Is Your Credit Report a Mess Post-Bankruptcy? A New Bill Could Help

Credit report errors are more common than you may think. A Federal Trade Commission report found that 20% of consumers had an error on at least one of their three credit reports — 5% of consumers had errors on their credit reports that were serious enough to subject them to higher interest rates on loans.

Likewise, it’s not unheard of for consumers who have filed for bankruptcy to find debts that were discharged in bankruptcy are still appearing on their credit reports as being owed. While the law governing credit reports provides for a way to correct those errors, there’s a new effort under way to ensure accurate reporting specifically for bankruptcy filings.

Sen. Sherrod Brown of Ohio has introduced a bill to strengthen credit report accuracy by requiring creditors to report 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. Senators Richard Blumenthal from Connecticut, Dick Durbin from Illinois, Al Franken from Minnesota, and Jeff Merkley from Oregon, have joined Brown in introducing the legislation.

Sen. Blumenthal said, “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.”

The bill is extremely simple and is only two pages long. It affirmatively requires creditors to report the debt as discharged in bankruptcy, rather than make debtors who have filed for bankruptcy dispute an old entry on the credit report to show that the debt is discharged.

The inaccurate credit reports creates “zombie debt,” which is then sold off to collection agencies. Even though the debt has been discharged, collectors will try to collect the debt in violation of the bankruptcy discharge. There is some dispute as to whether this is done intentionally by the various creditors, but the headaches for consumers — such as losing out on job offers and being turned down for loans, according to the New York Times — can be substantial.

It’s important for consumers to check their credit regularly for errors to minimize any potential negative impact. You can get your credit reports for free once a year from each of the three major credit reporting agencies (and some states allow for more frequent free access) — though you may want to check your reports more frequently if you’re trying to ensure errors are being corrected. You can also get a free credit report summary on Credit.com, updated every 14 days, to check for any important changes.