Proposed law would require creditors to show a zero balance for debt discharged in bankruptcy

WASHINGTON, D.C. — U.S. Sen. Sherrod Brown (D-OH) introduced legislation that would require banks and debt buyers to notify credit reporting agencies when a consumer’s debt has been extinguished through bankruptcy.

“During the financial crisis, more than 50 million people saw their credit scores fall due to foreclosures and financial hardships. Many turned to bankruptcy, but are still haunted by debt on their credit report that they no longer owe,” said Brown, ranking member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs. “This bill would ensure that debts prior to bankruptcy aren’t in effect double counted and don’t continue to make it difficult for consumers to get a job or secure a loan for a home.”

Americans are still recovering from the devastation of the 2008 financial crisis, which wiped out $13 trillion in household wealth and cost five million Americans their homes.

During the worst of the crisis, almost 50 million Americans saw their credit scores plunge by more than 20 points. Seven years later, many consumers are still struggling to obtain mortgage loans due to the impact on their credit scores.

Nationwide, millions of Americans are haunted by debts they have already paid or discharged yet continue to appear on their credit reports, so-called “zombie debts.” While a bankruptcy remains on a credit file for up to 10 years, the debt extinguished by the bankruptcy should be removed from the file once discharged.

The New York Times recently reported that the U.S. Department of Justice is investigating a number of banks, including JPMorgan Chase, Bank of America, Citigroup, and Synchrony (formerly GE Capital), for violating federal law in reporting this debt.

In May, the Times reported that JPMorgan Chase and Bank of America agreed to remove the debt consumers eliminated during bankruptcy proceedings from their credit reports, which could provide relief for about 1 million consumers.

The Consumer Reporting Fairness Act would amend bankruptcy law to require creditors to ensure that a debt discharged in bankruptcy shows a zero balance on the consumer’s credit report in an accurate and timely manner. The bill also would permit consumers to take legal action against creditors that fail to report a discharged debt that is no longer owed.

Sens. Richard Blumenthal (D-CT), Dick Durbin (D-IL), Al Franken (D-MN), and Jeff Merkley (D-OR), joined Brown in introducing the legislation.

“Every consumer should have a credit score that accurately reflects how creditworthy they are,” said Franken “When creditors fail to report that debt is no longer owed, they drive down consumers’ credit scores, costing consumers money and opportunities. The Consumer Reporting Fairness Act will help ensure that creditors fulfill their responsibility to provide correct and timely information about consumers’ credit.”

“A disturbing number of creditors have failed to ensure that bankruptcy discharges are reflected on consumer credit reports – and some appear to have done so deliberately, seeking unfair and illegal leverage over consumers,” said Blumenthal. “This bill, which will require banks to notify reporting agencies about discharged debts, will help prevent those debts from hanging over consumers’ heads as they seek a more financially secure future.”

“When a family makes the difficult decision to go through bankruptcy proceedings, they shouldn’t also have to worry that their discharged debts will continue to haunt their credit report,” said Durbin. “This bill is about protecting consumers’ right to a credit report that is a true representation of their financial status, and a credit score that is fair and accurate.”

The Consumer Reporting Fairness Act is supported by Americans for Financial Reform, Center for Responsible Lending, Consumer Action, Consumer Federation of America, Consumers Union, Demos, Leadership Conference on Civil and Human Rights, National Association of Consumer Advocates, National Association of Consumer Bankruptcy Attorneys, National Coalition for Asian Pacific American Community Development, National Community Reinvestment Coalition, National Consumer Law Center (on behalf of its low-income clients), National Council of La Raza, Public Interest Research Group, and Public Citizen.

Statements of Support for the Consumer Reporting Fairness Act:

Pamela Banks, senior policy counsel for Consumers Union, the advocacy arm of Consumer Reports, said, “When a debt is settled, it ought to be removed from your credit report quickly and consistently. Consumers shouldn’t be penalized for debts with a zero balance, and creditors shouldn’t make money off of debt that has already been discharged. This bill would be a significant step in cleaning up the credit-reporting process and helping consumers get a fresh start. We commend the senators who have introduced this important legislation.”

