Help! An Old Credit Card Is Stopping Me From Refinancing

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 warren Figuring 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.