Living with credit

Lawsuit takes aim at coercive credit report tactics

Fred Williams

After debts were erased in bankruptcy, Chase Bank left them marked “unpaid” on people’s credit reports as a pressure tactic to boost collections, a class-action lawsuit charges.

Chase denies it in papers filed in U.S. Bankruptcy Court in New York.  But in a July ruling, Judge Robert Drain said the charges have enough merit to be aired in court.

“I believe the complaint sets 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,” Drain wrote.

The case, Rusty Haynes versus Chase Bank, sheds light on a little-known corner of debt collection. Debts erased in bankruptcy are supposed to be gone for good. But in practice, that’s not always how it works out. Bankruptcy lawyers tell of clients who keep getting dinged for debts that were supposed to be discharged, again and again.

“They park that language on your credit report then they say they have no duty to change it,” said Kathy Cruz, a bankruptcy lawyer in Arkansas.

“Parking” is the term lawyers use for debts that appear on your credit report as unpaid, even after bankruptcy discharge. Those out-of-date demerits make it harder to rebuild credit. They also encourage collectors to keep pursuing the debt — even to the point of filing collection lawsuits. Cruz said one of her clients fought off more than 20 attempts to collect a debt that was extinguished in bankruptcy.

Some debt sale agreements spell out how the notation of a debt, or ” tradeline,” should appear on people’s credit reports. “I’ve seen agreements where neither the seller nor buyer can change how the tradeline looked before the sale,” said Max Gardner, a bankruptcy lawyer in North Carolina. “That thing is frozen like Antarctica used to be.”

Bankruptcy cases have established that creditors do have a duty to update credit reports when they receive the bankruptcy court’s notice of discharge. The black mark against your credit doesn’t disappear, but a notation shows the debt is no longer owed. If the tradeline isn’t updated, the debt looks like it might be new, or one not included in the bankruptcy.

In the Haynes case, Chase argued that it had no duty to update the credit report because it had sold off the debt.

Judge Drain took a different view. If Chase won’t correct the report, the consumer is in a Catch-22. The buyer of the debt isn’t named on the credit report, so the consumer doesn’t know where to turn to correct the information.

What’s more, leaving demerits on credit reports would help Chase sell off its debts, Drain said. Debt buyers know they will have a better chance of collecting.

And even after selling the debt, Chase stood to reap a portion of the money collected, under terms of its agreement with the debt buyer.

In court papers, Chase describes its interest in sold-off debt as a service fee for forwarding payments to the new owner of the debt. When delinquent consumers pay Chase after their debt is sold, the bank sends the payment along to the debt buyer.

But however it is structured, a continuing interest in sold-off debt raises questions about whether the sale of debt is truly free and clear, consumer lawyers said. The Haynes case, even if it doesn’t go to trial, could give another shake to a debt buying market that is already rattled by questions about faulty record keeping and mass-produced lawsuits.

Bankruptcy lawyers say their clients come to them reluctantly, as a last resort. The legal fees for filing are costly, and the bankruptcy itself stays on their credit report for 10 years. When debts that were wiped out remain on your credit report as unpaid, “it really undermines the whole purpose of going through a bankruptcy proceeding,” Gardner said.

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  • Lisa

    I filed for bankruptcy over 5 years ago. Chase bank has not removed marked my credit report permanently as released the debt on my credit report. I can not get any credit, car loans or other and it has hindered my ability to find employment because credit reports are routinely checked theses days.