Bill Would Allow Consumers To Sue When Bankrupt Debt Isn’t Removed From Credit Reports

Under federal law, when someone erases a debt in bankruptcy, their bank is required to update their credit reports to indicate the debt is no longer owed. To ensure this happens, legislators have introduced a new bill that would give credit card borrowers with inaccurate credit reports the power to sue their bank or a third-party debt buyer for damages if they continue to send so-called zombie debt to credit reporting agencies.

The Consumer Reporting Fairness Act of 2015 — introduced by Ohio Senator Sherrod Brown — aims to make it easier for consumers who discharge credit card debt through bankruptcy to fix errors and obtain accurate credit reports.

Under the bill [PDF], creditors and debt collection agencies would be required to notify credit reporting agencies (CRAs) when a consumer’s debt is canceled by bankruptcy. If notification doesn’t occur and reports continue to include inaccuracies, consumers could then sue for damages and fees.

As the Wall Street Journal points out the proposed bill would clear up confusion when it comes to large banks selling debt to third-party debt collectors, as current laws do not provide an explicit requirement that these entities notify credit reporting firms of a debt’s discharged status.

Brown contends that debts prior to bankruptcy may be double counted, further marring consumers’ credit reports.

The proposed bill comes at a time after several consumers filed lawsuits accusing banks of letting endangering their financial status by leaving discharged debt on their credit reports, the WSJ reports.

In some cases, the borrowers say the inaccurate data made it more difficult to obtain a job, find an apartment or acquire lines of credit, because the mark was seen as a “delinquent debt” on their credit report, the WSJ reports.

These issues were only magnified because in some instanced the original creditor sold the debt to a third-party debt collector.

Such was the case for Bank of America and JPMorgan Chase, which agreed in May to remove debt consumers eliminated during bankruptcy proceedings from their credit reports to resolve several consumer lawsuits.

The financial companies allegedly ignored the discharges in order to make money by selling off the debt to collectors, who then refused to correct issues unless borrowers paid the debts that were already cleared.

More recently, JPMorgan Chase agreed to pay $136 million and revamp its debt sales after state and federal authorities found the company sold zombie debts to third-party buyers — those debts included accounts that were inaccurate.

Federal Lawmakers Propose Credit Reporting Changes [The Wall Street Journal]