Home > Credit 101 > Help! An Old Credit Card Is Stopping Me From Refinancing

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The only thing holding Bob Warren back from refinancing his mortgage is a debt he no longer owes.

A few years back, Warren lost his job and had to let the credit cards go. When he got back on his feet, he settled one debt and paid back another. To his surprise, one of his card issuers — Chase — wrote his entire balance off, even though he had planned to pay them off as soon as he could. They sent him a 1099-C tax form reporting the canceled debt and he paid the taxes due as a result. He thought it was behind him.

Recently he tried to refinance his conventional mortgage with a VA loan, which will lower his interest rate and “free up a lot of money,” he says. But when the bank saw his credit report and the fact that Chase was reporting an unpaid balance of just over $16,000, they balked.

bob warrenFiguring it must be a mistake, Warren contacted Chase. After all, he had the 1099-C and a letter confirming they were no longer collecting the balance from him. So surely the balance should be reported as $0, he thought.

The representative at Chase they told him “no,” they were no longer trying to collect the debt. It was written off. But “no” they wouldn’t update the balance to zero, either. They would continue to report the unpaid balance for the full seven years. (That’s the length of time charge-offs can be reported under federal law.) He even asked about settling it but they told him they weren’t collecting the balance anymore. “They sounded like a robot,” he said.

We reached out to Chase by email. While they would not comment on Warren’s specific situation, they said, “Per IRS guidelines, we are required to issue a 1099-C to consumers for charge-off debt without payment for 36 months or 30 months from charge-off. The charge-off debt amount will still appear on a consumer’s credit report, as Chase was not paid.”

“To me, it’s strong-arm tactics,” says Chris Borzumato, a Massachusetts bankruptcy and consumer law attorney whom Warren has hired to represent him in a lawsuit against Chase. Borzumato believes Warren’s issue is similar to a problem he has seen with his bankruptcy clients, where lenders have failed to properly report payments or balances in what he believes is an attempt to pressure them into paying off debts they do not have to repay. According to a recent New York Times article, lawyers with the U.S. Trustee are investigating the credit reporting policies of a number of issuers because they continue to report balances on debts that have been discharged in bankruptcy. While that issue is different because bankruptcy laws are involved in the latter, Borzumato sees parallels between the two.

“I think it’s intentional on the part of the bank,” he says.

After Warren shared his experience in the comments section of a Credit.com article, four other readers have commented that they are in the same situation.

Warren in the meantime, is stuck in limbo with his refinance. “I qualified in every which way and everything was smooth until this,” he says. “I didn’t want to sue them. I just wanted the balance taken off.”

Warren’s experience is a reminder why it’s important to check your credit before applying for a mortgage or any other loan. You can get a free credit report summary from Credit.com. While not all problems have simple solutions–his certainly doesn’t — incorrect items can often be disputed and updated, but that process can take time. Waiting until you’ve already applied for a loan could be too late.

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Main image: iStock, Inset image courtesy of Bob Warren

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  • JDMc7

    I have the exact same issue with [redacted]. If there is an attorney out there looking to file a class action against these banks I will gladly participate. I even have talked with State (SC) and federal legislators to clarify that the balance owed must be removed after a 1099-c is issued. They say it is in works, but who knows when they will actually do it.

    These big banks were bailed out by the government and are now screwing people that suffered during the recession. Something just not right about that!

  • Matt

    I have a similar situation as many it, seems. One question I have is when does the 7 years begin until it goes off my credit? At the time they field the 1099-C?

  • SC

    Ok, I have the same issue. I called a couple years ago to ask if I can do a payment plan with Chase on a credit card I had not paid due to financial hardship. Because they went 2 years without payment they told me they could not take payment from me and that they are sending me an important tax form that I need to file and to speak with a tax professional to find out what the repercussions are. I filed it on my taxes and have since then have Lexington Law working on discrepancies in my credit history. That brought Chase up and now Chase decides to show a balance owed. Credit limit 5000 and balance owed 5511. I don’t understand this as they refused to take payment from me years ago and now this is going to be listed as a balance on my credit report for 7 years????? What am I supposed to do? What if they change their mind and randomly decide to collect on the debt they charged off with a 1099-c and refused to take repayment on? The story above is exactly how they sounded on the phone and what they said.

  • Thom

    I have almost the exact same problem with chase..i lost my job in 2007 and in 2013 i got a letter from chase releasing me from the debt. I then recieved a1099-c from chase for 7100.00. I paid taxes on that money…i am trying to get a mortgage now and on my bank application it shows the 7100.00 from chase. I called chase and got the exact same response as the person in the story. They don’t want the money, its been discharged, but they will not take it off my credit report because the card was unpaid.

  • Soos

    I to am in the situation as Warren except I am trying to purchase a housing loan thru MSHA but need.a FICO score of 640. I qualify in all the other ways. I too was laid off from job of 17 years my situation occurred in 2012. I received a 1099-c from Citifinancial and Capital one in 2014. I also received the exact same messages by little robots. It reports on my credit report as owing 13847 with monthly payments of 187. If only it was that simple. Before losing my job I was on my way to paying off my loans. These two were my last. I feel there is nothing I can do.

    • http://www.Credit.com/ Gerri Detweiler

      At a minimum file a complaint with the CFPB. If they get multiple complaints about the same problem they are likely to look into it.

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