With the tens of thousands of accounts of all types and in various states of financial health, a lender may, for whatever reason, fail to update the status of a debt discharged in bankruptcy to credit reporting agencies.
A recent U.S. Bankruptcy Court matter serves as a warning to lenders: processes related to reporting a debtor’s account status to credit reporting agencies must be improved.
The case arises out of a man named Rusty Haynes filing for Chapter 7 Bankruptcy in June, 2011. Haynes received a bankruptcy discharge in September, 2011. He claimed that from September, 2011, through July, 2013, Chase Bank USA reported that Haynes’s Chase account was “charged off.” Although Haynes requested that Chase delete or correct his credit report to reflect the accurate status, Chase initially refused. According to Haynes, Chase did not want to reflect the discharge because Chase received a percentage fee for any discharged debt mistakenly paid to Chase that had to be forwarded to a third party purchaser of the debt. Haynes argued that Chase knew that if the credit report was not updated, debtors would feel compelled to make such payments. As a result, Haynes claimed that Chase was trying to coerce payment of a discharged debt because it had an interest in the discharged debts being paid.
The Bankruptcy Court held that the Court would support a ruling in favor of Haynes because by forwarding funds paid on account of a discharged debt and retaining a percentage of that payment, Chase was not acting as if the debt was discharged, but was helping to enforce its collection for Chase’s benefit.
The Court’s decision indicates that a failure to delete a discharged debt on a credit report or change it to reflect the discharge may expose a creditor to liability for violating the discharge injunction. The Court focused on the fact that while Chase had the legal ability to change the credit report, Chase allowed the discharged debt to remain on the credit report, and Chase received a pecuniary benefit from certain payment on account of the discharged debt.
In conclusion, a creditor should be aware that when able to change a credit report, a creditor should change the reporting upon discharge or as soon as the creditor receives such a request from a debtor, either by deleting the debt or specifically reporting the debt as discharged in bankruptcy.
Consult with legal counsel or an experienced financial advisor for more information.
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