When a debt is discharged in bankruptcy, the Bankruptcy Discharge Order enjoins (ie prohibits) all efforts to collect that debt from the debtor personally. (but enforcement of rights to collateral are not affected). A discharge is central to the “fresh start” that bankruptcy affords. However, in a recent article, “Debts Canceled by Bankruptcy Still Mar Consumer Credit Scores”, the New York Times reports that several major lenders (including JP Morgan Chase, Bank of America and Citigroup) are under investigation and are being sued for systematically refusing to correct debtors’ credit reports to show their debts as discharged, in an apparent effort to coerce payments in violation of federal law. http://dealbook.nytimes.com/2014/11/12/debts-canceled-by-bankruptcy-still-mar-consumer-credit-scores/?partner=msft_msn?a=1&m=en-us
A nationwide class action against Chase Bank USA NA is now pending in the United States Bankruptcy Court for the Southern District of New York. In a July 22, 2014 ruling, Bankruptcy Judge Robert Drain refused to dismiss that suit. Haynes v Chase Bank USA NA, 2014 Bankr. Lexis 3111, 2014 WL 3608891. Mr. Haynes alleged that Chase had refused to correct his credit report to show that his debt had been discharged in bankruptcy. He charged that it did this as part of a systematic effort to pressure people like him, anxious to improve their credit, to pay discharged debts that were barred from collection efforts.
Chase claimed that it had no obligation to correct the credit report because it had sold off the debt. Judge Drain rejected this argument. He explained that under the facts alleged, Chase had an incentive in seeing payment on these discharged debts. First, if as Mr. Haynes claimed, Chase receives from the debt buyer a portion of the money collected, it would have an an incentive to help collection. And, he noted, it certainly has under those facts a continuing connection to the debt.
Secondly, while the credit reports list the debt as solder they do not identify the purchaser. Thus, Judge Drain points out, “as far as the debtor is concerned, the only creditor to approach to correct the credit reports is Chase, which, though it appears to be the only game in town, as a mater of policy refuses to correct them…highlighting further the perniciousness of Chase’s allegedly systematic approach to refusing to correct such errors”
At present, the suit is pending, along with similar others. In another case, Judge Drain denied a motion by GE Capital Consumer Lending to have the discharge violation action sent to arbitration under a provision of its loan agreement.
These practices are indeed pernicious and these investigations and lawsuits are a welcome response. We commonly urge our clients to demand from credit reporting agencies that all discharged debts be marked as having a zero balance and as having been discharged in bankruptcy. If this is not being done, then multiple federal laws are being violated and important rights need to be vindicated by aggressive legal action. Such actions under section 524 of the Bankruptcy Code can and should seek contempt sanctions.