Major Banks Tell Credit Reporting Agencies That Consumers Owe Debts Discharged in Bankruptcy

Usually, zombie debt is associated with unscrupulous debt collectors, trying to collect debts beyond the statute of limitations or which were discharged in Bankruptcy. However, according to Jessica Silver-Greenberg at the New York Times’ Dealbook, four major banks are under investigation: JPMorgan Chase, Bank of America, Citigroup and Synchrony Financial (formerly GE Capital).

The problem, state and federal officials suspect, is that some of the nation’s biggest banks ignore bankruptcy court discharges, which render the debts void. Paying no heed to the courts, the banks keep the debts alive on credit reports, essentially forcing borrowers to make payments on bills that they do not legally owe.

The practice — a subtle but powerful tactic that effectively holds the credit report hostage until borrowers pay — potentially breathes new life into the pools of bad debt that are bought by financial firms.

The United States Trustee Program (a division of the Department of Justice which is involved in overseeing bankruptcies) is investigating. Similar claims against the banks have been made in private litigation before the bankruptcy courts.

Although the increase in value may only be fractions of a cent on the dollar, as Silver-Greenberg notes that by reporting the accounts to the CRAs, the banks are also juicing the prices paid for the sale of their junk debt to Junk Debt Buyers:

None of the banks specifically outline how much of their overdue loans are sold to debt buyers, but a review of publicly traded debts buyers like the PRA Group in Norfolk, Va., shows that the sums of bad debt bought and sold are vast. Since 1996 the company has bought more than 36 million accounts with a face value of $81.3 billion. Roughly 16 percent of those accounts — with a face value of $23.4 billion — are bankruptcy debts.