Eternal vigilance is the price of freedom.
It’s also the price of freedom from old debts, as my former bankruptcy client learned.
He was about to close escrow on a new home a couple of years after his discharge.
But the sale came to a screaming halt when an old, discharged debt reappeared on his credit report.
It hadn’t been there before; it shouldn’t have reappeared. But “shouldn’t” didn’t keep it from happening.
Meet zombie debt
As we fought to save the deal for his new home, we figured out that the debt that had reappeared long after the bankruptcy was a junior loan on a property he’d owned before bankruptcy.
The servicer on the loan had changed, and the servicer was clueless
- That the property had been foreclosed years ago; and
- That the bankruptcy had eliminated my client’s liability for the debt
But being clueless didn’t keep the servicer from reporting that this mortgage debt was enforceable and delinquent. All of which threatened my client’s ability to get a new loan, or the price he’d pay for that loan.
The law probably gave my client a right to sue under the Fair Debt Collection Practices Act or for violation of the discharge injunction from the bankruptcy case.
More interested in saving the sale than collecting damages, I called a lawyer for the new servicer, rattled my sword, and got the credit report corrected in a hurry.
Don’t assume debt is dead
If you’ve filed bankruptcy, you no doubt checked your credit report shortly after the bankruptcy case. The history about the discharged debts can properly appear on your credit report, but, the balance owed must show zero.
But, as my client’s story shows, old debt has a habit of reappearing when it is sold to debt buyers, or, as in our case, the servicing on a real estate loan changes.
What the new holder of that debt gets from the old creditor is little more than an electronic file with some of the information about the original debt. Dollars to doughnuts, it says nothing about the bankruptcy case.
The fact that debt appears on the credit report doesn’t mean that it is enforceable. It just means that someone thinks it is.
But the impact on your post bankruptcy life can be oh-too-real.
Check your credit report
The moral of this story is obviously: monitor your credit report regularly.
Don’t assume that because nothing in your financial life has changed, that nothing in the report has changed.
Credit reporting is seriously flawed, and credit scores are based on information in your credit report.
As we say in Silicon Valley: garbage in, garbage out.
And your genuinely free credit report is available at AnnualCreditReport.com, not the guys who advertise “free”.
When discharged debts pops back up
Checklist for recovering from bankruptcy
Image courtesy of Thomas Berg and Wikimedia.