Filing bankruptcy is supposed to remove most debts from your credit report. The only exceptions are some tax and student loan debts. Unfortunately, some lenders and debt collectors don’t follow the rules. This can keep you from getting a fresh start and rebuilding your credit when you have a legal right to do so.
As the New York Times recently reported, “some of the nation’s biggest banks ignore bankruptcy court discharges, which render the debts void. Paying no heed to the courts, the banks keep the debts alive on credit reports, essentially forcing borrowers to make payments on bills that they do not legally owe.”
If you’re currently dealing with this kind of illegal treatment or have recently filed a bankruptcy make sure you know how to deal with these debt-collection tactics.
What Creditors Should Do
When a debt is discharged in bankruptcy it is voided. Creditors are supposed to update credit reports and show the debt as no longer owed. They should also remove all notations of “charged off” or “past due.”
But some aren’t doing it. And it’s intentional — not the result of a clerical error.
What Creditors & Debt Collectors Gain By Failing to Update Your Report
By misreporting the debts, the creditor still has some leverage for collecting money from unknowing consumers. And sometimes borrowers actually pay the debt – even though they have no legal obligation to do so.
Why? If the bad accounts remain on the credit report, it can hinder the borrower from getting a new loan, house or job.
How Creditors and Debt Collectors Work Together
The New York Times accessed unsealed court documents to find how these old debt payments were handled.
Contracts are usually structured in one of two ways. The seller of the debt (the bank) keeps any payments made after a certain amount of time (usually around 18 months after the sale), while the debt buyer gets anything sent before then. Or the debt buyer gives the creditor a percentage of any payments collected on the old debts.
Selling old debts is a big business. One publically traded debt buyer bought over 36 million accounts valued at $81.3 billion bankruptcy debts made up 16 percent of those accounts even though they were not legally required to be paid.
However, by continuing to report these accounts after the bankruptcy, there is still the possibility that they can collect some money. The banks usually send payments that they receive from borrowers to the debt buyers. In return, the debt buyers will buy more bad debts from the banks — even those that may wind up in bankruptcy.
How to Fix the Problem
First, make sure debts discharged in bankruptcy are not being reported on your credit report. To find this out, you can go to one of the free credit reporting sites, like annualcreditreport.com. You are entitled to receive one copy of all three of your reports one time per year. Experian, Equifax and Transunion are the three credit bureaus.
Review each credit report and if you notice any of your discharged debts still being reported, file a formal compliant with the credit-reporting agency. Each one will have an online procedure or you can mail them a copy of your dispute.
Give It 30 to 60 Days
It can take up to 30 days for them to respond to your dispute. They will research it and if it is legitimate, they will remove it from your report. It may take another 30 to 60 days to see the change take effect on your report. But some bureaus may offer you a “rapid re-score” which can help if the error is causing a problem with employment or getting a home or car loan.
It is always a good idea to include as much proof as possible when making your initial complaint. That way if the creditor tries to wiggle out of its obligation, the bureau can see that you’re in the right.
In this case, an official document showing that the debt was discharged in bankruptcy should be adequate. Ask your bankruptcy attorney to help you access it if you can’t locate it.
Bankruptcy – Not Discharged Accounts Stay on Your Credit Report
Also, be aware that a bankruptcy filing can remain on your credit reports for 10 years, but not the individual accounts discharged in the bankruptcy. The bankruptcy filing affects your credit for about two years, but then it gradually loses its impact. So start rebuilding your credit as soon as possible. You can start with a secured credit card or a bad credit loan, but be careful to avoid the same situation.
Most new creditors will focus on your last 24 months of credit history.