Why Discharged Accounts Still Show Up With Balances On Credit Reports

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We have been seeing lots of problems with Alabama consumers who have discharged debts but the debts are still on their credit reports showing up with a balance owed. No balance is owed. There was a major article in Business Week that came out that helps explain why this happens. Please read this article in its entirety by Robert Berner and Brian Grow. But here are some excerpts that will give you a good sense of the problem and why it exists.

Here is another excerpt:

This kind of failure by creditors to update credit reports happens with some frequency, consumer lawyers and court-employed bankruptcy trustees say. And it can have consequences: In September, 2003, when Rathavongsa tried to close on a $274,650 mortgage for a new house, his would-be lender, Wachovia (WB ), said he would either have to pay Capital One or show proof from the credit-card company that the debt had been discharged. Despite several calls and a letter from his attorney, he says, Capital One never revised the credit report. To obtain the home loan, Rathavongsa eventually did what many consumers in this situation do. He gave in and paid Capital One $9,523 he no longer legally owed.


This is a startling conversation in a court hearing between a bankruptcy judge and a lawyer for Chase:

The very existence of this marketplace confounds even some veterans in the bankruptcy field. During a preliminary hearing in New York in March, U.S. Bankruptcy Judge Robert Drain asked a lawyer for JPMorgan Chase (JPM ) how the bank had managed to sell consumer credit-card debts that had been discharged. “I don’t know who would buy a discharged account,” the perplexed judge said.

“Happens all the time, your honor,” the Chase lawyer, Thomas E. Stagg, responded.

Drain’s confusion is understandable. Traditionally, discharged debt was seen as not worth the paper it’s written on. Once a judge excuses some of a debtor’s obligations-part of the bankruptcy system’s goal of granting a financial fresh start-that person has no legal duty to pay them. In fact, bankruptcy law prohibits efforts to collect discharged debt.

Unfortunately, many companies are buying discharged debts and if you buy something, you intend on getting something out of it. In this type of situation, that means getting money out of consumers who no longer owe it. But many of these companies are not going to directly call you and harass you – instead they leave a balance on the credit report to indirectly force you to pay the discharged debt.

Continuing on into this excellent article which exposes an ugly side of illegal post discharge activity:

The pair of plaintiffs whose case in New York came before Judge Drain in March alleged they had been hurt by credit reports that hadn’t been brought up to date. Yvette R. Torres and Ariadna Mateo had owed Chase a total of $7,674 on three credit-card accounts. Those debts were discharged years earlier during proceedings under Chapter 7 of the U.S. Bankruptcy Code. Torres and Mateo sued Chase because the three accounts continued to appear on their credit reports, as if they were live. According to a hearing transcript, the judge said he was suspicious about why Chase hadn’t updated the reports when it received routine court notices of the discharges. Chase, the judge speculated, might have been trying to use the incorrect credit reports as a way to pressure the debtors to pay off the discharged debt. Further, the judge said, “the only reason Chase could sell it is because someone believed they could collect on it.”

On May 3, Judge Drain denied Chase’s motion to dismiss the central claim by Torres and Mateo. “The essence of the plaintiffs’ allegations is that Chase has continued to lay a trap for them until the eventual day that they need an accurate credit report,” the judge said in a written ruling. “Such behavior, if proven at trial, would be sufficiently vexatious and oppressive to support at least sanctions in the amount of plaintiffs’ costs and expenses incurred in releasing the trap.” A trial date hasn’t been set.

Finally, and of particular interest to Alabama consumers, is the quote from Judge Sawyer in Montgomery as follows:

Other judges warn that the secondary market in bankruptcy paper is encouraging improper collection tactics, which increase the potential value of that debt. William R. Sawyer, a U.S. bankruptcy judge in Montgomery, Ala., says that in the past two years he has seen a surge in cases alleging that lenders and debt buyers have purposefully neglected to report the discharge of debt to credit bureaus. The ploy, he says, is an “indirect means” of pushing consumers to pay debts they no longer really owe. “Creditors and collectors are skating as close as they can to the law and really trying to diminish its value.”

If you are an Alabama consumer and have received a bankruptcy discharge, please check your credit reports. If items that have been discharged are still showing up as having a balance, feel free to contact us for a free consultation as to your legal rights.

Update 2-7-08 — we missed a great commentary on this article by Professor Bob Lawless which we recommend for your reading.

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