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Second Circuit: The Value of Accurately Reporting Bankruptcy Discharge

Posted By USFN, Friday, January 29, 2016
Updated: Friday, February 19, 2016

January 29, 2016


by Nathan C. Favreau
Hunt Leibert – USFN Member (Connecticut)

Creditors and servicers use credit reports maintained by the major American credit reporting agencies to estimate the level of risk associated with lending decisions. The value of credit reports depends on the accuracy of information contained in them, which is provided by banks, mortgage servicers, and other finance companies. It is vital that furnishers of credit data supply updated and accurate information, including whether a debt has been discharged in a bankruptcy proceeding.

Furnishers of credit information in the Second Circuit face the possibility of a lawsuit being filed by a borrower for failing to accurately report the entry of a bankruptcy discharge under at least two legal theories of liability:

  1. Fair Debt Collection Practices Act – 15 U.S.C § 1692e(8) prevents debt collectors from using false, deceptive, or misleading representations in connection with the collection of a debt. This includes communicating credit information that is known, or should be known, to be false. The Court of Appeals for the Second Circuit recently reversed a case that had dismissed claims brought under the FDCPA for — among other things — improperly reporting that the plaintiff owed money on the discharged debt. Garfield v. Ocwen Loan Servicing, LLC, 2016 U.S. App. LEXIS 3 (2d. Cir. Jan. 4, 2016). [The Second Circuit is comprised of Connecticut, New York, and Vermont.]

  2. Violation of the Discharge Injunction – To prove a claim under 15 U.S.C. § 524, a plaintiff needs to show that a defendant attempted to collect debts by not informing credit reporting agencies that those debts had been discharged. Haynes v. Chase Bank USA, N.A., 2015 U.S. Dist. LEXIS 27400 (S.D.N.Y. Mar. 5, 2015); Torres v. Chase Bank USA, N.A. 367 B.R. 478, 489 (S.D.N.Y. 2007) (court discussed low threshold for determining that failure to report bankruptcy discharge was coercive activity by the creditor).

Mitigating the Risk of a Lawsuit

To promote the value of credit reports, as well as to mitigate the exposure to lawsuits from borrowers, it should be a priority for creditors and servicers to accurately and timely report any bankruptcy-discharged loans within their portfolio. Free-flowing communication among various departments within an organization provides the key to lowering the risks associated with failing to update credit reporting information to reflect a bankruptcy discharge. Policies and procedures should be in place allowing those units that are responsible for processing notices of bankruptcy petition filings to communicate with the department responsible for furnishing information to the credit bureaus.

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