WASHINGTON—A group of Democratic lawmakers is proposing a bill
that would make it easier for people who got rid of credit-card
debt using bankruptcy to fix inaccurate credit reports that don't
reflect they have earned a clean financial slate.
U.S. Sen. Sherrod Brown (D., Ohio) introduced a bill that would
force major banks and other creditors to notify credit reporting
firms when a person's debt has been canceled by a bankruptcy judge.
It would also punish creditors that ignore a borrower's request to
fix an inaccurate record, giving borrowers the power to sue for
damages.
The bill, called the Consumer Reporting Fairness Act of 2015,
comes after several borrowers have sued several big banks, accusing
them of letting poor marks for unpaid debt remain on their credit
reports even after the debt was canceled in bankruptcy.
According to federal lawsuits filed by borrowers, a bank's
failure to fix the credit-reporting records hurt their credit
scores and made it tougher to get a job, find an apartment and
borrow money at a low interest rate. In one case, a New York
resident who applied to live in a low-income housing apartment was
denied "because of delinquent debts" on his credit report,
according to sworn testimony provided to the court.
"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," Mr. Brown
said.
Specifically, the proposed changes to U.S. bankruptcy law would
clear up confusion in the rise of consumer-debt trading among banks
and debt collectors.
Banks often sell the right to collect on credit-card accounts to
debt collectors, especially if borrowers seem unlikely to pay them.
But no law explicitly requires the banks to reach out to
credit-reporting firms to change the status of a debt from "charged
off" to "discharged in bankruptcy" once the debt has been sold.
The law also would give credit-card borrowers who have
inaccurate credit reports after bankruptcy the power to sue banks
and third-party debt buyers over those reports. Under existing
credit-reporting laws, a borrower doesn't have the power to sue a
bank or other creditor over an inaccurate piece of information sent
to a credit-reporting firm.
"It's a really good incentive for companies to clean up their
act," said Dalié Jimé nez, a University of Connecticut law
professor, adding that the ability to sue for attorneys' fees on
top of damages means that consumers could have an easier time
finding a lawyer to represent them.
Several other lawmakers—all Democrats—have signed onto the bill,
including Sens. Richard Blumenthal (D., Conn.), Dick Durbin (D.,
Ill.), Al Franken (D., Minn.) and Jeff Merkley (D., Ore.).
"Every consumer should have a credit score that accurately
reflects how creditworthy they are," said Mr. Franken.
Filing for chapter 7 protection gives borrowers a fresh start
when a judge cancels their debts, aside from exceptions such as
student loans and tax debt, with a discharge. More than 600,000
people and couples filed for chapter 7 protection last year,
according to the Administrative Office of the U.S. Courts.
The issue has ensnared the country's biggest banks—including
Bank of America Corp., General Electric's Synchrony Bank and
Citigroup Inc.—each of which has been sued by borrowers who said
they had inaccurate credit reports. The banks have denied
wrongdoing.
Earlier this month, J.P. Morgan Chase & Co. agreed to pay
$136 million and overhaul debt sales after state and federal
authorities investigated the way it collects and sells credit-card
debt. The Consumer Financial Protection Bureau, along with 47
states and Washington, D.C., said they found that J.P. Morgan sold
"zombie debts" to third-party debt buyers which include accounts
that were inaccurate or in some way not collectible.
J.P. Morgan Chase didn't admit or deny allegations that it
harmed consumers by allegedly making errors in hundreds of
thousands of debt-collection lawsuits.
Emily Glazer contributed to this article.
Write to Katy Stech at katherine.stech@wsj.com
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