Credit Reporting Debts in Bankruptcy: Deluge of Recent Lawsuits Reveals Risks for AFSA Members April 22, 2019 John Rossman, Attorney at Law, Moss & Barnett Attorney John Rossman, Attorney at Law with Moss & Barnett penned the below article on recent lawsuits in credit reporting debts as an extension of conversations held at the 2019 Law & Compliance Symposium. It is provided only as a general discussion of legal principles and ideas. The financial services industry in the United States periodically undergoes changes regarding consumer practices in a tortured and often illogical process. In the first step of this bizarre dance, consumer attorneys identify a common, benign practice in the financial industry. Typical examples of harmless practices of the financial industry challenged by consumer attorneys have included the use of window envelopes to send letters to consumers and also whether disclosures are required when interest is not accruing on an account. The consumer attorneys then create a cause of action challenging the practice identified in the first step and begin suing out cases en masse across the country, hoping for favorable rulings or settlements which will be used to support additional cases. Finally, after months or years of frustrating, uncertain and incredibly expensive litigation, an appellate Court or regulator will issue an opinion on the challenged practice. In some instances – such as with the "window envelope" issue – a higher Court will issue an opinion favorable to the consumer (see, for instance, the Third Circuit Court of Appeals ruling in Douglas v. Convergent Outsourcing https://protectingconsumerrights.com/blog/2014/10/03/fdcpa-limits-on-the-envelope-containing-a-collection-letter-1/). In many other instances – such as whether a consumer must be advised that interest is not accruing on an account – the higher Court will rule against the consumer (see, for instance, the Second Circuit Court of Appeals decision in Taylor v. Financial Recovery Serviceshttp://www.insidearm.com/news/00043848-breaking-2nd-circuit-upholds-taylor-big-i/). Unfortunately, this "dance" of consumer attorneys challenging a harmless practice of the financial industry has begun anew. Dozens of consumer attorneys recently began suing creditors (including automobile and credit card originators and even local credit unions) for allegedly failing to accurately report to the credit bureaus ("credit reporting agencies" or "CRAs") certain debts included by a consumer in a bankruptcy filing. These lawsuits are made more difficult because of the dense rules and requirements for reporting accounts to the CRAs. How Can a Bankrupt Consumer Claim Damages from Accurate Credit Reporting?! Let's take a step back and apply common sense to these claims: The Plaintiffs in these new cases – all of whom are debtors who filed bankruptcy – are claiming that the accurate reporting of valid accounts to the CRAs harmed their credit. What these cases fail to acknowledge is that the bankruptcy filing by the consumer already caused immense damage to the consumer's credit for at least seven years. Further, consumers who file bankruptcy usually have damaged credit due to late payments and possibly even judgments. How can a consumer whose credit is already damaged due to a bankruptcy filing, late payments and even judgments assert that the accurate credit reporting of legitimate debts to the CRAs was wrongful and somehow caused credit damage?! How Should Accounts in Bankruptcy Be Reported to the CRAs? Accounts included in a bankruptcy that are reported to the CRAs must be reported accurately. One recent Court wrote: Courts in this district have held that the FCRA does not prohibit the accurate reporting of debts that were delinquent during the pendency of a bankruptcy action, even after those debts have been discharged, so long as the bankruptcy discharge is also reported if and when it occurs. See Mortimer v. Bank of America, N.A., No. C–12–01959 JCS, 2013 U.S. Dist. LEXIS 2993, at *16–18, 2013 WL 57856, at *6–7 (N.D.Cal. Jan. 03, 2013); see also Mortimer v. JP Morgan Chase Bank, N.A., No. C 12–1936 CW, 2012 U.S. Dist. LEXIS 108576, at *9, 2012 WL 3155563, at *3–4 (N.D.Cal. Aug. 2, 2012) (“While it might be good policy in light of the goals of bankruptcy protection to bar reporting of late payments while a bankruptcy petition is pending, neither the bankruptcy code nor the FCRA does so.”); see also Giovanni v. Bank of America, N.A., No. C 12–02530 LB, 2012 U.S. Dist. LEXIS 178914, at *14–16, 2012 WL 6599681, at *5–6 (N.D.Cal. Dec. 18, 2012). Indeed, the import of these decisions is recognition that the mere filing of a voluntary bankruptcy petition does not erase or invalidate debts, nor does that act excuse the debtor from making timely payments on his or her outstanding accounts. See Mortimer, 2012 WL 3155563, at *3–4, 2012 U.S. Dist. LEXIS 108576, at *9. If anything, the filing of a bankruptcy petition only imposes a limit on a creditor’s ability to collect on a debt. Id. But the debt and its delinquent status still exist, and it is not inaccurate or misleading to report that information to a CRA. Biggs v. Experian 209 F.Supp.3d 1142 (D. CA 2016). The technical answer of how to report a bankrupt account to the CRAs may be found in the CDIA manual, but there are several questions that a creditor must ask to determine the best course of action. These questions include: 1. When is the information furnished (after petition but before discharge, after petition and discharge, etc.)? 2. When did the debt arise (pre or post-petition)? 3. What type of debt it is (dischargeable or nondischargeable)? 4. The chapter under which the bankruptcy petition was filed (some bankruptcy chapters call for payments of only certain debts)? 