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Banks accused of disregarding bankruptcy discharge orders

Filing for bankruptcy can be a very good decision for some debtors, allowing them to get in a position to rebuild their financial life, but there are definite drawbacks to bankruptcy. Probably the biggest of these is the impact bankruptcy has on one’s credit, which lasts for years after the bankruptcy is completed. According to Experian, a chapter 7 bankruptcy filing remains on one’s credit report for 10 years, while a chapter 13 bankruptcy remains on for seven years. After that time, one is supposed to have the record the bankruptcy removed from one’s report.

Unfortunately, having a bankruptcy filing removed from one’s credit report is dependent on lenders filing correct reports to credit reporting agencies. While banks are supposed to update records to show that debt charged off in bankruptcy is no longer due, some banks don’t always do that. In fact, the Department of Justice is currently conducting an investigation into a handful of banks suspected of deliberately failing to update records in order to coerce debtors to pay debt already charged off in bankruptcy so that they may obtain a clean credit report. 

Because a marred credit report has such an impact on one’s ability to obtain good credit, some debtors fall for the below-the-belt debt collection tactic. This, of course, effectively empties the bankruptcy discharge of its significance.

In their defense, the banks have argued that they routinely sell off debts to third-party collectors and therefore don’t have any motivation to report discharged debts inaccurately. In response, at least one federal judge has said that the ability to sell those debts is based on the banks’ disregard of the fact that they were discharged in bankruptcy.

As this litigation continues to unfold, we are certainly hoping that federal courts will protect the rights of consumers by holding lenders accountable for systematically undermining the effectiveness of bankruptcy discharge orders. Those who do run into problems with creditor harassment for discharged debts should speak to an experienced bankruptcy attorney to determine their options.

Source: The New York Times, “Debts Canceled by Bankruptcy Still Mar Consumer Credit Score,” Jessica silver-Greenberg, Nov. 12, 2014. 

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