This week, Sherrod Brown, the top Democrat on the Senate Banking Committee, submitted legislation so obvious and self-evident that I had to look up to see if it didn’t already exist. Amazingly, in 2015 we need to write a law saying that, when a consumer satisfies a debt, the bank actually has to let credit reporting agencies know about it. Because that’s not a strict requirement right now, debts that have been discharged in bankruptcy can linger on credit reports for as many as 10 years, and some of these completed debts have even been resold to debt collectors.
This undermines the entire bankruptcy process, the goal of which is to wipe out debts and give people a fresh start. Even if consumers aren’t harassed to pay twice, “zombie debt” brings down credit scores for people trying to rebuild their financial record, affecting interest rates for mortgages or consumer loans and even making it difficult to get a job. Ed Boltz, president of the National Association of Consumer Bankruptcy Attorneys (NACBA), estimates that more than 1 million Americans have zombie debt sitting on their credit reports.
Under Brown’s proposed legislation, the Consumer Reporting Fairness Act, creditors would be required under the bankruptcy laws to represent a zero balance on any discharged debt to the credit reporting agencies. If they fail to do so, consumers would have the ability to sue the creditor. “This bill would ensure that debts prior to bankruptcy aren’t in effect double counted,” the senator said.
The question is whether zombie debt persists out of sheer negligence, from a disinclination to pay the cost to have staffers properly report to credit bureaus or because it’s lucrative. The nation’s biggest financial institutions, including JPMorgan Chase, Bank of America, Citigroup and Synchrony Financial (formerly GE Capital) have been sued over zombie debt in bankruptcy court. Debtors accused the banks of forcing them to pay debts they did not owe as a condition for cleaning up their credit report. In an era where credit scores have such outsized importance, it can be lucrative to extort people over it. The Justice Department is reportedly investigating the misconduct, but the Brown bill would give far more clarity to the law.