[Administrator]

Best Practices for Bankruptcy Credit Reporting
March 3, 2006
Topics: Consumer Bankruptcy Consumer Debt
http://abiworld.net/crackingthecode/index.php?p=41

Author: Raymond P. Bell, Jr.
Vice President, Creditors Interchange; Abington, Pa.
rbell@creditorsinterchange.com

Among the loose ends left hanging by BAPCPA is how lenders should report bankruptcy status to credit reporting agencies.

Prior to Oct. 17, 2005, most lenders reported accounts in bankruptcy to credit-reporting agencies. The notation commonly appeared in the credit report as “included in bankruptcy.” However, changes that occur in a bankruptcy proceeding may or may not be reported, such as an order of dismissal or conversion of the case to another chapter. Verification to ensure that the account record is an accurate reflection of event change practices may be inconsistent or insufficient.

Inconsistency and inaccuracy in credit reporting isn’t a new phenomenon. According to a report published by the National Association of State PIRGs, 25 percent of credit reports surveyed contained serious errors and 79 percent of the credit reports surveyed contained either serious errors or other mistakes.1 According to a written submission to the National Bankruptcy Review Commission, “credit bureaus operate with a error rate of 50-90 percent, according to the experts.”2

Little or no direction has been communicated from the Federal Trade Commission, but the provision that mentions bankruptcy in the Fair Credit Reporting Act states that “cases under 11 USC from the date of entry of the order for relief or the date of adjudication, as the case may be, antedate the report by more than 10 years.”3 This leaves a perplexing question as to whether lenders should report bankruptcy status to the credit-reporting agencies. To further complicate the issue, credit-reporting agencies do not use the same technology or terminology involving bankruptcy file updating. Section 524(a)(2) provides that a discharge in a case operates as an injunction against the commencement or continuation of an action, the employment of process, or an act to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived. This poses a question to lenders who, for example, are successful in bringing an action under 11 USC 523(a)(2)(C) or are granted a motion by the court to pursue collection against a non-filing chapter 13 co-debtor and how either event should be reported.

Debtors often misinterpret what the report says after a discharge. Debtors also misunderstand their attorney’s statement “you have a clean slate,” or, “you do not owe the unsecured debts any more.” Compounding the confusion is the new breed of sub-prime lender that advertises that you can get credit even though you filed for bankruptcy, or the other for-profit entity known as “credit repair,” which advertises a clean-up of a credit score and the improvement of a consumer’s ability to get credit.4 These conditions require lenders to update credit reports after a discharge order is reported because a sub-prime lender will consider extending credit only if they know the debt was included in the discharge order, but they won’t wait or take the time to review the schedules or the court docket.

With the new changes to BAPCPA, left to be determined are the procedural changes within a lender’s organization to ensure proper reporting. Credit-reporting issues and risks to lenders have escalated since Oct. 17. Unless better procedures are implemented, as well as a more consistent uniformity of credit reporting, lenders are going to face additional costs and expenses. Here are some considerations/recommendations that may help alleviate the potential risks:

Since a filing under Title 11 is a public record, the credit-reporting agencies are free to report this event.

Beyond this, determine whether you want to report the ongoing events that will occur in a bankruptcy proceeding or discontinue reporting bankruptcy statuses. Keep in mind that a debt discharged in a bankruptcy proceeding is still a legal debt. However, a lender is not permitted to enforce further collection of the debt if the debt is discharged, and the permanent injunction remains forever to prevent further collection efforts. If a lender reports only the balance of the account and it is charged off, then the question of whether this is sufficient remains. The omission of “arrearage due,” “past due” and “balance owing” needs to be removed and changed to reporting the balance at the time of charge-off only.

If, however, a lender wishes to report bankruptcy account statuses, then the requirement of terminology should be uniform for all three credit-reporting agencies. Additionally, lenders must establish audit reviews of what they are reporting every month. Additional costs will occur, and whether a lender wishes to accommodate keeping expenses low, easing the loan decision of sub-prime lenders or allowing credit-repair companies to influence how bankruptcy should be reported will be a decision of management.

If a lender sells bankruptcy claims, consider notating the account record to include the party that the account was sold to and the contact information of the buyer. Even if a lender sells bankruptcy claims, the reporting to credit bureaus may still belong to the seller, not the buyer. Also, if a lender does not report bankruptcy status to credit reporting agencies as a normal course, and sells the claim while it is an active case, who is reporting status changes that may occur, such as a dismissal?

If lenders have not initiated meetings to discuss credit reporting or have not implemented internal audit procedures to ensure accuracy of information reported, then the potential risk of lawsuits remains. I would suggest a lender take a sampling of bankruptcy events on accounts such as chapter filed, case converted to another chapter and a dismissal order to actually see what is reflected in the credit report by the three major credit-reporting agencies. A recent sampling actually showed a “Heinz 57 Variety” of notations and even the term “wage earner” defined in the Bankruptcy Act of 1898 and changed to chapter 13 on Oct. 1, 1979.

Author’s Note: This paper expresses the opinion of the author and not the opinion of Creditors Interchange Receivables Management, LLC.

Footnotes

1 “Mistakes Do Happen: A Look at Errors in Consumer Credit Reports,” June 2004. National Association of State PIRGs.


2 Abstract posted 1/12/98, American Bankruptcy Institute, summarizing the text of submissions: Number NBRC – 0188.


3 Section 605(a)(1) of the Fair Credit Reporting Act.


4 Credit repair on the www.LegalHelpers.com Web site states (2/11/06): “After your discharge, all of these debts should be listed on your credit report as “included in bankruptcy.” If they are not listed that way, they still appear to be active accounts in collection status, which could limit your ability to get credit.
_________________
David Szwak
Chairman, Consumer Protection Section, Louisiana State Bar Association
Bodenheimer, Jones & Szwak, LLC
416 Travis Street, Suite 1404
Mid South Tower
Shreveport, Louisiana 71101
318-424-1400
Fax 318-221-6555