23 Jul Is Incorrect Credit Reporting A Violation of the Discharge In Bankruptcy?
Credit reporting after bankruptcy is a hot topic lately. Following discharge of a debt in bankruptcy, the creditor is required to indicate the tradeline as having $0 balance due and having been discharged in bankruptcy. Those are the words of the Federal Trade Commission, not me.
The first major case dealing with this issue came in 1991, when the U.S. Bankruptcy Court for the Southern District of Ohio decided In re Sommersdorf, 139 B.R. 700 (Bankr. S.D. Ohio, 1991). In Sommersdorf, the court held that a creditor violated the automatic stay in bankruptcy by furnishing credit reporting agencies with information that the debtor’s pre-petition debt was charged off. The debtors had asked the creditor to properly note the account as having been discharged, only to be refused. The Sommersdorf court concluded that the creditor’s adverse reporting was a “flagrant” violation of the stay and that the creditor’s conduct was “in fact, just the type of creditor shenanigans intended to be prohibited by the automatic stay.”
Fast forward to 2007, and the case law has begun to pile up in both direction. Some courts have chosen to follow Sommersdorf, but another line of reasoning has emerged that holds that credit reporting, in the absence of anything else, just isn’t a discharge violation.
I believe that this line of decisions comes as a result of a feeling that debtors are simply rushing into court, waving the Bankruptcy Code in the hopes of financial settlements in the form of damages.
But what happens when the debtor does absolutely everything possible to get the report corrected only to be rebuffed by the creditor? Can any court truly consider the refusal of a creditor to update reporting to comply with the guidelines set forth by the FTC to be a “no harm, no foul” sort of situation?
The Fair Credit Reporting Act provides for a specific means of disputing an inaccurate report. When a consumer follows those procedures, the law gives them the comfort of knowing that they will be vindicated and the report updated. The creditors have a duty to report accurately, and the law gives a mechanism to ensure such accuracy.
It is not the failure to update, that passive “oops, we forgot,” sort of thing, that makes the discharge violation. Rather, it is the refusal in the face of an affirmative duty that causes the discharge violation. Creditors, by refusing to comply with their duties of furnishing accurate information to the credit bureaus, are making an affirmative statement to the world that a debtor continues to owe a balance due. That statement is read by new prospective creditors, landlords, potential employers and others who use credit reports in making business decisions as an indictment of the consumer. And that indictment causes the consumer tremendous harm even after they believe that they have broken free of the chains of their former creditors.
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