Bucks Blog: Credit Reports More Accurately Reflect Debts Discharged in Bankruptcy

When you file for personal bankruptcy protection and have debts discharged by the court, your credit report is supposed to be updated to reflect that you no longer have to pay those bills.

In the past, the big three credit reporting bureaus weren’t always so good about doing that. But over the past few years, the bureaus have become much better, says John Ulzheimer, president of consumer education at SmartCredit.com.

The reason, he said, is a settlement that the bureaus agreed to as part of a class-action lawsuit. (Mr. Ulzheimer was an expert witness on behalf of plaintiffs in the lawsuit.)

The class-action case, which began as multiple suits in 2005 and 2006, said that the major credit bureaus — Experian, Equifax and TransUnion — issued credit reports stating that consumers were delinquent in making payments on debts that had been eliminated in bankruptcy. Some plaintiffs also said that the credit bureaus didn’t investigate the errors, even after they made the bureaus aware of the problem.

A $45 million financial settlement in the suit was approved by the trial court, but was thrown out in April by the United States Court of Appeals for the Ninth Circuit. The appeals court found that some plaintiffs in the case stood to benefit more than others, creating an improper conflict.

Improvements in the bureaus’ bankruptcy reporting procedures, however, had already gone into effect, as part of an earlier agreement reached as part of the suit in 2008, Mr. Ulzheimer said. As part of that settlement, the credit bureaus agreed to put in place systems to make sure debts accrued before bankruptcy are accurately reported as being included in a bankruptcy filing. (As long as the debts are eligible, of course. Some debts, like student loans, aren’t dischargeable in a bankruptcy.)

The bankruptcy and its negative impact remains on your credit report for years — 10, in the case of a Chapter 7 filing. So is it really a big deal, if your report incorrectly shows that you still owe some debts, since your credit is ruined anyway?

Well, yes, Mr. Ulzheimer said. It’s true that in the year or two immediately after a bankruptcy filing, your credit rating will suffer greatly. If you stay on top of new debts, though, it should gradually begin to improve. But if old debts are still incorrectly shown as due and payable, your credit score would be worse than it should be.

Accurately reflecting the status of your debts “makes the best out of a bad situation,” he said.

You shouldn’t expect all traces of prior delinquency to magically disappear overnight, however. Experian’s Web site notes that after a debt is discharged in a bankruptcy, the associated account isn’t immediately deleted from your credit history. Rather, the site explains, the accounts are “updated” so show they are included in the bankruptcy, so there’s no balance due.

Have you checked your credit report after a bankruptcy filing? Did the report accurately reflect your debts?

Article source: http://bucks.blogs.nytimes.com/2013/04/30/credit-reports-more-accurately-reflect-debts-discharged-in-bankruptcy/?partner=rss&emc=rss