Getting back to good credit is one of the three big reasons to file Chapter 7 bankruptcy. (The other two are so your creditors can’t call you and so they can’t garnish you.) Unfortunately, probably half the people who go through bankruptcy don’t get their credit report fixed.
How should your credit report look? In 1990, the Federal Trade Commission issued a staff commentary explaining what the credit bureaus had to do to meet the requirement that people’s credit reports be complete and accurate. Here’s the link: http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr;sid=cd868f99ffd5bad868a78dca62918841;rgn=div5;view=text;node=16:1.0.1.6.63;idno=16;cc=ecfr#16:1.0.1.6.63.0.45.3.49
The Federal Trade Commission staff said three things.
First, that a debt discharged in bankruptcy should show a zero balance. ( “A consumer report may include an account that was discharged in bankruptcy (as well as the bankruptcy itself), as long as it reports a zero balance due to reflect the fact that the consumer is no longer liable for the discharged debt.” )
Second, that a debt discharged in bankruptcy should show a discharged in bankruptcy status. (“Similarly, a consumer reporting agency may include delinquencies on debts discharged in bankruptcy in consumer reports, but must accurately note the status of the debt (e.g., discharged …”)
Third, that the credit bureaus need to stay on top the the creditors to make sure they send in the required updates–specifically to update past due accounts that are then included in bankruptcy. (“A consumer reporting agency must employ reasonable procedures to keep its file current on past due accounts (e.g., by requiring its creditors to notify the credit bureau when a previously past due account has been paid or discharged in bankruptcy…”)
In spite of these three requirements, spelled out by the Federal Trade Commission, probably half the people who are discharged in a chapter 7 bankruptcy still have errors on their credit report. It’s better than it was ten years ago, when probably seven out of ten people came out of bankruptcy with these kinds of errors. But it still stinks.
The problem now is largely practices that were legalized by a class action lawsuit in California that was supposed to fix the problem. This is the Terri White class action and it didn’t help much. To settle the law suit, the credit bureaus agreed to stop things that had already been stopped. And they were allowed to ignore smaller problems that are getting more and more common, now that they have an official ok.
The big problem, that had mostly stopped, was putting after bankruptcy “charge offs”–meaning you owe the money but aren’t paying–instead of “discharge,” meaning you don’t owe it any more.
Ten years ago, several major credit card issuers always reported charge off instead of discharge. First USA, Bank One and Fleet were the worst, and the credit bureaus did nothing about it.
A handful of law firms around the country starting suing them. James L Manchee in Texas, http://www.mancheelawfirm.com/, Kathy Cruz in Arkansas, http://cruzlaw.com/ and Charles Juntikka, in New York City http://www.cjalaw.com/ . Jason Krumbein, http://www.krumbeinlaw.com/, and myself here in Virginia.
All three of those brands were taken over in big mergers. First USA and Bank One became part of Chase. Fleet was gobbled up by Bank of America. The new owners of those credit card lines didn’t want the hassle. By the time of judge in the Terri White case told the credit bureaus they needed to fix that problem, it had pretty much been fixed.
New problems were created. The credit bureaus are not required to update accounts that have been sold. HSBC, when they get notice of a bankrutpcy, always “sells” their accounts. (Who is buying bankruptcy accounts?) Then they say–both HSBC and the credit bureaus–that they don’t have to show the account was discharged in the bankruptcy. It just stays as a zombie account on your credit report. You’ll notice this is the opposite of what the FTC said (although never enforced)–the the credit bureaus were supposed be sure the creditors told them when a past due account had been discharged in the bankruptcy.
The same rule applied to “minor” derogatories. If the credit card is only 90 days past due, they can leave it as past due and never show the bankruptcy.
Even worse. They can leave the bad credit sitting on your credit report if your account is closed. More and more we are seeing bank and credit card companies just “close” your account when they get notice of the bankruptcy–and just park it on your credit, ignoring the fact that it was discharged by the bankruptcy.
What’s the lesson of all this. When your bankruptcy is over, your credit report will probably not be right. Unless you or your lawyers, check it, disputes it, and sues to protect your rights, it will look like some of your debts were missed by the bankruptcy.
That will drag down your credit score; and cause problems with future lenders, possible employers, and security clearance agents, who will want to know why this or that debt was not taken care of.
The bankruptcy is not really over until the credit report is right.
I quit paying--how long after bankruptcy can I keep my house?
{ 9 comments… read them below or add one }
Will a home loan that was included in a chapter 7 bankrupt, a loan that was not reaffirmed, be protected, so to speak, from being reporetd to the credit bureaus as a foreclosure if I ever decide to walk away from the house in the future?
Is it possible for one credit bureau to be reporting my home loan, which was discharged under a chapter 7 bankruptcy, as a zero balance while the others still reporting a balance?
If a home loan is discharged under a chapter 7 bankruptcy, can the mortgage company still report to the credit bureaus on a monthly basis that the loan is current? Although the loan was not reaffirmed, I am still living in the house, making monthly payments and never being late? I would think that they are violating the injunction of the discharge if they report anything, even if it is positive, to the credit bureaus?
Those are great comments, Laura, because they cover a whole lot.
After bankruptcy, the credit reports should show bankruptcy status on the house–”included in bankruptcy” and balance $0–whether you are paying or not paying, still living there or moved out. That’s because you don’t have to pay any more. (Although obviously if you don’t pay, they will take over the house.)
If you keep the house for now and move out later, that should stay the same. There should NOT be any foreclosure or late’s that show up after the bankruptcy. (I emphasize should NOT–I am seeing mortgage companies use the credit reporting METRO 2 code Q often. Code Q says the bankruptcy report was a mistake and takes it back out. They are not allowed to do that, and I’m in a big fight in court trying to make them pay when they do.)
However, even if the credit report is right, there will still BE a foreclosure. It should not show on the credit report, but it will be on the public record.
What does that mean?
Suppose you in the house for three or four years after the bankruptcy and build up your credit. Then you move out. Moving out will not change your credit score–you will still be able to get a car loan at a good interest rate. But it will be three years before you can buy a house again.
Under FHA regulations, which came out in March, you can be eligible for an FHA insured loan two years after a bankruptcy, but if you give up the house, the house has to be out of your name for THREE years. That’s whenever you give up the house. Before the bankruptcy, during or after–that’s when the three years start.
Thank you so much for your answers. I have recently become aware that the mortgage company is still sending monthly reports to the credit bureaus, indicating that I have made the house payment for that month. I looked at my Experian report, and it does indicate that the home loan was discharged through bankruptcy Chapter 7/Never late. It shows a $0 balance. But it also indicates that I am continuing to make the payment for that month. Is the mortgage company doing anthing wrong by continuing to mention on my credit report that I am paid as of that particular month. I called the mortgage company, and they did say that they are sending monthly reports to the credit bureaus.
Would this constitute violating the injunction of the discharge?
I think a better question is, does it hurt you to have them report you as current? I think the answer to that is, no.
Robert, thank you again for your sage answer. I will not push them to stop sending a monthly account of my payment for each month. Since I am into details, I am still curious
if they are violating the injunction of the discharge. I am looking forward to your answer. Your knowledge of the law is amazing.
Wise judges know when they decide a case, they answer only the questions they absolutely have to. I’m going to follow that rule here. I don’t sue people for doing things that don’t hurt my clients, so I’ve never really analysed whether a good thing can also be a violation.
Robert, your answer, as all of your answers, truly helped me. Thank you for sharing your wisdom.