It is illegal to collect a debt which has been discharged in a bankruptcy case. Under the Bankruptcy Code, an honest debtor receives a discharge from any personal obligation for debts arising before bankruptcy. To put teeth into this discharge, the Bankruptcy Code imposes an injunction against anyone from collecting a debt. Specifically, section 524 of the Bankruptcy Code prohibits “the commencement of an action, the employment of process, or an act, to collect, recover, or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.”
All too frequently, credit card issuing banks fail to report to credit reporting agencies like Experian, Equifax and TransUnion, that their debts have been discharged in bankruptcy. Instead, they report the debts as having been “charged off” or “transferred to another office” or “late” or “delinquent” or “derogatory”. Why do they do this? A debt which has been “charged off” is worth more on sale to a debt buyer than a debt which has been discharged in bankruptcy.
A respectable body of law has developed holding that continued reporting of a debt other than discharged in bankruptcy may in and of itself be an act to collect or recover the debt in violation of the discharge injunction.
Most recently, the bankruptcy court for the Southern District of New York denied Chase Bank’s motion to dismiss a class action brought by renowed attorney David Boies’ firm in Haynes v. Chase. A copy of this opinion is available at: http://www.nysb.uscourts.gov/sites/default/files/opinions/245564_63_opinion.pdf. Judge Drain was highly critical of the practice of failing to correct credit reports to state that debts have been discharged in bankruptcy. Judge Drain stated that by failing on a systematic basis to correct the credit reports, banks like Chase enhance purchasers’ ability to collect on the debt. Buyers know that post-sale, banks like Chase will refuse to correct credit reports placing additional pressure to obtain a “clean” credit report by paying the debt. The Court held that Chase was using the inaccuracy of its credit reporting on a systematic basis to further its business of selling debt and its buyer’s collection of such debt. And since Chase was alleged to retain a percentage of payments received on this debt, the practice of improper reporting was held to be “pernicious”.
Banks do not roll over and play dead in response to claims based on this theory. But we at Upright Litigation have advanced this type of claim against many banks with success in courts around the country. We will continue to do so as long as banks try to place pressure on honest debtors to pay discharged debts through improper credit reporting.