There are many false beliefs when it comes to discharged debts. Some believe that debts are “erased;” others believe that discharged debts are no longer legal obligations. Neither of these beliefs are accurate.
In simple terms, a discharged debt means that the creditor is enjoined from collecting on that debt from the debtor. The bankruptcy discharge is a court injunction that protects the debtor, personally. The debt is not erased and the creditor may still collect from anyone other than the debtor by any legal means that does not violate the bankruptcy injunction. That may mean repossessing or foreclosing on the debtor’s property (actions that are against the property, not against the person), making harassing collection calls to co-debtors, or even filing lawsuits that do not seek money from the discharged debtor.
Because the discharge order only prohibits a creditor’s conduct and does not “erase” a legal debt, many creditors sell these debts in bulk to third party collectors. Sometimes these debts end up with zombie collectors who harass debtors for payment of “dead” debts. The original creditors claim clean hands because they take no part in violating the bankruptcy court’s discharge injunction. Additionally, there is no order to update credit reports to reflect the bankruptcy discharge.
But the times they are a changin’.
Recently, The New York Times reported that Bank of America and JPMorgan Chase have agreed to update borrowers’ credit reports within the next three months to reflect the correct status of discharged debts. This comes in response to lawsuits filed against the megabanks accusing them of deliberately ignoring bankruptcy discharges in order to make more money when selling off pools of bad debts to third party debt buyers. The lawsuits accuse the banks of purposely holding individual credit reports hostage, refusing to update reports or fix mistakes unless money is paid for debts discharged in bankruptcy.
Typically, a credit report is updated by a creditor to correctly reflect that the debt is “discharged in bankruptcy” and that the balance is “zero.” This stops all negative reporting and allows the individual’s credit score to improve over time. Bank of America promised to go further, agreeing to remove any marks on consumers’ credit reports for all credit-card debts sold since May 2007.
If you are considering filing for bankruptcy please call the experienced attorneys at Fears Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.