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Are Some Banks Using Credit Reports to Help Collect Discharged Debts?

posted by Dalié Jiménez

Last week, Adam pointed us to a NYT's story on "zombie debt" after bankruptcy. I did a bit more research into the story because I had a hard time understanding the problem from the article.

There are a few lawsuits that have been filed about this (I found ones against GE Capital/Synchrony, Bank of America/FIA Card Svcs, Citigroup, and Chase). The GE complaint alleges that the banks have a systematic practice of "selling and attempting to collect discharged debts and ... failing to update and correct credit information to credit reporting agencies to show that such debts are no longer due and owing because they have been discharged in bankruptcy." You can download the complaint in the GE case here.

More specifically, the allegations are that after a discharge, some creditors do not update their tradelines to a status of "in bankruptcy" and instead leave them as "charged-off." The credit report of a person in this situation would then say they have filed bankruptcy and obtained a discharge but you could not tell whether any individual debt has been discharged in that bankruptcy. The (non-binding) credit bureau reporting guidelines (METRO 2) specify that creditors should report accounts as "included in bankruptcy" once they receive a notice of discharge.

The complaint characterizes GE's argument as being that the FCRA does not require it to make this change, perhaps especially in particular after a debt has been sold and they no longer have an interest in it. (GE has not filed an answer yet, but it seems like this is one argument they might make from reading their other filings). That seems to me to be a wrong interpretation of the FCRA and the FTC's Furnisher Rule. It should also be a violation of the discharge injunction. As Judge Drain put it in an opinion denying a motion to compel arbitration:

One could argue that the reporting of a discharged debt as still outstanding when the credit report also shows that the debtor has been in bankruptcy is even a worse result, indicating to those who are considering providing credit in the future that the debtor has fallen into the category of the dishonest debtor who did not receive a discharge.

I am told that NPR's On Point will be doing a segment on this on Thursday at 10AM EST with one of the attorneys filing these cases. You can listen to the podcast here.

Note: post has been edited to correct the timing of the NPR program and to add the link to the podcast.


Credit reporting is all about collecting debts. Why do creditors go through the expense, time, effort, and potential liability of reporting to the agencies at all? It's not out of some sort of altruistic sense of, "we all need to pitch in to make the system work well, it's all in our mutual benefit." It's because they know that one of the best ways to collect an old debt is to park it on a credit report and wait for the borrower to, some day in the future, need to use their credit.

Dalié, would the discharge injunction would prevent a creditor from posting a bad check and picture of the paperhanger in its store window? I don't think so. That seems to be an analogous situation. But perhaps there's a difference I'm not seeing now. There's an obvious tension with the fresh start policy, but 524's implementation of the policy doesn't seem to reach far enough to nab technically accurate credit reporting.

Indeed, the GE suit does not allege that GE is attempting to collect on the discharged debts. Instead, it alleges that GE is just telling the debtors that it won't change the report unless it's paid. "Class Members, in order to obtain favorable credit or credit at all, often feel it necessary to pay off the
debt despite its discharge in order to remove the inaccurate information from their credit reports." Class members might "feel it necessary" to pay off the debt to get their credit report cleaned up, but I don't see how this sort of passive collection activity is a discharge injunction violation. Still, there might be enough alleged to get past a 12(b)(6) motion and to discovery.

As for a FCRA violation, I think the question turns on whether something that is technically accurate is still accurate if it could be misleading. I think it's a tricky question because whether something is misleading is contextual, and the furnishers do not control how the information they report actually appears on reports, even if they have awareness of what is being represented.

Even if there is a FCRA violation, however, is it actionable? I would think the violation would be of the duty of furnishers to report accurate information (including updating), but there's no private right of action for that under FCRA. A private plaintiff could bring suit for lack of reasonable investigation of a dispute, but that's a rather different suit.

That said, I would think a violation of the duty to report accurate information would be a sufficient predicate violation for some state UDAP statutes, like California 17200. There's also a California Credit Reporting Agencies Act cause of action for furnishing inaccurate information that is not preempted. (It's also not clear if FCRA preempts libel claims that allege malice, etc.) A California class isn't the same as a nationwide class, but it's nothing to sniff at.


I see a couple of unfair/deceptive issues.

First, in the credit report itself, if creditor reports a debt as "Charged-Off" when they know it's been included in the bankruptcy I think there's a good argument you are misleading the debtor and anyone who reads that credit report. That seems to also come within the "unfairness" definition in Dodd-Frank. I disagree that the furnishers do not know how the information will show up on the credit report: that is exactly what the METRO 2 format does. It is the creditor who chooses to report "charged-off" or "in bankruptcy." The credit bureau (per the METRO 2 standard) just displays that (in different formats depending on the end user but with the same substantive information). They should know exactly what will happen here.

The hardest task the plaintiffs are going to have to prove here is the pattern-and-practice. Even in their own production of the plaintiff's credit score they showed two GE cards, one reported as "Charged-off" and the other as "in bankruptcy." (Maybe she paid one? Unclear). So maybe it's just carelessness? Or it's a P&P that wasn't well executed? From my own review of a small number of bankrupt credit reports, I have seen this happen a number of times after a bankruptcy.

If there is a P&P, the violation of the discharge injunction should turn on what the court thinks was the creditor's intent/purpose in implementing this practice. What is the purpose of not reporting the most accurate information on the credit report? (and violating the FCRA's requirement of having "reasonable procedures to ensure maximum possible accuracy"?). There's no private right of action under the FCRA but I don't see why the bankruptcy court can't take the FCRA violation (and contractual violation with the credit bureaus) into account when trying to figure out the purpose.

The second deceptive issue has to do with what the creditor is telling the consumer will happen when they pay the bill. Are they saying they will remove the item? that the debt buyer will also remove it? This seems like another contractual violations (the credit bureaus and CDIA should be very upset if that's happening systematically). If they don't remove it, are they saying that the credit score will improve? The CFPB has warned collectors that making statements about what will happen to a consumer's credit score when they pay a debt may be deceptive (http://files.consumerfinance.gov/f/201307_cfpb_bulletin_collections-consumer-credit.pdf).

Finally, I want to dig in more, because the plaintiffs seem to be alleging that the contracts between the creditors and debt buyers allude indirectly to this nefarious intent. The documents GE filed in court actually included one of the contracts (bringing my database of these contracts to 86, http://dalie.org/contracts/). I haven't had a chance to dig into it yet though.

Took a little time to plow through Credit Slip's archives:


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