“Senator Brown’s bill would require creditors to update consumers’ credit bureau records to prevent old debts from harming consumers who have chosen a fresh start through bankruptcy,” said Consumer Action’s Director of National Priorities Linda Sherry. “The bill’s redress provisions are essential in giving consumers the ability to sue creditors who violate their responsibilities and fail to report that consumers no longer owe a discharged debt.”

“Accurate credit reports are critical to ensuring a safe and sustainable credit market,” said Tom Feltner, director of financial services at the Consumer Federation of America.  “We applaud this proposal to set a new, higher standard for creditors and ensure that discharged debt is reported in a timely manner.”

“The Consumer Reporting Fairness Act addresses a significant abuse that prevents people from realizing the fresh start promise of bankruptcy,” said Ed Boltz, president of the National Association of Consumer Bankruptcy Attorneys (NACBA).  “It is estimated that more than a million Americans who have gone through the bankruptcy process and have legally discharged debts find that their debts continue to appear on their credit reports.  This practice of flaunting the bankruptcy discharge by some of the largest banks in this country is intolerable.  NACBA commends Senator Brown and his colleagues for introducing the Consumer Reporting Fairness Act which will help put an end to this abusive practice. ”

“Senator Brown’s bill targets the abusive practice of many banks to intentionally use misleading debt collection practices to falsely continue to report debts no longer owed on credit reports, leaving consumers unable to rebuild their lives, especially after bankruptcy,” said Ed Mierzwinski, Consumer Program Director, U.S. PIRG. “The bill is a critical step toward cleaning up debt collection and credit reporting, both of which the CFPB calls dead end markets, because consumers have no choices.”

“Bankruptcy is hard enough, for all parties involved, but debt collectors who go after ‘zombie debt’ defeat the whole purpose of bankruptcy,” said Rob Randhava, senior counsel of the Leadership Conference. “The existing laws on this need to be more clear.”

“On behalf of our low-income clients, we applaud Senator Brown for introducing this bill that will prevent banks and other creditors from continuing to list on a consumer’s credit report that a debt discharged in bankruptcy is still owed by the consumer,” said National Consumer Law Center staff attorney John Rao. “This practice of failing to update credit reports after bankruptcy has harmed consumers by making them look like they are still hopelessly in debt when they are not. They deserve the fresh start that bankruptcy offers.”

“Millions of Americans are charged higher interest rates because financial institutions have inaccurately represented their debts to credit reporting agencies,” said Lisa Stifler, Policy Counsel, Center for Responsible Lending. “Americans who have gone through bankruptcy are also routinely sued for debt they do not owe because financial institutions and abusive debt collectors doggedly pursue them for debts that are actually forgiven during bankruptcy. In both cases the burden is on the consumer to dispute the record with the credit reporting agency, or even to contest a lawsuit, at their own expense. This is wrong, and it is why the Fair Consumer Reporting in Bankruptcy Act is urgently needed.”

“The Consumer Reporting Fairness Act appropriately raises the bar for creditors when reporting information to the credit reporting agencies,” said National Community Reinvestment Coalition (NCRC) President and CEO John Taylor. “The stakes are only increasing for consumers, businesses and workers who can see lending opportunities, jobs, and housing prospects disappear because of inaccurate information on a credit report.  Quite simply, there should be consequences for reporting false information.”

National Association of Consumer Advocates: The National Association of Consumer Advocates (NACA) strongly supports the Consumer Reporting Fairness of 2015, which would provide for more accurate credit reports and accountability from the credit reporting industry. American consumers across the country who go through bankruptcy are harmed by discharged debts that continue to wrongly appear on their credit reports.  This bill is an important first step to allow consumers to obtain good credit, jobs and the financial stability they seek.

Public Citizen: “Public Citizen welcomes Sen. Brown’s measure to clean up the banking industry’s shoddy credit reporting habits. Americans shouldn’t continue to suffer onerous interest rates even after they’ve repaired their debts.”

Americans for Financial Reform: The Consumer Reporting Fairness Act of 2015 will keep borrowers from continuing to be haunted and harmed by debts discharged in bankruptcy. Millions of consumers who are in bankruptcy find themselves continuing to deal with debts that remain on their credit reports even though they have been discharged. Passage of this bill would be a big help to consumers who too often have their credit scores negatively impacted by debts erroneously remaining on their reports, or pay debts they do not owe.


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