Banks Ignore the Bankruptcy Laws

US Trustee Program

Respectfully submitted by Lawrence E. Rafferty (rafflaw) Weekend Contributor

In the past, I have written about the Big Banks continued unlawful actions that only result in “slap on the wrist fines” that in many cases are passed on to the shareholders and/or used as a tax deduction. It seems that Wall Street and the Banksters have not learned a thing.  Or have they?

The latest wrinkle in Banksters taking advantage of American citizens is noted in a Crooks and Liars report which detailed an investigation into several Big Banks and their alleged refusal to honor the orders of Bankruptcy judges across the country. Of course, the “usual suspects” have been named in the latest investigations. 

“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.

Now lawyers with the United States Trustee Program, an arm of the Justice Department, are investigating JPMorgan Chase, Bank of America, Citigroup and Synchrony Financial, formerly known as GE Capital Retail Finance, suspecting the banks of violating federal bankruptcy law by ignoring the discharge injunction, say people briefed on the investigations.” Crooks and Liars

What the US Trustee Program is investigating is the alleged practice by the aforementioned target banks of refusing to extinguish the debts that Bankruptcy judges have ordered extinguished and keeping those debts on the debtor’s credit reports.  Without the debts being removed from the credit reports, discharged debtors are caught in a never ending process of trying to pay off discharged debts, just to renovate their credit ratings.

Of course, this practice is in direct conflict with our bankruptcy laws, but the law never seems to get in the way of Big Banks and their efforts to make everyone pay, except for themselves.  A few examples from the New York Times, may help understand the impact of these alleged illegal actions by the aforementioned Big Banks.

“The errors are not clerical mistakes, but debt-collection tactics, current and former bankruptcy judges suspect. The banks refuse to fix the mistakes, the borrowers say, unless they pay for the purged debts. And many borrowers end up paying, given that they have so much at stake — the tarnished credit reports showing they still owe a debt can cost them a new loan, housing or a job. The Vogts, a couple in Denver, for example, paid JPMorgan $2,582 on a debt that was discharged in bankruptcy because they needed a clean credit report to get a mortgage.

There are many more who make payments on debts that they no longer legally owe, but never alert anyone because they do not realize the practice is illegal or cannot afford to litigate.

Humberto Soto, a 51-year-old unemployed hospital worker who went through bankruptcy in 2012, said he was almost one of those people who paid. In January, he was rejected for a Brooklyn apartment after the housing agency pulled his credit, which was tarnished by $6,411 on a Chase credit card, according to a letter from the agency, a copy of which was reviewed by The New York Times.

When he called JPMorgan, Mr. Soto said, he was told that the black mark would remain unless he paid. “It was either pay or lose the apartment,” he said. But after his bankruptcy lawyer explained the situation to the rental agency, Mr. Soto ultimately did not pay. (He got the apartment.)” New York Times

Federal Judge Robert D. Drain is handling these cases and he is skeptical about the defenses raised by the Big Banks.

“Judge Drain, who is presiding over the cases, posited that the banks’ ability to sell the soured debts depends on ignoring the bankruptcy discharge in order to collect money from people who don’t have to legally pay it.

In July, the judge refused to throw out the lawsuit against JPMorgan, saying that the “complaint sets forth a cause of action that Chase is using the inaccuracy of its credit reporting on a systematic basis to further its business of selling debts and its buyer’s collection of such debt.”

During a hearing last year on a related case, transcripts show, Judge Drain said, “I might refer this, if the facts come out as counsel’s alleging, to the U.S. attorney,” for criminal prosecution.” New York Times

As noted in the examples above, real people get hurt by the Big Banks alleged refusal to follow the law.  Of course, I guess I should not be surprised that a Big Bank would do whatever it takes to get their money. Even if it breaks the law.  After all, according to the linked New York Times article, their are billions at stake.

As shown in the latest reports of some of these same Big Banks being caught manipulating the foreign currency exchange market and the $4.3 Billion dollar fine assessed, they never seem to learn. Or as I suggested earlier, maybe they have learned how to game the Justice Department.

If these targeted corporate persons are found to have violated the Bankruptcy Laws, do you think any officer or director will go to jail?  Just asking.

