What Sort of Credit Remediation is Available to Alleged Debtor After Dismissal of an Involuntary Bankruptcy Petition?

By: Charles B. Jimerson, Esq. & Suzanne H. Clark, Esq., CEDS

Involuntary Bankruptcy is used by some creditors to force an alleged debtor[1] into bankruptcy. From the perspective of a debtor, an involuntary bankruptcy carries serious consequences, including loss of credit standing. The impact on a debtor’s credit report and to her credit score can follow a debtor for years, even if the Involuntary Bankruptcy proceeding is dismissed after a debtor shows the creditor did not have a right to pursue the action. All bankruptcies, whether voluntary or involuntary result in a significantly reduced credit score, and may remain on a consumer’s credit report for 10 years. Therefore, this article will discuss what steps an alleged debtor may take to remediate her credit where she is successful in having an involuntary bankruptcy dismissed. To begin the analysis, it helps to look at the role of the Credit Reporting Agencies in reporting public records, including bankruptcies, on an individual’s credit report. We will then take a look at obtaining court orders, notifying Credit Reporting Agencies of disputes, and additional remedies available to debtors in credit remediation.

For a detailed overview of Involuntary Bankruptcy specifically, see Part 1 and Part 2 of Jimerson & Cobb’s blog on this subject.

What is the Role of Credit Reporting Agencies? 

Basically, Credit Reporting Agencies (“CRAs”), such as Equifax, TransUnion, and Experian, are in the business of providing creditors with accurate information about consumers, which is a service to creditors. 15 U.S.C. §1681’s statement of purpose states that CRAs existed before the law regulating them was enacted in 1970.  Specifically, the CRAs are private entities, not governmental bodies, and therefore they are simply regulated by statute 15 U.S.C. §1681, they were not created by or given any authority under statute. 15 U.S.C. §1681 limits what the CRAs can do, it does not specifically list out what they are permitted to do. This means that if a CRA is not prohibited by 15 U.S.C. §1681 from taking a certain action, then a CRA may take that action.

CRAs have a duty to follow a reasonable procedure to assure that the information on the report is accurate. See 15 U.S.C. §1681e(b). CRAs may report the filing of a bankruptcy because it is a Public Record. Typically, by reporting what is reflected on the Public Record (for example, Bankruptcies, Final Judgments, Liens, etc.), the CRAs have followed reasonable procedure to list accurate information. Pursuant to 15 U.S.C. §1681c(a)(1), a CRA may report a bankruptcy of any kind on an individual’s credit report for a period of up to 10 years after adjudication. There is a distinction regarding when the time period starts running. If a bankruptcy results in a discharge, the 10 year period runs from the date of filing, whereas if a bankruptcy is dismissed, the 10 year period runs from the date of dismissal of the bankruptcy. See FTC Staff Summary 605(a)(1), Item 3. Also, noteworthy is that Section 605(a) does not require CRAs to report all adverse information within the time periods set forth, but only prohibits them from reporting adverse items beyond those time periods.

A problem arises when an Involuntary Bankruptcy is filed by a creditor or creditors and later dismissed. The purpose of CRAs reporting bankruptcies is to inform creditors of the risks associated with extending credit to a consumer. While the reporting of a dismissed Involuntary Bankruptcy is an “accurate” reflection of the public record, it may not accurately reflect the true image of a particular consumer, or the risk associated with extending her credit. Therefore, a consumer may want her credit remediated under this set of circumstances. The only surefire way to remediate the debtor’s credit is to obtain a court order prohibiting CRAs from reporting the bankruptcy.

Court Orders

Best practices for assisting a client in remediating her credit when an involuntary bankruptcy is dismissed, is to have it reflected in an order pursuant to 11 U.S. C. § 303(k)(2) that the CRAs are prohibited from reporting on the Involuntary Bankruptcy.

11 U.S. C. § 303(k)(2) states:

If the debtor is an individual and the court dismisses a petition under this section, the court may enter an order prohibiting all consumer reporting agencies (as defined in section 603(f) of the Fair Credit Reporting Act (15 U.S.C. 1681a(f))) from making any consumer report (as defined in section 603(d) of that Act) that contains any information relating to such petition or to the case commenced by the filing of such petition.

