Life After Debt: Rebuilding After Bankruptcy
Once a consumer has made the difficult decision to file bankruptcy, gone through the bankruptcy process, and received their discharge, it can often feel like they are on their own to figure out what to do with their financial life after debt.
There are all kinds of myths, misconceptions, and misunderstandings surrounding what happens after someone files bankruptcy. Many people think that bankruptcy means that one cannot buy a house for ten years or that bankruptcy ruins your credit for life. The good news is that there is life after bankruptcy and it comes around much quicker than many think. The not-so-good news is that rebuilding takes effort and knowing one’s rights. A key to rebuilding is a proactive approach with credit reports and knowing how debts are reported post discharge.
Credit Reporting Issues During and After Bankruptcy
One of the biggest issues that comes up after bankruptcy (and even during bankruptcy in a Chapter 13) is how debts are reported on the debtor’s credit report. Should the debts show with a balance of $0?Does a mortgage company have to report payments made after filing? What does a debtor need to do after bankruptcy to find and fix errors?
Should Debts Show with a Balance of $0? Fair Credit Reporting Act Issues
A debt that has been included in a bankruptcy discharge should show up on the credit report with a zero balance and language such as, “discharged” or “included in bankruptcy.” Under the Fair Credit Reporting Act, it is a violation to report incorrect information, including discharged balances as currently past due, late, charged off, etc.1
Does a Mortgage Company Have to Report Payments Made After Filing?
No, a mortgage company does not have to report any payments that are made after the bankruptcy filing, unless there is a reaffirmation agreement signed and approved by the court. On the flip side, they also do not report missed or late payments either. This often comes up because a debtor is keeping their primary residence and continuing to make payments, even though their personal liability on the mortgage was discharged in the bankruptcy. This problem rears its ugly head when the debtor tries to refinance or get a new mortgage because there is no recent payment history on the loan and many automated underwriting programs deny the application. Unless the mortgage was reaffirmed, the payments will not be reported because the mortgage companies have reason to believe that they could be held liable for trying to collect on a discharged debt through the reporting process.
There are a couple of cases discussing this issue with debtors trying unsuccessfully to get mortgage companies to report post-petition payments. In one case, a mortgage creditor’s failure to report a Chapter 7 debtor’s post-discharge voluntary payments on the mortgage, in the absence of a reaffirmation of the mortgage, was not a violation of the Fair Credit Reporting Act. The creditor reported the debt as discharged in bankruptcy with a zero balance instead of showing the voluntary payments made.2
In another case, a home mortgage creditor’s reporting of the Chapter 7 debtor’s loan as having a zero balance and no payment activity, even though the debtor had continued making mortgage payments to avoid foreclosure, was not false or inaccurate, and therefore did not violate the Fair Credit Reporting Act. Since the debtor’s personal obligation to pay the debt was discharged in bankruptcy, and the fact that the creditor accepted the debtor’s voluntary payments and refrained from foreclosing on his home did not suggest that any new debtor-creditor or similar relationship arose between the two parties. See Schueller v. Wells Fargo & Co., 559 Fed. Appx. 733 (10th Cir., May 22, 2014) (case no. 13-2057); Horsch v. Wells Fargo Home Mortgage, –––F.Supp.3d ––––, 2015 WL 1344836 (E.D. Pa., March 25, 2015).3
One solution for the refinance or new loan option where mortgage payments are not being reported is to obtain a written history of payments from the mortgage company through a written request for information.4That payment history can then be provided to the mortgage underwriter as proof of on-time payments.
Fixing the Problem and Rebuilding: Best Practices
After discharge, there are several steps a debtor can take to rebuild:
- Debtors should run their credit reports about 60 days after discharge to see if there are any errors that need correcting. Using AnnualCreditReport.com allows debtors to receive a credit report from each of the three major credit reporting agencies on an annual basis. The Fair Credit Reporting Act requires each of the nationwide reporting agencies to provide a free copy annually, upon request. 5
- If there are errors, the debtor needs to dispute those errors with each of the credit reporting agencies. Ideally, these disputes are made in writing and include copies of evidence showing the erroneous entry and the correction that needs to be made.
- Other strategies for rebuilding after bankruptcy include obtaining a secured credit card, making on-time payments for any active accounts, and keeping the debt ratio on revolving lines of credit below 30%.
Understanding the problems debtors face after bankruptcy and developing a proactive plan for rebuilding really helps combat the myths and misconceptions out there about bankruptcy. There is life after debt and getting that concept out to debtors before and after the bankruptcy process will help more debtors be financially successful after a tough decision.
[1]15 U.S.C. § 1681s-2(a)(1)(A)
[2]Dixon v. Green Tree Servicing, LLC, 2015 WL 2227741 (N.D. Ind., May 11, 2015), appeal filed, Case No. 15-2269 (7th Cir., filed June 12, 2015).
[3]Groff v. Wells Fargo Home Mortgage, Inc., F.Supp.3d, 2015 WL 2169811 (E.D. Mich., May 8, 2015).
[4]12 C.F.R. § 1024.36
[5]Fair Credit Reporting Act, 15 U.S.C. § 1681.