Banks Step Up to Provide Relief to Bankrupt Consumers

Bank of America and JPMorgan Chase announced this week that they will make changes to how they report debt that was included in a bankruptcy. The change is set to occur within the next three months.

This change comes from lawsuits filed in Federal Bankruptcy court against these two banks along with Citigroup and Synchrony Financial, formerly GE Capital Retail Finance. The lawsuits accuse them of selling off bad debts that were included in a consumer’s bankruptcy to collection agencies and other financial firms that also report to the credit bureaus in order to make money by collecting on debts that are not owed. There are also claims that these companies sometimes continue to report these accounts as charge offs with balances even after the bankruptcy has been discharged. In some cases they even continue to report current late payments even though the bankruptcy may have been discharged years ago. If the account was sold to a third party, that company also reports the debt with a balance and current late payments. In both instances they are reporting debts that are no longer owed as they were discharged in the bankruptcy. If the debt is sold the consumer is being hit twice on their credit report for an account that is no longer owed: once by the original creditor and once by the creditor who purchased the account.

Chase has agreed to ensure that accounts that were included in a bankruptcy were correctly reported on a credit report as bankruptcy with no balance owing. This will ensure that there is no indication of charge off or any past due amount. Bank of America is going a step further and has agreed to erase all credit card debt from a consumer’s credit report that has been sold since May of 2007 that was actually included in the bankruptcy.

Synchrony Financial and Citigroup are also looking at making similar changes to the way they report bankruptcy accounts to the credit bureaus. Hopefully they will decide to go the route that Bank of America has taken and agree to erase the debt completely from the credit report.

These debts that are being inaccurately reported on a consumer’s credit report are considered “zombie debts” since they are no longer actually owed. And these changes could benefit up to 1 million consumers.

One of the issues that are often seen on credit reports are creditors who continue to report an account every month even after the bankruptcy has been discharged. This not only continues to keep a borrower’s credit score down as it brings the bankruptcy to a current reporting date every month, but it also causes declines from automated underwriting systems as it makes it look like a current bankruptcy. By erasing the debt completely as Bank of America has agreed to do will eliminate this issue.

Hopefully this change will cause other creditors to step up to the plate and follow in the foot steps of these major banks in order to avoid potential law suits of their own.

For now this is at least a step in the right direction and a victory for the consumer who has had a bankruptcy and is working to get their credit reports back in good shape!