Even with the 303(k)(2) order, there are additional remediation steps to follow to have the bankruptcy reporting removed and the credit remediated.[2]

Notice to Credit Reporting Agencies Through the Reporting Dispute Process 

While the CRAs perform Public Records searches to locate items such as bankruptcies, they do not proactively look at the language of a court’s order of dismissal. Therefore, it is up to the debtor, or his representative, to bring it to the CRAs’ attention that they have a court ordered obligation to remove the bankruptcy from the consumer’s credit report pursuant to the 303(k)(2) order. It is not a simple process to communicate with CRAs. It is essential to keep fastidious records and provide the necessary paperwork in accordance with each CRA’s reporting dispute process to remediate the credit in the most efficient manner possible.

Each CRA (Equifax, TransUnion, and Experian) has a dispute process and a contact through which to file disputes on their websites. Once you file a dispute, which will begin with a cover letter documenting the disputed portion of the Credit Report and enclosing the court’s 303(k)(2) order, the CRA will open an investigation. If an attorney or representative other than the consumer is handling the remediation, a Power of Attorney should be provided to the CRAs in accordance with their requirements. Once the dispute is filed in writing, the CRAs will most likely send out form letters stating they received the dispute, their 30 day time frame for resolving the dispute under 15 U.S.C. § 1681i(a)(1)(A), and a reference number. It may be helpful at this juncture to telephone the CRAs, and verbally explain the dispute, and their obligation pursuant to the court’s 303(k)(2) order.

An additional consideration in the dispute process, is that creditors may be furnishing bankruptcy information to the CRAs which is reflecting in specific trade lines on the credit report, in addition to the bankruptcy being reported in the Public Records portion of the consumer’s credit report. As an example, a creditor might close an account as soon as the Involuntary Bankruptcy is filed, and may themselves furnish the information to the CRAs that the account is closed due to bankruptcy. This will then be reflected in the historical information about that account. Because of this, there may be an additional step in the dispute / remediation process. Not only will you have to notice the CRA’s of their obligation to remove the Involuntary Bankruptcy in the Public Records report, you may also have to inform the CRAs that they must have the historical information removed from specific tradelines, as well.

Once the CRAs investigation is complete, they will provide the consumer with a letter stating the results of their investigation. It will hopefully state that the reporting of the bankruptcy has been removed from the Credit Report. However, if the investigation did not go in the consumer’s favor, then there are still additional steps to take to pursue the remediation.

What if the Credit Reporting Agencies Do Not Remove the Involuntary Reporting After Their Investigation?

Once the investigation is finalized, the reporting dispute process has been exhausted. In the unlikely event the CRA decides not to remove the reporting of the Involuntary Bankruptcy, they will not likely change their reporting without outside action. There are a couple of options at this juncture: (i) the consumer may file a complaint against the CRA with the Consumer Finance Protection Bureau or the State Attorney General’s office, or (ii) the consumer may make a motion in the Bankruptcy Court proceeding regarding the violation of the court’s order and seek remedies in that forum.

Conclusion

The credit remediation process can be very tedious, under any circumstances. In the event of a dismissed Involuntary Bankruptcy, having a 303(k)(2) order in place directing the CRAs to remove any reporting of the bankruptcy from the alleged debtor’s credit report is a key factor in successfully remediating the consumer’s credit. Attorneys who have the knowledge to not only put proper legal measures in place, but who can also navigate the dispute process with Credit Reporting Agencies is key in assisting an alleged debtor towards successful credit remediation after an Involuntary Bankruptcy is dismissed.

Involuntary Bankruptcy is used by some creditors to force an alleged debtor[3] into bankruptcy. From the perspective of a debtor, an involuntary bankruptcy carries serious consequences, including loss of credit standing. The impact on a debtor’s credit report and to her credit score can follow a debtor for years, even if the Involuntary Bankruptcy proceeding is dismissed after a debtor shows the creditor did not have a right to pursue the action. All bankruptcies, whether voluntary or involuntary result in a significantly reduced credit score, and may remain on a consumer’s credit report for 10 years. Therefore, this article will discuss what steps an alleged debtor may take to remediate her credit where she is successful in having an involuntary bankruptcy dismissed. To begin the analysis, it helps to look at the role of the Credit Reporting Agencies in reporting public records, including bankruptcies, on an individual’s credit report. We will then take a look at obtaining court orders, notifying Credit Reporting Agencies of disputes, and additional remedies available to debtors in credit remediation.

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[1] For purposes of this article “alleged debtor” and “debtor” will be used interchangeably.

[2] If a court order is not obtained a consumer has a right to add a 100 word comment to his report explaining the Involuntary Bankruptcy. This will not impact the score, but could impact a decision by a person (lender, potential employer, etc.) who reads the report.

[3] For purposes of this article “alleged debtor” and “debtor” will be used interchangeably.

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