When a debtor discharges their loans in bankruptcy, the filing will go on their credit report. All debtors recognize that this is one aspect of having their debts erased, and accept that the information will be shown for years to potential lenders. Nonetheless, this is often not the stigma that many creditors would like their borrowers to believe.
Most people also know that post-bankruptcy credit is not that difficult to obtain, even with the negative mark on the credit report. One reason for this may be that lenders know that it will be years before the borrower will have access to the bankruptcy option, so their risk of a total loss is small. For example, a Chapter 7 discharge will prevent another Chapter 7 for eight years. Because of this, many filers will receive credit card offers in the mail just a short time after their discharge is complete.
The Post-Bankruptcy Credit Report: A Place for Creditor Leverage
There is another issue for debtors that is emerging with their post-bankruptcy credit report. Under the bankruptcy law, creditors are supposed to update the debtor’s credit report and remove any negative notations about the account. Doing so gives the bankruptcy laws impact allowing a ‘fresh start’ for those who need it. However, there is a current practice among some banks to ignore the mandate for updating the report, and effectively hold the debtor hostage to pay the debt anyway.
Some banks will expressly refuse to correct the report unless the debtor pays the amount owed and already discharged in bankruptcy. Many of those debts are purchased by debt buyers who stand to profit from collecting on the bad debt. If a debtor refuses then the negative mark will affect their credit score, limiting access to new credit or other opportunities.
It is an ironic twist to the credit reporting and lending system that a bankruptcy discharge is less of a barrier to new credit than a charge-off for a single loan that lingers on a report. However, the banks know this, and are using this as a post-bankruptcy debt collection practice that seriously undermines the effectiveness of a bankruptcy discharge.
Fair Business Practice or Intentional Interference With Bankruptcy Laws?
This can get even more serious for some people who cannot get a job or housing due to negative credit reports. Employers and landlords frequently use these reports as a measure of a person’s integrity and reliability, and the banks that won’t amend the reports are having an unreasonable impact just to collect on the debt. In the meantime, debtors are under pressure to pay off the debts just so that they can obtain a good credit score.
This questionable tactic demonstrates how the business of lending, borrowing and debt collection is more intense than ever, and that bankruptcy may not always offer the absolute immunity that many debtors imagine. The saving grace is that any debt discharged in bankruptcy cannot be collected through legal means such as lawsuits and garnishments. But that does not solve the problem of the permanently stained credit report held hostage at the hands of dissatisfied creditors, or those who buy the bad debt.