5. Whether the creditor filed a proof of claim, the amount of any proof of claim filed, the result of the filing of the proof of claim, etc.? 6. Is there a co-borrower and did the co-borrower file for bankruptcy? Delete the Tradeline When a Bankruptcy Notice is Received and Avoid Liability? Many creditors consider deleting the credit bureau tradeline when a bankruptcy notice is received to avoid liability for post-bankruptcy credit reporting. The creditor receives no benefit from maintaining the tradeline while the consumer is in bankruptcy and, if anything, faces legal risk for continuing to report such an account. However, the CRAs discourage creditors from deleting tradelines of bankrupt accounts. Experian posts guidance on its website clearly stating that accounts included in bankruptcy will not be automatically deleted from the consumer's credit bureau: https://www.experian.com/blogs/ask-experian/can-accounts-included-bankruptcy-deleted/ https://www.experian.com/blogs/ask-experian/accounts-are-not-removed-immediately-after-bankruptcy/ [Both of these links were last accessed by the author on April 9, 2019.] Creditors may also risk violating the terms of their contracts with the CRAs by deleting the tradelines on bankrupt accounts, since these contracts often only allow creditor/furnishers to delete tradelines in limited circumstances. Major Debt Buyers Delete Tradelines in Other Circumstances Support for a creditor's deletion of tradelines upon receipt of a bankruptcy notice may be found in the recent decisions by two major debt buyers to delete credit bureau tradelines a set period of time after an account is paid, settled or is a certain period of time after the date of first delinquency:https://www.encorecapital.com/?press-release=encore-capital-group-enhances-credit-reporting-policy-help-consumers https://www.insidearm.com/news/00044747-what-you-may-not-know-about-practice-pay-/ [Both of these links were last accessed by the author on April 9, 2019.] Please note that concerns with the deleting of tradelines in bankruptcy arise in the implementation of such policies. Creditors must take care to ensure that policies are applied uniformly to all consumers to avoid disparate impact or related issues. Further, if a consumer's bankruptcy is not discharged (i.e. the debts are not forgiven, which can happen for a variety of reasons), it is unclear if a creditor could "reinsert" a tradeline previously deleted due to a bankruptcy filing. How to Successfully Defeat a Claim that Reporting a Bankrupt Account to the CRAs Violated the Law. A recent Ninth Circuit Court of Appeals decision affirmed dismissal of the Plaintiffs' claims that Defendants improperly reported to the CRAs accounts included in bankruptcy, writing: Plaintiffs here do not make any allegations about how the alleged misstatements in their credit reports would affect any transaction they tried to enter or plan to try to enter—and it is not obvious that they would, given that Plaintiffs’ bankruptcies themselves cause them to have lower credit scores with or without the alleged misstatements. They have therefore said nothing that would distinguish the alleged misstatements here from the inaccurate zip code example discussed by the Supreme Court in Spokeo. Indeed, Plaintiffs have not alleged that they tried to enter any financial transaction for which their credit reports or scores were viewed at all, or that they plan to imminently do so, let alone that the alleged inaccuracies in their credit reports would make a difference to such a transaction. Unlike the plaintiff in Spokeo, Plaintiffs did not say anything about what kind of harm they were concerned about, other than making broad generalizations about how lower FICO scores can impact lending decisions generally—without any specific allegation that lower FICO scores impact lending decisions regarding individuals who are already in Chapter 13 bankruptcy. Without any allegation of the credit report harming Plaintiffs’ ability to enter a transaction with a third party in the past or imminent future, Plaintiffs have failed to allege a concrete injury for standing. Jaras v. Equifax No. 17-15201 (9th Cir. 2019). However, please note that this ruling by the Ninth Circuit in Jaras is contrary to the ruling of the 11th Circuit Court of Appeals in Pedro, which established a different standard for determining whether a Plaintiff has suffered an injury sufficient to state a claim for relief: Pedro alleged an injury that is both concrete and particular. Pedro alleged a concrete injury because the harm caused by the alleged violation of the Act— the reporting of inaccurate information about Pedro’s credit to a credit monitoring service—has a close relationship to the harm caused by the publication of defamatory information, which has long provided the basis for a lawsuit in English and American courts. See, e.g., Restatement (First) of Torts § 569 cmt. g (Am. Law Inst. 1938) (explaining that it is “actionable per se” to publish a false statement that another has “refus[ed] to pay his debts”). Pedro also alleged a concrete injury because she alleged that she “lost time ... attempting to resolve the credit inaccuracies.” Cf. Palm Beach Golf Center-Boca, Inc. v. John G. Sarris, D.D.S., P.A., 781 F.3d 1245, 1252– 53 (11th Cir. 2015) (explaining that the occupation of a fax machine during the transmission of an unwanted faxconstituted a concrete injury). And Pedro’s alleged injuries affected her personally. Indeed, her credit score dropped 100 points as a result of the challenged conduct. Because Pedro alleged that she suffered an injury in fact, she has standing to pursue her complaint. Pedro v. Equifax 868 F.3d 1275 (11th Cir. 2017). Conclusion The reporting of accounts included in bankruptcy to the CRAs is a practice that is under scrutiny and attack by the consumer bar. Creditors must consult with an attorney to review and update credit reporting policies as they relate to bankrupt accounts. Further, any creditor named as a Defendant in a case involving allegations of improper reporting of accounts in bankruptcy should carefully review with counsel the recent case law which provides some defenses, including complete defenses in certain circumstances. This article is provided only as a general discussion of legal principles and ideas. Every situation is unique and must be reviewed by a licensed attorney to determine the appropriate application of the law to any particular fact scenario. If you have a legal question, consult with an attorney. The reader of this publication will not rely upon anything herein as legal advice and will not substitute anything contained herein for obtaining legal advice from an attorney. No attorney-client relationship is formed by the publication or reading of this document. Moss & Barnett assumes no liability for typographical or other errors contained herein or for changes in the law affecting anything discussed herein.