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. I have not seen one balanced comment on this article yet. First, banks notoriously extend credit to people beyond their means to pay back the debt. All banks send “pre-approved” credit card offers to people who already have multiple credit cards with high balances that are beyond their means to repay. So, the banks are hardly innocent victims when a good percentage of people go into bankruptcy. Second, many people are irresponsible in the way they handle credit, accumulating debt far beyond their means to repay. So, both the banks and the consumers share in the responsibility. However, if a debt is discharged by a bankruptcy court, that is the end of the person’s responsibility for that debt. That is the law. Banks need to respect this, and if they do not there should be severe consequences for the banks. The banks do have their opportunity to challenge a discharge during the bankruptcy court proceedings. Just because a debt is discharged in bankruptcy does not mean a person’s credit report is now clean. They will have the bankruptcy listed on their credit report for 10 years, and this will have a very negative impact on their ability to get credit, a mortgage, a job or housing for those 10 years. As with almost every issue these days, the extremists on the right and left excrete their propaganda to defend their idealogical position without regard to the truth.

  2. Great post! First, I am not related to Judge Drain, although it is possible we have used the same plumber at some point.

    Second, I am very familiar with bankruptcy laws and process, although I don’t file bankruptcy cases for clients.

    Third, a couple of technical points. The bankruptcy discharge does NOT make the debt disappear. Rather, the Code creates a statutory injunction that bars creditors from collecting a debt “in personam” from the bankruptcy debtor, i.e., they can’t sue the debtor personally for the debt. The discharge injunction does NOT prohibit a secured creditor who held a valid lien against property owned by the bankruptcy debtor as of the date of the bankruptcy from enforcing its lien against the property.

    For example, a bankruptcy discharge prevents the lender/holder of a mortgage against real estate from pursuing the owner/debtor personally for the debt but does not prevent the lender from foreclosing on its deed of trust.

    Fourth, the debtor can, under certain circumstances, enter into a “reaffirmation agreement” by which they become personally liable for a pre-bankruptcy debt. These agreements (with which I am generally not familiar) must be approved by the bankruptcy Judge.

    Violations of the discharge injunction are normally dealt with in a manner similar to other civil contempt proceedings, and the standards governing civil contempt apply. For example, if a the debtor failed to list the creditor in the bankruptcy paperwork so that the creditor was unaware of the bankruptcy at the time they violated the discharge injunction, the initial violation of the discharge injunction will not result in them being held in contempt of the discharge injunction.

    Fifth, Bankruptcy Judges can be “pro-debtor” or “pro-creditor.” Or they can be middle of the road, or they can be “pro-Trustee.” The notion that the majority of bankruptcy Judges are pro-debtor is absurd. They are over the place ideologically, just like the population at large.

    Now to the point of the post. I would wager that the actions discussed in the post are the tip of a very large iceberg. Bankruptcy debtors generally have no political or economic pull. They generally can’t afford to take on large financial institutions when the financial institutions violate the discharge injunction. An active U.S. Trustee’s Office is essential to prevent them from being abused. Some well publicized criminal prosecutions would be very helpful.

    But the only effective remedy is to keep punching these bullies in the nose by costing them money through contempt proceedings. That is the only language that they understand, unfortunately. i’ve handled some of these types of proceedings against tax agencies, and it really does make a difference when they have to write a check to my client for violating the discharge injunction.

  3. Squeeky Fromm Girl Reporter:

    Atlas Shrugged? What is that? Charles Atlas?

    Do some wall street bankers behave badly, of course.

    Go do some real reporting and call a couple of people who worked for Wells Fargo and BBT, you might actually learn something. Most books are written by people with an agenda or an axe to grind.

    Doody Kravitz
    Girl Watcher

  4. @DoodyK

    Oh sure, and JPM is paying $13billion on a criminal charge because they are sooo public spirited. I suggest you drop the Atlas Shrugged romantic fantasy stuff, and maybe read Liar’s Poker, and Econned for a better understanding of the real world. Plus, your feet kind of smell, sooo maybe you need to change your socks???

    Squeeky Fromm
    Girl Reporter

  5. the banks are just in competition with the federal government and the Fed to see who can fleece us the fastest.


    “Wall Street banks have been granted a license to steal and violate the law.  It’s called forced arbitration.  Buried in the fine print of many bank and credit card contracts are dangerous forced arbitration clauses that eliminate access to justice and replace it with a secretive tribunal rigged in favor of Wall Street.

    Forced arbitration is Corporate America’s Trojan Horse – a campaign to eliminate access to the courts and individual rights and replace them with Big Businesses’ own dispute mill. Most Americans do not even know forced arbitration exists.

    The U.S. Consumer Financial Protection Bureau (CFPB) can revoke banks’ license to steal.  Tell the CFPB to put consumer financial security above Wall Street and stop forced arbitration.”

  7. Squeeky Fromm, Girl Reporter:

    You should read some more about what happened. Only a few banks did that and those should have been allowed to fail.

    The creeps in DC saved their bacon. Using your money, I might add. The real fault is with the federal government.

    If you were a real reporter and not a shill for the left wing nuts and their party line, you would know this.

    Doody Kravitz
    Girl Watcher

    1. Annie – and nurses are famous for stealing and selling medication. That is why cabinets are now locked and daily inventories are taken.

  8. justice is not blind anymore, judges can and do change outcomes based on personal ideology.

    If the debt was discharged properly, the financial institution should follow the law.

    People should not be able to accumulate debt and then claim bankruptcy. Many do it with forethought.

    Bankruptcy used to be for second chances, it became a license to steal.

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