Bankruptcy Discharge and your Credit Report

Reporting a bankruptcy on your credit report is a rather gray area for consumers, especially when a debt is sold to a debt buyer just before the bankruptcy filing.  While bankruptcy reporting and credit reports has been a fairly clear issue under the Fair Credit Reporting Act (“FCRA”) since the inception of the Act, debt buying and bankruptcy has been reviewed far less. 

Debt buying is when a creditor sells a consumer’s debt (usually for far less than the amount owed)  to a new owner who will collect the debt from the consumer or sell the debt again to a collector for pennies on the dollar.  As the debt gets sold over and over the owner of the debt becomes so disconnected from the originator of the debt that information about the consumer can get lost.      

A consumer who is in irrevocable debt has the option to file for bankruptcy in either Chapter 7 liquidation or a Chapter 13 reorganization to allow for a fresh start.  This fresh start or discharge allows the debtor to pay off his or her debts for an amount less than owed without the concern that a creditor will come after the debtor for the remaining balance.  The bankruptcy code is slightly unclear when it comes to interpreting the relationship between a debtor’s discharge and credit reporting, and recent class action law suits have raised this issue.

Under the FCRA, a creditor has an obligation to report accurate information regarding a consumer to the creditor reporting agencies.  Such information includes when a consumer files for bankruptcy and when the bankruptcy is discharged.  This reporting must reflect the consumer’s account that were included in the bankruptcy filing and report a zero balance.  It would be inaccurate to report the balance of a debt after the discharge on a consumer’s report.  While in a few older cases, including In re McKenzie-Gilyard, 388 B.R. 474, 481 (Bankr. E.D.N.Y., 2007), the court held that failure to report a debtor’s bankruptcy discharge is not an automatic violation of the statute, more recent class action cases have shown a different outcome when a debt buyer gets involved. 

In In re Haynes, No. 11-23212 (RDD), 2014 WL 360889 at *5 (Bankr. S.D.N.Y. 2014), the court held that if a debtor is able to prove that the original creditor failed to report a discharge in bankruptcy for the purpose of selling a debt, then it is more than likely a violation of the FCRA has occurred.  In Haynes, the plaintiff-debtor argued that the original creditor, who had sold the debt to a debt buyer, was still reporting the balance of the debt on his report.  The plaintiff stated that the original creditor made a habit of failing to update credit reports to show the discharge in bankruptcy because the creditor was more likely to sell the debt to a debt buyer.  If the debt was not updated, a consumer would be more likely to pay off the debt even though it was discharged, in an effort to fix their credit report.  Therefore, it would be more likely for a creditor to be able to sell a debt even though it was included in bankruptcy and essentially no longer collectable.  This conduct of reporting and refusing to update the information, is a violation of the FCRA.

If you believe your rights have been violated, under the FCRA and you would like to speak with a licensed attorney, contact SmithMarco P.C. for a completely free case review.