A typical lender is often managing tens of thousands of accounts of all different types and in various states of financial health. So what happens when a lender, for whatever reason, fails to update credit reporting agencies about the status of a debt discharged in bankruptcy?
In a recent case from the U.S. Bankruptcy Court for the Southern District of New York, a major creditor is now exposed to liability for violating a discharge injunction. The opinion, issued July 22, 2014, serves as a red flag to lenders that they may need to improve processes related to reporting a debtor’s account status to credit reporting agencies. As this decision shows, a swift, accurate response on an individual basis could protect a lender from future liability.
The opinion came as a bench ruling from U.S. Bankruptcy Judge Robert Drain denying Chase Bank USA, N.A.’s motion to dismiss adversary proceeding or, in the alternative, strike the class action allegations. The motion stems from a lawsuit filed by Rusty Haynes and similarly situated plaintiffs against Chase for violating the discharge injunction. In the context of a motion to dismiss the case, the court had to analyze whether the facts alleged by Haynes, if accepted to be true, provided a basis to find Chase liable.
Haynes filed for chapter 7 bankruptcy on June 20, 2011. He received his discharge on September 28, 2011. Haynes claimed that from the date of the discharge through July 2013, Chase reported his Chase account as “charged off.” Haynes further alleged that in April 2013, he requested that Chase delete or correct his credit report to reflect the discharge, which Chase initially refused. According to Haynes, Chase’s refusal was motivated by the fact it 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. He argued that Chase knew that if the credit report was not updated, debtors would feel compelled to make such payments. Consequently, Haynes claimed that Chase was trying to coerce payment of a discharged debt because it had an interest in the discharged debts being paid.
Chase argued that it had no duty to delete or correct the credit reports because it had sold the debt to a third party well before the bankruptcy filing. First, Chase noted it had complied with its reporting duties at the time of sale because it changed the credit reports to reflect the account was charged off, had a $0 balance and was either “PURCHASED BY ANOTHER LENDER” or “Transfer/Sold.” Chase then contended that because it did not own the debt at the time Haynes filed for bankruptcy or the time he received his discharge, it had no duty to change the credit reports. In the alternative, Chase also argued that the court should strike the class because it did not have jurisdiction to make determinations for debtors who received their discharge outside of the district.
The bankruptcy court held that Haynes alleged facts, that if found to be true, would support a ruling in his favor. The court reasoned that, 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 helping to enforce its collection for Chase’s benefit.
Then the court made a broader inference about Chase’s systemic failure to change the credit reports. It presumed that Chase knew there was a probability that many of the charged off accounts would later go into bankruptcy. Therefore, the court reasoned that Chase implemented a policy of not changing the credit reports post-petition so that the debt would remain easier to collect and sell for a higher price pre-petition. The court also noted that Chase did not reveal who the debt was sold to, making Chase the only party a debtor could approach to change the report. The court found this as further evidence of Chase’s systemic approach to not changing the credit reports. Finally, with respect to the motion to strike the class allegations, the court held it had jurisdiction over the class but stated that whether the class would be certified was not before the court.
The Opinion is a further indication that 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. In this case, the debtor did not rebut Chase’s assertion that Chase changed the credit report to reflect a balance of $0 and that the debt had been sold. Yet, the court only focused on the fact that Chase had the legal ability to change the credit report, let the discharged debt remain on the credit report and received a pecuniary benefit from certain payments on account of the discharged debt.
Thus, where a creditor has the ability to change the credit report, the best practice is to change the reporting upon discharge or, at the latest, as soon as the creditor receives such a request from the debtor by either deleting the debt or specifically reporting the debt as discharged in bankruptcy.
Vitaly Libman is an associate in Thompson Coburn’s Financial Restructuring group.