If you’re like many collection agencies, you report collection items to the bureaus. This not only helps to paint a truer picture of the consumer for creditors and others who obtain copies of the consumer’s credit report, but it may also aid in your collection efforts. But by posting collection items to a credit bureau, you put your company in the position of a “furnisher” as defined by the Fair Credit Reporting Act (FCRA). You must make sure to not only be in the know about what that means for your company, but you should also have a written procedure in place to handle changes in the status of the debt and the status of the consumer; such as bankruptcy.
In May of this year, several of the larger banks were in the news for not correctly reporting debts on credit bureaus that were discharged in bankruptcy. Pursuant to lawsuits, which were filed in White Plains, New York Bankruptcy Court, and investigations by the US Trustee’s Office, the banks were not correctly updating trade-line accounts on consumer’s credit bureaus with information that the debt was discharged in bankruptcy.
Under federal law, once a borrower has discharged a debt in bankruptcy, banks are required to update the credit reports to indicate that the debt is no longer owed, and remove any notation of “past due” or “charged off.” The balance should also be zeroed out and terminology such as “included in bankruptcy” or “discharged in bankruptcy” should show for the trade-line.
But this extends further than just the banks. Any agency, law firm, debt buyer or debt servicer who reports to credit bureaus should follow the same rule. It is also important if you are a debt buyer to make sure to pre-scrub potential portfolio purchases to get a better understanding of what is in the portfolio for purchase. A quick evaluation for not only bankruptcy but also deceased accounts will go a long way in making sure you purchase accounts that you can actively collect.
In the late sixteenth century, Francis Bacon was the first to say “Knowledge is power”. And I couldn’t agree more. Being knowledgeable about your consumers will go a long way in keeping your company out of court and out of the news. But you also need to use that knowledge wisely – and take the appropriate steps once you have that knowledge. And in this case, that means properly updating the trade-line or collection item on the consumer’s credit bureau with the bankruptcy information, and removing the “past due” or “charged off” verbiage.