You may well be hesitant to file a bankruptcy case for your own benefit if that means trashing your co-signer’s credit. The good news is you CAN protect the co-signer from bad marks about your bankruptcy in his or her credit report. This is because of changes in credit reporting procedures over the last decade or more. These changes are largely the result of consumer lawsuits against the major credit reporting agencies.
WHAT USED TO BE THE PROBLEM? (AND SOMETIMES STILL IS!)
In the past—10, 15 years ago and earlier—if you filed bankruptcy, your co-signer’s credit report would quickly show the account as “included in bankruptcy.” This happened even if the account was current!
This happened automatically since the standard credit reporting system of the time (called “Metro”) provided for credit reporting by accounts. So an account was considered to be in bankruptcy if one of the people on that account filed bankruptcy. The credit record of everybody who was liable on that account showed that the account was in bankruptcy, and for the co-signer often did not make clear that he or she had NOT actually filed bankruptcy.
HOW WAS THIS FIXED?
Way back in the late 1990′s, the credit bureaus created and started phasing in a new system (called “Metro 2”) which provided for credit reporting by person instead of by account. This way the creditor could report that the person on the account who filed bankruptcy had in fact done so, while not reporting the bankruptcy on the co-signer’s credit report. The co-signer’s report would show the payment status on the account, including that it was current if it was.
As explained in a U.S Department of the Treasury publication:
In 1997, the credit reporting industry initiated the use of the “Metro 2” format which became the industry standard for reporting debtor information. The “Metro 2” format was developed by Consumer Data Industry Association (CDIA) to replace the Metro format which was developed in the late 1970’s.
. . .The “Metro 2” format . . . is designed to capture better data for debtor records within the credit reporting agency databases. The Metro 2 format increases the accuracy of debtor files which subsequently produces a better credit report and provides additional features for the report user.
WHY WAS THIS CHANGE MADE AS TO CO-SIGNERS?
As big as the main credit reporting agencies are, they still need to compete for business. The product they sell is information about consumers’ creditworthiness. The more accurate their information, the better they can compete among themselves. So they have changed with the times for the sake of greater accuracy.
The credit reporting agencies also made changes because they were forced to.
First, the Consumer Credit Reporting Reform Act of 1996, through major amendments to the main federal law governing this area, the Federal Fair Credit Reporting Act, required greater accuracy.
Second, particularly as to the problem described above with co-signers, lawsuits against the big credit reporting agencies were a significant motivator.
For example, in Clark v. Experian, Equifax, and Trans Union, a class action lawsuit filed by co-signers in the late 1990s but not resolved by settlement until 2004, the co-signers’ credit reports “contained references to bankruptcy filings despite the fact that they had never personally filed for bankruptcy. . . . . The reference[s] did not expressly state that the bankruptcy at issue was that of [a] co-obligor.” The co-signers argued that the credit reporting agencies’ “practice of reporting the accounts as ‘In Bankruptcy’ (at least without clarifying that the account was ‘In Bankruptcy of Another Person’) violate[d] the FCRA’s [Fair Credit Reporting Act’s] ‘maximum possible accuracy’ standard.”
So “Metro 2” was created and improved over time to address these credit reporting problems.
HOW COME THERE ARE STILL OCCASIONAL PROBLEMS?
It is now rare for a co-signer’s credit report to show a bankruptcy regarding an account on which another obligor has filed a bankruptcy. But it occasionally still happens.
Why? One possible reason is that some creditors may still not be using “Metro 2.” In 2006, seven years after the new system had been put into place, the Federal Reserve reported that half of the credit reporting was still being done on the old Metro system. It’s been a long time, but some creditors, particularly smaller ones, may still be using outdated procedures, yielding these presumably illegal results.
SO HOW CAN A PERSON FILING BANKRUPTCY BE ASSURED THAT HIS OR HER CO-SIGNER’S CREDIT IS NOT BEING HARMED?
First, the only absolutely sure way to make sure there are no errors on your co-signer’s credit report is for him or her to check it. Better yet, have it checked twice. Once about a month after you file your bankruptcy case, and then again three months after the bankruptcy discharge (write-off) of your debts. If there is a reference to your bankruptcy, there is a usually very speedy complaint mechanism that should take it off.
If you have decided that you don’t want your co-signer to know about your bankruptcy, so that you won’t ask him or her to look at his or her credit report, it IS very unlikely that your bankruptcy would show up on his or her credit report. But the only way to make absolutely sure is to look at the credit report.
Second, in case it isn’t obvious, what WILL show up on your co-signer’s credit report is the payment status of the account. So, if it’s current, your co-signer will get that positive information on his or her report. But if you’ve fallen behind, the late payments and other negative information will also be reported. All this assumes that if you want to protect your co-signer’s credit, somebody—you or the co-signer, presumably—would have to make on-time payments until the account was paid off. One of your likely motivations in filing the bankruptcy case was to discharge your other debts so that you could afford to pay the co-signed debt and protect your co-signer’s credit.
To learn about how bankruptcy affects your credit go to Will Bankruptcy Ruin My Credit?