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Zombies: Debts that won't die after personal bankruptcy

When California residents emerge from bankruptcy, the overwhelming feeling experienced is one of relief. The discharge process of personal bankruptcy leads to the elimination of many forms of consumer debt, leaving individuals free to rebuild their financial foundation from the ground up. This is also a time in which credit repair is a top priority for many. Unfortunately, there are cases in which some debts refuse to stay dead, and come back to wreak havoc for those who want nothing more than to move forward.

Known as zombies, these debts were discharged during bankruptcy, yet are still being reported by the original lender to credit bureaus. In this way, they appear to be current outstanding debts, leading to a decreased credit score each month that the accounts are not paid down. This can be a devastating blow to an individual who is trying to secure a new line of credit, obtain a new job or work toward purchasing a new home in the years to come.

Attorneys with the U.S. Justice Department are currently investigating some of the nation's largest banking institutions to determine if they have been intentionally reporting debts that were discharged during personal bankruptcies. Among those under investigation are J.P.Morgan Chase, Bank of America and Citigroup. These institutions would have reason to continue reporting old debts, as these accounts are often sold off to debt buyers who then make collections attempts. Some consumers would rather simply pay on those accounts than risk the credit damage that comes with letting the accounts continue to appear as unpaid debts.

For those in California who are considering filing for personal bankruptcy, or who are already in the process, it is important to understand how zombie debts could become an issue. Consumers should regularly check credit reports and look for accounts that were discharged during bankruptcy but continue to show up as open or past due. Making a complaint to the credit bureaus may yield a positive result. In addition, the results of the current investigation could lead to a strengthening of the rules that require banks and other creditors to accurately report the current status of all accounts, even those that were discharged through bankruptcy.

Source:, "Debts canceled by bankruptcy still mar credit scores", Nov. 21, 2014

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Thomas F. Miles, Attorney and Counselor at Law
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