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75 thoughts on “Banks Ignore the Bankruptcy Laws”

  1. @DoodyK

    You said, “you do realize in the end, the consumer pays for the bad debt through higher fees and larger interest payments?”

    Hmmm, You do realize in the end, that the consumer pays for the banking executives exorbitant salaries through higher fees and larger interest payments???

    And you do realize in the end, the consumer pays for the sins of the banking industry through real estate devaluation, loss of jobs, and loss of income? We are currently in a financial depression because the financial industry pricks just wanted to earn commissions, and to heck with honesty or responsibility?

    Squeeky Fromm
    Girl Reporter

  2. I’ll second Squeeky’s comment about this article. I worked for Chase for a number of years and this does not surprise me in the least.

    Paul,
    If a consumer followed the bankruptcy laws to discharge a debt then they should have every reason to expect the creditor will also follow the bankruptcy laws.

    1. Olly – just for the sake of argument, let’s assume the debtor ran up debt with the idea that they were going into bankruptcy. Now, having defrauding the system to begin with, do they not deserve to be defrauded in return?

  3. Dr. Signe…Given that there were over 1,000 convictions after the S&L bust, and numerous convictions after the 2000 bust, I don’t think it is accurate to state that executives always manage to duck prosecution.
    But it is clear that when charges are not brought, they won’t be prosecuted. The question I have raised is why there were a lot of charges brought and criminal convictions in previous financial scandals, yet none post-2008.

  4. you do realize in the end, the consumer pays for the bad debt through higher fees and larger interest payments?

    You do realize that many judges are progressives and discharge debt not based on law but ideology?

    You do realize that people go into debt and claim bankruptcy for financial reasons?

    You do realize that $7,000.00 could be paid back at $50/week? [but then that would require a job which the socialist prince in the White House is trying to destroy the creation thereof.]

    1. “You do realize that many judges are progressives and discharge debt not based on law but ideology?”

      So belief that judges are biased is now a defense for institutions to violate the law?

      Does that make any sense?

      1. bfm – ask the DOJ for their defense for breaking the law. And remember, we are a long way from a final decision.

  5. Squeeky,

    I looked at the three comments you made that were gobbled up by the spam filter and the naked, capitalism link is the suspect. It could likely be that the wordpress spam subsystem has had too many spam pieces referring to that site and banned it across the entire wordpress system.. As such I don’t have the ability to change this setting as it is most likely on the system side and not ours. We don’t have a whitelist setting in the administration tools so it might be best to either dereference the link to naked, capitalism or use another source.

  6. Paul Schulte:

    Your assumption is incorrect. A discharge in bankruptcy eliminates the debt, which is the point, after all. It appears that the banks are including discharged debts among defaulted debts in packages discounted to collection companies. It is actually a double wrong because it violates the bankruptcy laws and defrauds debt purchasers.

  7. @Paul: “You do realize that these people actually owed the banks this money?”

    You do realize we have bankruptcy laws in this country – right?

    You do realize the ones complaining have been through the bankruptcy process – right?

    You do realize the banks had a chance to present their side of the story to the bankruptcy court – right?

    you do realize the banks have violated the ruling of the bankruptcy court – right?

    1. bfm – you realize that a lot of people run up their credit cards, debt, etc. just before filing bankruptcy? You realize that every bankrupt costs YOU money with the bank you are currently dealing with? You realize that bankruptcy laws are different in different stater?

      What I want to know is: how is the one person who filed bankruptcy getting a mortgage?

      1. “bfm – you realize that a lot of people run up their credit cards, debt, etc. just before filing bankruptcy? You realize that every bankrupt costs YOU money with the bank you are currently dealing with? You realize that bankruptcy laws are different in different stater?”

        I do realize that some abuse the law. I just do not see that as a reason to excuse other parties breaking the law.

        If you think the bankruptcy laws should be more restrictive make that argument.

        If you think action should be taken against some judges because of flaws in their decisions then make that argument.

        Defending banks or any party violating decisions by courts does not seem to be an answer to me.

        1. bfm – silly me. I thought because Bush did something it was okay for Obama to do it. Therefore, using the same reasoning, if the debtor is defrauding the bank and the court, why shouldn’t the bank defraud the debtor.

