A million or more consumers nationwide may see their credit histories improve as a result of an agreement in a Federal Bankruptcy Court in White Plains, New York.  As a result of two separate lawsuits brought in the court Bank of America and JPMorgan chase have agreed to update borrowers' credit reports to eliminate data on so-called zombie debts, delinquent accounts that had actually been extinguished in bankruptcy.

The banks, along with Citigroup and Synchrony Financial (formerly GE Capital) had been charged in the suit with retaining the information on the credit reports as live debts to enable the banks to generate higher prices for the loans when sold in pools to investors as bad debts.  

According to a report in the New York Times, the banks are accused of "engineering what amounts to a subtle but ruthless debt collection tactic, effectively holding borrowers' credit reports hostage, refusing to fix the mistakes unless people pay money for debts that they do not actually owe."  The banks offered as a defense to the lawsuits the argument that they do comply with the law and accurately report discharged debts to the credit agencies. 

According to the Times, Judge Robert D. Drain, has repeatedly refused the banks' requests to throw out the lawsuits, criticizing Citigroup last month for its actions and saying, "I continue to believe there's one reason, and one reason only, that Citibank refuses to change its policy... because it makes money off of it."

The banks are also rumored to be under investigation by the Department of Justice over whether they are deliberately flouting federal bankruptcy laws which require that banks update credit reports for a borrower discharged in bankruptcy to indicate the debt is no longer owned and to remove any reference to a debt being past due or charged off. 

Bank of American and JPMorgan did not admit to wrongdoing but did agree to update the reports within three month.  Synchrony made a similar agreement last year, but only on a temporary basis and a Citicorp spokesman said the bank had made a proposal to the plaintiffs' lawyers that was consistent with the other banks' actions.  Bank of America promised to take an additional step, removing any negative marks on credit reports for all credit-card debts sold since May 2007.