By Katy Stech - Dow Jones Business News, May 13, 2015 (via NASDAQ.com)
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Two top U.S. banks are preparing to delete negative credit reporting records for some borrowers who filed for bankruptcy, after facing accusations of letting poor marks for unpaid debt haunt borrowers' credit even after the debt was canceled.
At a hearing last week, lawyers for Bank of America Corp. and J.P. Morgan Chase & Co. announced that bank officials are preparing to delete notices they sent to credit reporting agencies that a borrower's account was "past due" and/or " charged off," according to a court transcript viewed by The Wall Street Journal.
The announcement came after the banks, along with Credit One Bank N.A., General Electric's Synchrony Bank and Citigroup Inc., were sued by people who had filed for bankruptcy and gotten their debts canceled with a discharge order but still had notices on their credit reports that their old credit card debt had been "charged off."
In several lawsuits filed in U.S. Bankruptcy Court in White Plains, N.Y., borrowers argued that the banks are required under the federal Fair Credit Reporting Act to "promptly notify credit reporting agencies of any corrections" to their information, even if the bank has sold the account to a debt collector.
A bank's failure to fix the records, the lawsuits said, hurt their credit scores, making it tougher to get a job, find an apartment and borrow money at a cheap interest rate. In one case, a New York man's application to live in a low- income housing apartment was denied "because of delinquent debts" on his credit report, according to sworn testimony provided to the court.
A debt that is listed as "charged off" typically looks worse than a debt listed as discharged, said lawyer Adam R. Shaw, who represents the borrowers in the lawsuits and said that the announcement could affect more than 1.3 million people.
"Debtors emerge from bankruptcy with what's supposed to be a fresh start, and these debts are supposed to be deleted and cleaned, but the banks are continuing to announce to the world that they're due and owing," said lawyer George Carpinello, who also represents borrowers.
Mr. Carpinello said the banks' move could help people who got a bankruptcy discharge but didn't realize that their credit reports are being affected by older notices from a bank.
More than 600,000 people and couples filed chapter 7 protection in 2014, according to the U.S. Administrative Office of the U.S. Courts. Filing for chapter 7 protection typically clears a person's debts with few exceptions, such as student loans, taxes and debt that a borrower agrees to continue paying.
Aside from hurting their credit score, the older records can have another consequence for the borrower: it creates an incentive for them to pay the debt off to improve their credit score even though that debt was discharged in bankruptcy.
"Some people are just going to pay it," said Dalié Jiménez, a University of Connecticut law professor. " It's faster than getting in a fight about it."
The banks' lawyers made their record-deleting announcement at a May 5 court hearing before Judge Robert D. Drain. At an earlier hearing, Judge Drain said he might refer the cases to the U.S. attorney's office and suggested that Chase's lawyer review bankruptcy law's criminal section, according to a transcript.
Neither bank admitted wrongdoing. A Bank of America spokeswoman said that the bank's reporting is "consistent with credit reporting agency policies.," and a Chase spokesman declined to comment.
Synchrony Bank and Citigroup also agreed to delete some notices to credit reporting agencies, Mr. Shaw said.
A lawyer for Credit One Bank N.A. wasn't immediately available to comment.
The borrower lawsuits put a spotlight on the confusion that has arisen over debt-reporting responsibilities when a borrower's debt is sold from banks to debt collectors. Banks often sell the right to collect on credit-card accounts to debt collectors, especially if borrowers seem unlikely to pay them.
No law explicitly requires the banks to reach out to credit reporting agencies to change the status of a debt from "charged off" to "discharged in bankruptcy" once the debt has been sold. Under the federal Fair Credit Reporting Act, passed in 1970, banks and other entities that send information to credit reporting agencies are banned from sending erroneous information and have a duty to correct and update information if they regularly transmit information to those agencies.
The borrower lawsuits trace back to the bankruptcy of Rusty Haynes, a Hudson Valley man who filed for chapter 7 protection in June 2011. At the time, his family's home was worth less than the $216,796.11 mortgage, and he was so far behind on credit-card payments that he faced a court order to pay some of that debt immediately, according to documents filed in U.S. Bankruptcy Court in White Plains, N.Y.
A judge discharged his debts several months later, but Mr. Haynes noticed that his Trans Union and Equifax credit reports still showed the words "charged off" next to the discharged Chase account. Neither credit reports reflected that the account had been "included in bankruptcy."
Chase initially refused to remove the "charged off" wording at Mr. Haynes's request, according to court documents.
Manhattan bankruptcy lawyer Charles Juntikka said he has come across hundreds of similar cases in which banks have failed to notify credit reporting agencies about a bankruptcy discharge, including the case of a New York man whose application to live in a low-income housing apartment was denied "because of delinquent debts" on his credit report, according to sworn testimony provided to the court.
Write to Katy Stech at [email protected]
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