, JP Morgan Chase, Citibank and Synchrony Financial (Formerly GE Capital) had instituted reporting practices, leaving debt on credit reports even after they have been sold to a debt buyer and/or later discharged in bankruptcy. These are often referred to as zombie debts because consumers have been unable to correct reporting errors when these debts show up after years on a credit report.
Consumers were being held hostage by the banks because of the importance of credit reports when seeking loans, jobs, and even application approval for an apartment. This pressure on consumers has resulted in millions being paid on debts that the consumer was no longer legally responsible for.
Lawsuits and an inquiry by the justice department have put pressure on banks to change their policies. A judge in White Plans New York overseeing the case against Bank of America and Chase, gave the opinion that banks were refusing to obey the law because they were profiting from the sale of the bad debt. This has led to the involvement of the Department of Justice, which may result in more penalties and fees for the banks involved. This pressure causes the major banks with illegal reporting practices to rethink how they handle customer delinquencies and charge offs with regard to credit bureau reporting.
The full article can found in the New York Times:
Changes Implemented By August 2015
Banks of America and Chase, with Citibank soon to follow, have agreed to update credit files that reflect charged off accounts and remove any default accounts that involve debt discharged in bankruptcy. Bank of America went a step further and agreed to remove all charged off debt prior to 2007.
With an estimated 80% of consumers having inaccurate information on their credit reports, these changes will provide a better assessment of the consumer’s financial condition. The new reporting practices will more accurately reflect bankruptcy, charge offs and debt the consumer is legally responsible for.
Things to Look For: Those with past due balances or charge offs that were later discharged in bankruptcy from Bank of America and Chase will be removed from consumer credit reports. Going forward, Bank of America customers will see past due accounts in default and sold to debt buyers, removed from the credit file. This will eliminate duplicate reporting of delinquent debt. Other banks like Citigroup are in discussions to make similar changes. These changes will provide relief for millions of Americans suffering from inaccurate debt reporting and the collections of debts no longer owed.
Things That Will Stay the Same: Bankruptcies are reported on a credit file for 10 years. It can take several years after the bankruptcy has been completed before new credit can be re-established giving the consumer a fresh start.
As credit reports become a factor in more non-credit related decisions, having an accurate depiction of what you legally owe has become essential. More and more employers are relying on credit files for employment decisions making financial security dependent on these reports.
It is hoped that this decision in New York will have a ripple effect through the industry and will ensure that debts consumers are no longer legally obligated to pay will be accurately reported on credit files.