Banks Agree to Remove Credit Notations on "Zombie" Debt

A million or more consumers nationwidernmay see their credit histories improve as a result of an agreement in a FederalrnBankruptcy Court in White Plains, New York. rnAs a result of two separate lawsuits brought in the court Bank ofrnAmerica and JPMorgan chase have agreed to update borrowers’ credit reports torneliminate data on so-called zombie debts, delinquent accounts that had actuallyrnbeen extinguished in bankruptcy.</p

The banks, along with Citigroup and SynchronyrnFinancial (formerly GE Capital) had been charged in the suit with retaining therninformation on the credit reports as live debts to enable the banks to generaternhigher prices for the loans when sold in pools to investors as bad debts.  </p

According to a report in the New York Times, the banks are accused ofrn”engineering what amounts to a subtle but ruthless debt collection tactic,rneffectively holding borrowers’ credit reports hostage, refusing to fix thernmistakes unless people pay money for debts that they do not actually owe.”  The banks offered as a defense to thernlawsuits the argument that they do comply with the law and accurately reportrndischarged debts to the credit agencies. rn</p

According to the Times, Judge Robert D. Drain, has repeatedly refused the banks’rnrequests to throw out the lawsuits, criticizing Citigroup last month for itsrnactions and saying, “I continue to believe there’s one reason, and one reasonrnonly, that Citibank refuses to change its policy… because it makes money off ofrnit.”</p

The banks are also rumored to be underrninvestigation by the Department of Justice over whether they are deliberatelyrnflouting federal bankruptcy laws which require that banks update credit reportsrnfor a borrower discharged in bankruptcy to indicate the debt is no longer ownedrnand to remove any reference to a debt being past due or charged off.  </p

Bank of American and JPMorgan did notrnadmit to wrongdoing but did agree to update the reports within three month.  Synchrony made a similar agreement last year,rnbut only on a temporary basis and a Citicorp spokesman said the bank had made arnproposal to the plaintiffs’ lawyers that was consistent with the other banks’rnactions.  Bank of America promised torntake an additional step, removing any negative marks on credit reports for allrncredit-card debts sold since May 2007.

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