When A Customer Goes Bankrupt
A bank's task of accurately reporting its customers' accounts to Credit Reporting Agencies ("CRAs") is a tall order, in and of itself. When you factor in a Chapter 13 bankruptcy filing by a customer, the task can become confusing, at best and sanctionable, at worst.
On one hand, a bank is subject to the provisions of the Fair Credit Reporting Act ("FCRA"), codified at 15 U.S.C. §1681, which provides that "a person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate." 15 U.S.C. §1681s-2(a)(1)(A). On the other hand, when a customer files for relief under Chapter 13 of the Bankruptcy Code, pursuant to 11 U.S.C. §1327(a), confirmation of a debtor's plan binds the debtor and each of the debtor's creditors to the plan terms.
Problems arise when the Chapter 13 Plan treatment differs from the actual pre-petition status of the loan. For instance, a vehicle loan may be 75 days past due at the time of filing, but the loan is then treated as "current" through the Chapter 13 plan going forward. Or, the actual balance owing on the loan and the contract rate of interest may be "crammed down" or modified. In those instances, a bank is faced with a choice: report the debt to CRAs as delinquent based on the original pre-bankruptcy status and contract terms or report the debt to CRAs as "bankrupt-Chapter 13", along with the modified terms as set forth in the confirmed plan.
In determining the best practices for a lender, it should be noted that there is very little case law which addresses the issues created when creditors report to CRAs during the pendency of a Chapter 13 case. The case of In re Luedtke, 2008 Bank. LEXIS (Bankr. E.D. WI. July 31, 2008), was particularly enlightening, as it involved an allegation that a credit union continued to report a member's loan as late, despite a confirmed Chapter 13 plan which crammed down the balance to the fair market value of the vehicle. Further, the credit union was alleged to have continued to report the pre-bankruptcy balance owing on the loan, as opposed to the lesser, crammed-down amount.
In finding for the debtor, the Luedtke court held that the credit union violated the confirmation order by affirmatively and inaccurately reporting the debt to CRAs. The credit union was ordered to cause the CRAs to remove the disputed information. While recognizing the credit union's good faith belief that it was accurately reporting the debt based on the pre-petition status, the court made clear that the only accurate way to report such a debt would be to conform to the terms as modified in the confirmed plan.
The Luedtke court reasoned that allowing a creditor to report the original amount of the loan and that the plan payments were excessively late based on the original loan terms, undermines the spirit and purpose of Chapter 13, which is designed to allow a debtor to reorganize and pay creditors over time under a court supervised plan.
Thus, it can be safely inferred that the best practice for banks faced with reporting a customer's account when a Chapter 13 is filed would be to cease reporting the account as delinquent and, instead, report the account as "bankrupt-Chapter 13" while the case remains pending. Further, with regard to timeliness of payments, a creditor should treat a loan as current when the obligation is provided for in a confirmed plan. To attempt to report to CRAs based upon the pre-bankruptcy status of the loan puts the creditor at risk of potential sanctions brought by a customer, based either on a violation of the confirmation order or FCRA.
Finally, when a secured claim is modified in a confirmed plan, a creditor should be sure to accurately report the balance based upon the modified terms, not based upon pre-bankruptcy account status.