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Creditor Reporting of Late Payments During Chapter 13 Does Not Violate Automatic Stay

Credit reporting in Chapter 13 bankruptcyWHAT IS THE "AUTOMATIC STAY"?

The "automatic stay" is one of the most valuable benefits of filing bankruptcy. This law makes just about every act of a creditor to collect a debt illegal once you file a bankruptcy case. See Section 362 of the U.S. Bankruptcy Code.

The automatic stay specifically stops:

  • the filing or continuation of a lawsuit or other legal proceeding against you to collect a debt
  • the enforcement of a prior judgment against your property
  • taking possession of or control over your property
  • the creation or enforcement of a lien against your property

(Sections 362(a)(1-4) of the Bankruptcy Code.)

Then to make sure all the bases are covered, the automatic stay more broadly stops:

  • "any act to collect, assess, or recover a claim against the debtor that arose before" the case filing. (Section 362(a)(6))

So, once you file bankruptcy your creditors can't do anything to collect or recover a debt while the automatic stay remains in effect.

(See our earlier blog post, The Value of the Automatic Stay, for more about this.)

IS A CREDITOR'S FILING OF A CREDIT REPORT A VIOLATION OF THE AUTOMATIC STAY?

If a creditor's filing of a credit report would be considered an "act to collect [or] recover" a debt, it would be a violation of the automatic stay. It would be illegal.

Courts have held that where a creditor's credit reporting was done for the purpose of making the debtor pay the debt, that's a violation of the automatic stay. (For example, Weinhoeft v. Union Planters Bank, N.A. (In re Weinhoeft), 2000 WL 33963628, at *2 (Bankr. C.D. Ill. Aug. 1, 2000)).

IS A CREDITOR VIOLATING THE AUTOM ATIC STAY SIMPLY BY CREDIT REPORTING WITHOUT ANY EVIDENCE THIS WAS DONE TO COLLECT THE DEBT?

According to a recent opinion by the 9th Circuit Bankruptcy Appellate Panel, the answer is "no." In re Keller (9th Cir. BAP May 26, 2017).

Specifically, a creditor's reporting of delinquent payments to a creditor reporting agency, in and of itself, is not a violation of the automatic stay.

WHAT ARE THE FACTS OF THIS RECENT CASE?

Robert and Finley Keller filed a Chapter 13 "adjustment of debts" case when they were $11,400 behind on their mortgage. Their court-approved Chapter 13 payment plan provided for catching up on that arrearage over time, and paying their ongoing monthly payments as well.

The Kellers made their required payments to the Chapter 13 trustee and caught up on their mortgage in less than three years. They continued in their case to finish dealing with other creditors. And they continued keeping current on their monthly mortgage payments.

Several months after catching up on their mortgage arrearage but while still in their Chapter 13 case, Mr. Keller applied for credit to buy a vehicle. He was denied. He was told he was an "Unacceptable Credit Risk" "based in whole or in part on information obtained on a report" from Experian.

The Kellers' 3-bureau credit reports at that time reported the account as $9,297 past due, even though at that point they were current. The "payment history" showed the account as "120 to 90 days late" during periods of time after the account had been brought current.

WHAT RECOURSE DID THE DEBTORS TAKE HERE?

The automatic stay has some teeth to it. The Bankruptcy Code states that

an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages.

(Section 362(k)(1).)

So the Kellers' lawyer asked the bankruptcy court to find the mortgage holder in contempt and require it to pay sanctions for violating the automatic stay. The argument was that

by reporting misleading and inaccurate information on their credit reports — i.e., that the account was severely delinquent and with a past due balance — Defendants had willfully acted to collect on a debt that was subject to the automatic stay .

For reasons that aren't clear, the lawyer did not focus on the inaccuracy of the mortgage holder's credit reporting. Rather his argument was

that reporting of an account which has been included in a chapter 13 bankruptcy as "past due" or "late" is a per se violation of the automatic stay, because reporting late payments or past due balances is classic collection activity under § 362(a)(6) [cited above]. Debtors argued that such reporting did more than acknowledge that the debt still exists; it suggested that Debtors had failed to perform and served no other purpose than to coerce them into paying the debt directly to Shellpoint [their mortgage holder], despite the trustee's payments.

HOW DID THE BANKRUPTCY JUDGE RULE ON THIS?

The bankruptcy judge was Christopher Jaime, in the Eastern District of California based in Sacramento. He focused on the legal issue "whether past-due credit reporting is a per se violation of [the automatic stay]." Judge Jaime ruled by dening the Kellers' motion for contempt and sanctions for violation of the automatic stay.

So the Kellers appealed to the Bankruptcy Appellate Panel for the Ninth Circuit, an appeals court for bankruptcy cases. (The Ninth Circuit covers California and eight other western states.)

SO WHAT DID THE BANKRUPTCY APPELLATE PANEL DECIDE?

The 3-judge panel agreed with the Sacramento bankruptcy judge in deciding

that the act of postpetition [(after bankruptcy-filing)] credit reporting of overdue or delinquent payments while a bankruptcy case is pending is not a per se violation of § 362(a)(6),"

Section 362(a)(6) is the provision forbidding "any act to collect . . . or recover" a debt.

BUT DOESN'T CREDIT REPORTING FOR THE PURPOSE OF COLLECTION VIOLATE THE AUTOMATIC STAY? WHAT'S THE DIFFERENCE HERE?

The Bankruptcy Appellate Panel ("BAP") looked at the question narrowly, saying that the credit reporting, "without more, does not violate the automatic stay as a matter of law."

The BAP cited two Northern California cases in support. One said the automatic stay does not "bar reporting of late payments while a bankruptcy petition is pending." The other held that "negative postpetition credit reporting alone . . . is not a violation of the automatic stay."

The BAP then looked at two analogous areas of bankruptcy law, creditor violations of the discharge injunction and the codebtor stay.

First, creditors naturally are forbidden from attempting to collect a debt after it has been discharged (legally written off) in bankruptcy. The BAP looked at whether "negative credit reporting, without more," is a violation of the injunction against attempting to collect a discharged debt. The Panel cited nine different opinions from all over the country saying, no, the discharge injunction is violated only if "the credit reporting was done with the purpose of coercing the debtor to pay the reported debt."

Second, the codebtor stay forbids creditors of consumer debt from taking collection action against a debtor's co-debtor during a Chapter 13 case. The BAP cited three opinions concluding "that negative credit reporting, without more, does not violate the codebtor stay."

The BAP acknowledged that there was one opinion, In re Sommersdorf, that supported the Kellers' position. There an Ohio bankruptcy judge ruled that a credit reporting by a creditor

most certainly must be done in an effort to effect collection of the account. . . . . Such a notation on a credit report is, in fact, just the type of creditor shenanigans intended to be prohibited by the automatic stay.

But the BAP did "not find Sommersdorf persuasive" because the "court provided little analysis to support its holding, and what authority it did rely on does not support it." That's why, according to the BAP, this opinion's "per se analysis has been rejected or largely not followed."

Finally, the BAP rejected the Kellers' argument that reporting overdue payments during a Chapter 13 case "violates the automatic stay because its sole purpose is to coerce a debtor into paying the debt." Other purposes for credit reporting include "shar[ing] information relevant to credit granting decisions"—arguably the primary purpose of the credit reporting system.

SO WHAT HAPPENED IN THE END?

The BAP affirmed the decision of the bankruptcy judge in Sacramento. So the Kellers' efforts to make their mortgage holder pay damages for its credit reporting while they were in their Chapter 13 case were not successful.

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