How to Erase a Debt That Isn’t There
By Gretchen Morgenson | September 29, 2012 – NYTimes
GREETINGS, unhappy homeowners! Here’s some wonderful news:
“We are canceling the remaining amount you owe Chase!” says a letter that JPMorgan Chase sent recently to thousands of home loan borrowers. “You are approved for a full principal forgiveness of your Home Equity Account,” says another, from Bank of America.
Jackie Esposito, of Guilford, Conn., got a letter like that. But she wasn’t elated — because she doesn’t owe the money anymore. She and her husband filed for bankruptcy three years ago. The roughly $64,000 they owed Chase has been legally wiped out.
What’s going on?
Cast your mind back to February. Five of the nation’s big banks, including Chase and Bank of America, agreed to pay $25 billion to settle state and federal claims over questionable mortgage practices and promised to work harder to help borrowers who were in trouble. To prod the banks, the government said it would give them credits against the amounts they agreed to pay.
So, to the ire of customers who couldn’t get banks to work with them before, banks are now forgiving debts that no longer exist.
“When I got this letter that said they were going to relieve our debt, I just about fell over,” Ms. Esposito said last week. “You can’t forgive a debt that you’re legally unable to collect.”
Others have received similar letters about phantom debts. A borrower in Florida received word this month that Chase was erasing $190,065.10 of debt that had already been wiped out. Bank of America told a Virginia resident that a $231,767 home equity loan was being forgiven, even though the debt was discharged last May.
Neil Crane is a lawyer in Hamden, Conn., who represented Ms. Esposito and her husband in their bankruptcy. He says four of his other clients have recently received letters from banks claiming to forgive discharged debt.
“I never thought in my wildest dreams that the banks would do this properly,” Mr. Crane said last week. “But I think it’s really wrong to be foreclosing on mortgages you don’t own and relinquishing debt you don’t own.”
It’s bad enough that these letters are inaccurate. But even worse are the tax problems that they may create for people like Ms. Esposito. In most cases, the Internal Revenue Service considers debt that is forgiven to be taxable income. One exception occurs in bankruptcy; when a debt is discharged, it is not taxable.
But the letters sent by Chase and Bank of America clearly warn that the forgiveness will be reported to the I.R.S. If so, these borrowers may have to prove that the banks erred in claiming to have forgiven the debts.
I ASKED spokesmen for Chase and Bank of America how they could forgive debts that no longer existed. Both gave the same unsatisfying answer. Very similar letters had been sent, both banks said, to two very different types of borrowers. One set of borrowers has outstanding debt that the banks are offering to forgive. The other set has had their debts discharged in bankruptcy, but the bank still holds a lien against their properties. Releasing the liens provides a benefit to borrowers when they go to sell their homes, and both banks said the letters were intended to notify borrowers whose liens were being released.
Why not take care to write letters specifically tailored to each borrower’s situation?
Dan Frahm, a Bank of America spokesman, said the bank would work on clarifying what was in the letters to borrowers. And, late Friday, the bank put a more extensive descriptionof the forgiveness and lien release program on its Web site. Not a bad idea, since nowhere does Bank of America’s letter discuss releasing the lien. Mr. Frahm estimated that 12,000 Bank of America customers whose debts had been discharged had received these letters.
Tom Kelly, a Chase spokesman, conceded that the bank “may have caused some confusion for customers.” Its letter does note that the bank is releasing the lien on the property.
But even this is incorrect in Ms. Esposito’s case, Mr. Crane said. Her lien was actually eliminated back in 2009, during her bankruptcy proceeding.
All of this made me wonder: are the banks’ forgiveness letters a way to gain credits for debts these institutions are improperly claiming to have extinguished? The banks say no.
But Chase appears to be claiming to release a lien on Ms. Esposito’s property that it does not hold. And under the mortgage settlement, it could receive a credit.
So I asked Joseph A. Smith Jr., a former banking regulator in North Carolina who is monitoring the settlement, how he planned to vet the banks’ claims of relief provided and credit earned. For example, how will he ensure that institutions do not receive credit for releasing liens that have been eliminated?
“We will review compliance with this requirement as we will with all of the consumer relief requirements,” Mr. Smith said, “through review of the corporate records relating to such transactions.”
Good luck with that.
AS for Ms. Esposito, she said she found the bogus loan forgiveness letter from Chase especially upsetting because of the years she has spent trying to have the bank modify her first mortgage. She pays 9 percent on her loan and cannot refinance it into a lower-rate mortgage, given her recent bankruptcy.
Chase won’t help her modify her loan, Ms. Esposito said, but it is happy to help by forgiving a loan that has already been discharged and releasing a lien that is already gone.
“There is no chance that this group of institutions can help homeowners,” Mr. Crane said. “They should not be in charge of fixing problems they helped create.”
