Pub. 6 2015 Issue 2

www.wvbankers.org 18 West Virginia Banker By John Spires and Dave Thomas, Dinsmore & Shohl LLP Credit Reporting Following a Bankruptcy Discharge T he “discharge injunction” of Section 524 of the Bankruptcy Code is one of the most, if not the most, important features of United States bankruptcy law. Debtors in bankruptcy must complete detailed paperwork regarding their assets and lia- bilities and either turn over their non-exempt assets to a bankrupt- cy trustee or execute a payment plan that repays all or a portion of their debt. In return, individual debtors who comply with their obligations under the Bankruptcy Code receive a discharge of their pre-bankruptcy debts, unless those debts are among those that Congress has deemed non-dischargeable (e.g., most student loans, tax obligations, and other such debts). This discharge is enforced by the “discharge injunction,” a prohibition upon any attempt to collect a discharged debt. Creditors who violate the discharge injunction are subject to severe sanctions, including compensatory damages and the attorney’s fees a debtor incurs in remedying the violation of the injunction. Often, it is easy to tell when the injunction has been violated, such as when a creditor sues a debtor to recover a discharged debt. However, whether a creditor has actively engaged in an effort to collect a debt is sometimes unclear, and nothing epito- mizes that ambiguity more than the listing of a debt on a credit report. Under the Fair Crediting Reporting Act (“FCRA”), a creditor not only has a duty to provide accurate information to a credit reporting agency but must also correct any information it later discovers is inaccurate. 15 U.S.C. § 1681s-2, which is part of the FCRA, provides that a person who regularly furnishes informa- tion to credit reporting agencies and learns that information it has furnished is incomplete or inaccurate must “promptly” notify the agencies to correct that information. In other words, banks or other furnishers of credit information have an affirmative duty to inform crediting report agencies once they learn that the infor- mation they reported is now inaccurate or incomplete, including because their debtor filed for bankruptcy protection. The statute also says that furnishers of information must correct inaccura- cies “promptly.” While the term “promptly” is certainly open to interpretation, there is little benefit to be gained from delay in cor- recting inaccurate or incomplete credit information. While the FCRA does not set forth a specific protocol of affirmative steps a creditor must take after a debt has been discharged in bankruptcy or the time-frames for doing so, banks may want to be proactive in coding debts as discharged in bankruptcy instead of waiting until ordered or instructed to do so. While the failure to proactively update a credit report after a bankruptcy discharge may not be deemed a violation in and of itself, in some instances, State and Federal officials, and consum- er advocates, have alleged that some banks and creditors have failed to update credit reports on purpose as a “backdoor” way to get debtors to pay a discharged debt even though the debt is no longer due. As widely publicized, last July, the Bankruptcy Court for the Southern District of New York denied a motion to dismiss filed by Chase Bank USA, N.A. in Haynes v. Chase Bank USA, N.A. This case is a class action lawsuit alleging a systemat- ic violation of the discharge injunction based on Chase’s refusal to correct the plaintiffs’ credit reports by showing that their debts had been discharged. In its motion to dismiss, Chase claimed that it had sold the debt instruments at issue in the case and there- fore it could not attempt to collect a debt from the plaintiffs. The Court rejected that argument for two reasons. First, the plaintiffs had alleged Chase actually kept a percentage of any re- coveries on the debt they had sold and therefore Chase did direct- ly profit from the failure to update the plaintiffs’ credit reports. Second, the Court found Chase profited indirectly by failing to update the debtors’ credit reports, because it could sell the debts to buyers for a higher value. Thus, the Court found the plaintiffs adequately “set forth a cause of action that Chase is using the inaccuracy of its credit reporting on a systematic basis to further its business of selling debt and its buyer's collection of such debt.” While the issues in Haynes largely centered around a bank’s credit reporting obligations in the context of debts sold to another enti- ty, the holding does have implications for all banks as it suggests that the failure to delete or change a discharged debt on a credit report could lead to allegations that the creditor violated the discharge injunction. As a result, creditors need to be aware of their credit reporting obligations with respect to debts discharged in bankruptcy and have policies and procedures in place to deal with discharged debts. The most conservative approach is to have a system in place for updating a borrower’s credit report promptly upon learning of a bankruptcy discharge or, at the very latest, when a borrower requests such a change. n John Spires is a member of Dinsmore’s Corporate Department and Bankruptcy & Restructuring Practice Group. DavidM. Thomas isa Partner in the LitigationDepartment inDinsmore & Shohl’s Morgantown, West Virginia office.