          1. ” I thought because Bush did something it was okay for Obama to do it. Therefore, using the same reasoning, if the debtor is defrauding the bank and the court, why shouldn’t the bank defraud the debtor.”

            Some people do seem to reason that way. Fortunately there are some who will voice their opposition to wrong doing regardless party affiliation.

  8. Well, let me try posting my comment without the link and see if wordpress lets it through:

    @Rafflaw

    First, thank you so much for finally writing something that is not just a weekend partisan Democratic Party shill piece! You should do more of this, because this is a timely and well written article.

    You may also find this of interest:

    altered link: california-attorney-general-sues-jp-morgan-over-debt-collection-abuses-including-sewer-service-robosigining.

    1. Chase Bank sold to third party debt buyers hundreds of millions of dollars worth of credit card accounts. . .when in fact Chase Bank executives knew that many of those accounts had incorrect and overstated balances.

    3. Chase Bank executives routinely destroyed information and communications from consumers rather than incorporate that information into the consumer’s credit card file, including bankruptcy notices, powers of attorney, notice of cancellation of auto-pay, proof of payments and letters from debt settlement companies.

    4. Chase Bank executives mass-executed thousands of affidavits in support of Chase Banks collection efforts and those Chase Bank executives did not have personal knowledge of the facts set forth in the affidavits.

    …the American Banker story quotes current and recent employees who confirm that he bad practices that Almonte called out are still very much alive. Specifically:

    “We did not verify a single one” of the affidavits attesting to the amounts Chase was seeking to collect, says Howard Hardin, who oversaw a team handling tens of thousands of Chase debt files in San Antonio. “We were told [by superiors] ‘We’re in a hurry. Go ahead and sign them.’”…

    The records the law firms used to sue people sometimes differed from Chase’s own files at an alarming rate, according to a routine Chase presentation prepared by Almonte and later submitted to the Securities and Exchange Commission. Some law firms’ records disagreed with Chase’s in almost 20% of cases sampled, a rate far above what is regarded as an acceptable level of errors.

    “That’s horrendous,” says a former Chase attorney who was informed of the numbers by American Banker…

    Borrower correspondence sent to the San Antonio facility, such as bankruptcy notifications, address changes, and hardship requests were being dropped on an unmanned desk, according to a 2009 printout from Chase’s troubleshooting log….

    Squeeky Fromm
    Girl Reporter

  9. It’s not only who has the guts to prosecute these alleged “felons” but also whom do they charge. Executives always seem to manage to slide out from under by stating, “I didn’t know it was happening” or “It wasn’t policy.” If anyone is charged with breaking the law, it us some underling. Pathetic.

    As an aside, I hope we can get back to separating activities of banks such that bank investment activities are not commingled with customer savings.

  10. Mr. Rafflaw….In the wake of the S&L crisis, there were over 1,000 convictions, and many lengthy prison sentences. After the Enron, dot com, Tyco, and MCI bust if 2000, there were also criminal charges brought” and numerous convictions.
    Since the near-collapse of our financial system in 2008, I’m not aware of any criminal charges being brought.
    Why do you think that is? Just asking.

  11. Paul,
    The law allows individuals and corporations to file for bankruptcy. Are you suggesting that the Banks should be allowed to ignore the law?

  12. Listen. in my lifetime I have loaned money to many people with the promise to repay — just because somebody has a piece of paper saying they now have a clear financial record — if they chose to spend money on personal accouterments rather than pay debt to those who trusted them, I shall not be willing to side with such so called good citizens against any creditors

  13. Laws are laws Paul, don’t you righties always say that? Should banks be allowed to not follow the law while the average citizen must? The debts should’ve been discharged according to bankruptcy law and and a Judge’s order. Why should banks get away with not following the law?

  14. They are no less a criminal than the guy who robs a liquor store in the ghetto. High time they get prosecuted. No one should be too big to prosecute.

  15. Okay, let me get this straight. They want to screw the bank out of the money and they want a clear credit report. Hmmm. Makes perfect sense to me.

  16. Once again, two systems of justice in the U.S.

    We (the little guys) have to obey the law or face the full force of the justice system.

    Big guys and the connected, have a much more generous justice system that excuses violations or gives a much reduced penalty.

    Breeds contempt for our justice system in both the big and the little guys.

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