Bankruptcy, Debt Collection and Credit Reporting

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One of my favorite questions I like to ask lawyers is “Why do people file for Bankruptcy?”

The most common answer I get is because they owe money, or they have a lot of debt.

But that is wrong. The truth of the matter is very different.

One time, when I was about 17 or 18, I asked my father why big companies have no problem working out deals with their creditors, but people could never work out a deal. His answer was it depends on the amount of money at stake. When you owe the bank $1,000, and you don’t pay them, you have a problem. They will seek to collect the money. When you owe the bank $100,000,000 dollars, and you don’t pay them, the bank has a problem. That’s a big amount of money to lose.

Like wise, the reason people file for Bankruptcy is not that they owe money. People who owe lots of money but have no one calling or writing letters, or suing or using other court process to collect, don’t file for Bankruptcy. The majority of people figure if they aren’t concerned, then neither am I.

People file for bankruptcy because they are getting calls, night and day. The letters demanding payment fill their mailbox. The lawsuits demanding a response are coming fast and furious. The repo man is at the end of the driveway picking up the car, and the attorney for the bank is selling the house. Then, they want to come in to file for Bankruptcy.

They come in thinking that a bankruptcy will stop the calls, the letters, the repo men, the foreclosure. And for some, maybe, even many, it reduces the threats and the abuse. But for a good number of people, this is just the beginning.

It turns out that about half of the people who file for Bankruptcy continue getting calls or letters or other contact from debt collectors well after they file for Bankruptcy. Some even get sued on the debts that were discharged.

This horrifying trend of not allowing people to get on with their lives after they have drawn the line in the sand is the opposite of the purpose of the Bankruptcy code. Bankruptcy is meant to provide relief for the well meaning, but honest debtor.    Marrama V. Citizens Bank of Mass., 549 US 365, 127 S. Ct. 1105, 1107 (2007) citing Grogan v. Garner, 498 U. S. 279, 286-287 (1991).

Each of these attempts to collect a debt is abusive, false and misleading, and unfair. Each of which is a violation of the Fair Debt Collection Practices Act, a Federal law that prohibits abuse, harassment, false or misleading statements, and unfair or deceptive actions. There are a minority of jurisdictions that hold that the sole remedy for a violation that is based solely upon the Discharge Injunction is to return to the Bankruptcy court, and seek sanctions for violation of the Bankruptcy.

This, however, is an almost dishonest effort to ignore the basic rules of construction of the law of injunctions. An injunction is enforceable ONLY against a party who has notice (whether actual or constructive) of the order of Injunction. The Discharge, by its terms, is an injunction. It “operates as an injunction against the commencement or continuation of an action, the employment of process or an act, to collect, recover or offset any such debt as a personal liability of the debtor….” 11 US Code, section 524(a)(2). That means that to a third party, who comes late to the game, they are not bound by the INJUNCTION of the Bankruptcy. But, they are restricted against acts to collect that are unfair, false or misleading, or abusive.

And I think we can all agree that it is false and misleading at best, and potentially abusive, harassing, and unfair and deceptive, to ask someone to pay a debt for which they have no personal liability.

But this problem does not end here.

Imagine if you will, you fall upon hard times, and things get bad, resulting in your needing to file for Bankruptcy. After all the effort, the forms, the classes, the restrictions, the hearings, and on and on, you eventually obtain that brass ring of Bankruptcy, the Discharge. It was not easy, but it was worth it. Your creditors are no longer allowed to collect from you, and you get the respite from Bankruptcy you were looking for.

You know, of course that your credit is damaged, heavily, because a Bankruptcy will do a lot of damage to your credit file and resulting score. The public record of your Bankruptcy is a big black marker in your file.

But now, to your horror, you discover that not only is the black mark of your Bankruptcy there, but your creditors will not update your credit file to show that your debts are no longer owed. You get the double whammy of Bankruptcy, and showing that your debts are still owed. You look like a dead beat who isn’t paying their bills after you filed for Bankruptcy, and got out of your debt.

This is a potential violation of the Fair Credit Reporting Act. Both the Consumer Credit Reporting Agencies, and the furnishers have certain duties under the FCRA. Agencies have 2 duties. The first is to maintain a procedure to assure maximum possible accuracy. The second is to conduct reasonable investigation into the credit file of a consumer, and to forward the dispute to the source of the information. The creditors have a duty to report accurately, and also, more importantly, they have a duty to investigate errors when a consumer disputes.

A failure of either the agency or the creditor to update and show the account as discharged in the Bankruptcy is clearly not maximum possible accuracy, nor accurate reporting.

But we need to be clear. Credit reporting is not, by itself, an act to collect. It is merely an “important tool” in collections. Rivera v. Bank One, 145 FRD 614, 623 (D. PR, 1993). But it can be an act to collect. The actions have to come together, to make it an act to collect, much like sacrificing a goat to the Roman god Mercury is not an act to collect, unless the debtor knows, and cares, for example, a threat to make the goat into cabrito (cabrito is a roasted kid goat, and a specialty of the city of Monterrey, Mexico). See, In Re Mahoney, 368 BR 579, 587, (Bankr. W.D. Tex, 2007).

But under the right circumstances, even if it is not an attempt to collect, it is certainly a violation of the Fair Credit Reporting Act.

About the Author

Attorney Jason Krumbein is licensed in Virginia state and Federal courts. Jason has been a member of the National Association of Consumer Advocates since 2004. He is a solo practitioner at Krumbein Consumer Legal Services, Inc in Richmond, Virginia. Mr. Krumbein focuses his practice on representing consumers with problems with abusive debt collectors, credit report errors, and Bankruptcy. For more information about Jason Krumbein please visit his website at or call him at (804) 303.0204.


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