Credit Reporting Emerging as "Hot" Issue in Bankruptcy Litigation

Furnishing information to credit reporting agencies is a common transaction in the creditor-debtor relationship. However, when a debtor files for bankruptcy protection, several questions arise: Does the Bankruptcy Code compel a creditor to update the agencies after a debtor receives a discharge in bankruptcy? Is the failure to do so an "act" to collect a discharged debt, actionable under the Bankruptcy Code or another federal statute? Will the Creditor be liable for damages if it does not update a credit report to show the debtor's discharge? In a recent opinion, a bankruptcy court had the opportunity to discuss these questions and review previous case law on this important topic. Since this issue will undoubtedly be the subject of significant litigation in the future, it is important that all creditors are aware of this litigation and the holdings of various bankruptcy courts.

In Torres, which was a consolidation of two cases with similar facts against the same Creditor, the last information supplied by the Creditor was pre-petition, and showed the accounts as "past due" or "charged off." The entries also included the balance on the accounts. The complaints alleged that the Creditor refused the Debtors' requests to supply updated information to the credit reporting agencies, reflecting that the creditor's debts had been discharged in bankruptcy. According to the Debtors, the Creditor's inaction violated the discharge injunction in the bankruptcy code, which, after the Debtors' discharge, prohibits 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." The Debtors also alleged a violation of the Fair Credit Reporting Act while the Creditor insisted that it was not required to "update" a report after a debtor received a discharge. The Debtors further averred that the failure to update their reports was part of a larger scheme by the Creditor to coerce collection of discharged debts.

The Creditor filed motions to dismiss the Debtors' complaints, arguing that the actions were not "acts to collect" the debts, that the pre-petition information was accurate, that it had no after-discharge duty to update the agencies with the Debtors' discharge, and that its actions did not rise to the level of willfulness and egregious or oppressive conduct or bad faith. To support its position, the Creditor relied on three prior bankruptcy court opinions that it averred showed that its failure to update the reports were not acts to collect a debt. The Court reviewed each of the cases cited by the Creditor but found none persuasive.

The first case involved a debtor's lawsuit claiming a the creditor violated the discharge injunction by allegedly making false reports to credit reporting agencies. In that case, the court held that false reporting alone is not a violation of the Bankruptcy Code. Rather, to be actionable as a violation of the discharge injunction, a false statement must be reported with the intention of forcing the debtors to pay the debt. Because in Torres the Debtors alleged that the Creditor engaged in a pattern of abusive and threatening collections schemes intended to force payment of discharged debts, the court distinguished the Creditor's first supporting case. Additionally, the Court noted that several other Bankruptcy Courts had already ruled that false or outdated reporting to the credit agencies, even without further collection attempts, can constitute an "act" to extract payment, in direct violation of Section 524.

The second case relied upon by the Creditor in its defense was similar to the first in that the debtor failed to adequately prove that the Creditors' reporting was an "act" to collect a debt. However, the Torres Court did note that the earlier court did foresee situations where the continued reporting of a debt may in fact be an "act" sufficient to violate the discharge injunction of Section 524; namely, ". . . if the act of reporting a debt was undertaken for the specific purpose of coercing the debtor into paying the debt."

Finally, the Court was not persuaded by the third case cited by the Creditor in which the court found that, because a discharged debt is not extinguished, but rather, is merely unenforceable against the debtor, reporting the debt and the balance as "past due" was not inaccurate. This Torres Court simply disagreed with this finding, instead holding that a credit report that continues to note a discharged debt as "outstanding," "charged off," or "past due" is "unquestionably inaccurate and misleading, because end users will construe it to mean that the lender still has the ability to enforce the debt" because it was never discharged, the debtor has reaffirmed the debt, or the debt was declared nondischargeable.

In denying the Creditor's motion to dismiss the complaints, the Court questioned the Creditor's position that credit reporting is "of only historical interest, lacking any continuing effect on a consumer's life" which was a "highly unusual position for a financial institution to take." While stopping short of finding liability at this stage, the Court's refusal to dismiss the complaints means that the Debtors will be able to continue to pursue their claims and will likely begin to engage in discovery of the Creditor's credit reporting practices. This case signals an emerging split of authority on the issue of whether or not a creditor is required to update a credit report after a bankruptcy is filed, and if so, what must be reported and when. Future issues of Bankruptcy Report will follow significant developments on this most important issue for creditors.
In re Torres/In re Mateo, 2007 Bankr. Lexis 1478 (S.D.N.Y.)