Credit Reporting Debts in Bankruptcy: Deluge of Recent Lawsuits Reveals Risks for Financial Industry

The financial services industry in the United States periodically undergoes changes regarding consumer practices in a tortured and often illogical process. In the first step of this bizarre dance, consumer attorneys identify a common, benign practice in the financial industry. Typical examples of harmless practices of the financial industry challenged by consumer attorneys have included the use of window envelopes to send letters to consumers and also whether disclosures are required when interest is not accruing on an account. The consumer attorneys then create a cause of action challenging the practice identified in the first step and begin suing out cases en masse across the country, hoping for favorable rulings or settlements which will be used to support additional cases. Finally, after months or years of frustrating, uncertain and incredibly expensive litigation, an appellate Court or regulator will issue an opinion on the challenged practice. In some instances – such as with the "window envelope" issue – a higher Court will issue an opinion favorable to the consumer (see, for instance, the Third Circuit Court of Appeals ruling in Douglas v. Convergent Outsourcing). In many other instances – such as whether a consumer must be advised that interest is not accruing on an account – the higher Court will rule against the consumer (see, for instance, the Second Circuit Court of Appeals decision in Taylor v. Financial Recovery Services). 

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Unfortunately, this "dance" of consumer attorneys challenging a harmless practice of the financial industry has begun anew. Dozens of consumer attorneys recently began suing creditors (including automobile and credit card originators and even local credit unions) for allegedly failing to accurately report to the credit bureaus ("credit reporting agencies" or "CRAs") certain debts included by a consumer in a bankruptcy filing. These lawsuits are made more difficult because of the dense rules and requirements for reporting accounts to the CRAs.