Personal Finance

Banks to erase some bad debts on credit reports

Good news for people with old Chase and Bank of America credit card debt: The banks promised last week to delete black marks on many people's credit reports for debts that were sold off.

During a hearing May 5 in New York bankruptcy court, Bank of America's lawyer promised that, within 90 days, it will erase demerits for unpaid credit card accounts that the bank has sold since May 2007.

At the same hearing, Chase's lawyer said that by Aug. 5, the bank will delete negative information for accounts it has sold off, if the account holder has extinguished the debt in Chapter 7 bankruptcy.

"We don't know whether or not we will be, or when we will be selling debt again," Chase attorney Noah Levine said, according to a court transcript. If the bank does sell debt, he said, it will note that unpaid debts have been wiped out in bankruptcy without having to be brought into court.

If you bite the bullet and file bankruptcy, debts that are wiped out by the court should not show up on your credit reports as still being owed. But several big banks have argued that, after they sold off unpaid accounts, they weren't responsible for credit reporting.

As a result, many thousands of consumers have been weighed down with negatives on their credit reports that did not belong there. The new owners of the debt did not appear on consumers' credit reports, leaving consumers with no way to erase the black mark -- short of paying off the debt. The consumer can deal only with the bank, and the bank said it won't correct the report.

Pressure tactic

That was an unfair pressure tactic on thousands of people to pay debts they didn't owe, consumer lawyers argued.

"You know doggone well the people they're selling the debt to want this to happen," said Charles Juntikka, a bankruptcy lawyer in New York who is leading the class action lawsuit against Chase.

With the debt still outstanding on their credit reports, people would be turned down for jobs or car loans, pressuring them to pay. When consumers paid Chase for the extinguished debt, the bank forwarded their payment to the new owner of the debt, minus a fee.

With court cases against Chase and other banks still ongoing, it is unclear how many consumers have been harmed by their practices, but a New York Times report put the number at more than 1 million.

Rusty Haynes, a Chase customer who is the lead plaintiff in the lawsuit against the bank, received a letter from Chase in 2010 saying that negative credit marks "may affect your ability to purchase things you need in the future -- a home, a car, and education," according to court records. His unpaid debt was erased in bankruptcy, but it stayed on his credit report for 21 months before filing his lawsuit and getting it removed.

Last week's court hearing marked a shift in the banks' position. While still denying they acted improperly, Chase and Bank of America have changed their policies against correcting the status of sold-off debt.

Other banks with similar tactic

Other big card-issuing banks have been accused of similar tactics in related cases, including Citi, Synchrony Bank (formerly GE Capital) and Credit One, a Las Vegas-based subprime card issuer. Synchrony in December 2014 said it changed its policies and agreed to erase negatives on bankrupt consumers' reports.

The banks' change of heart came as U.S. Bankruptcy Judge Robert Drain seemed to grow increasingly skeptical of their claim that they had no financial interest in the sold-off debt. In July, he allowed the case against Chase to continue in order to hear evidence that its practice of not correcting debtors' credit reports was illegally helping to collect debts that were extinguished, or "discharged," in bankruptcy.

Meanwhile, some other major card issuers have managed to report the status of discharged debts correctly, Juntikka said. His review of 1,700 bankruptcy cases found only two instances where American Express continued reporting discharged debts as unpaid.

"This is not uniform, across the board," he said. "There are good actors out there."

See related:5 tips for those considering bankruptcy

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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