What Exactly Does Bankruptcy Do To My Lien And The Debtor's Credit? - Oct 2013

Terry Jessop & Bitner Newsletter

Issue 2, October 2013

Have you been contacted by a bankruptcy debtor who claims you are messing with his credit? How about one saying that you are obligated to release your lien because she discharged it? There seem to be two common misunderstandings about what bankruptcy does: (1) that it automatically discharges, pays off, removes, eliminates or voids liens or interests in property; and (2) that it improves one's credit or changes the debtor's prior bad credit. Neither perception is correct.

Your Lien Survives Bankruptcy!

We all know that a debtor, when he completes a bankruptcy, receives a discharge. What we sometimes get confused about is just what that means. Put simply, it means that any debt or obligation is eliminated. There is no further requirement to make any payment or perform under a contract. What it does not do is eliminate any property rights associated with those debts. Said another way, liens are not discharged, only debt. A debtor is no longer obligated to make automobile loan payments or house mortgage payments. That part has been discharged. However, the lien right pertaining to that security interest or trust deed is largely unaffected. The lien right survives bankruptcy and once the automatic stay has been terminated, the right can usually be exercised, including the right to repossess, foreclose or exercise self help. Since this is a general simplification, and because the laws and rules can be different depending of the type of bankruptcy filed, please make sure you consult with your bankruptcy attorney or call us for specifics of how and when you can strike.

What? No Stigma?

Historically, bankruptcy was considered the plague as far as one's credit was concerned. People avoided bankruptcy because it ruined credit, carried with it a devastating stigma and was a public or personal embarrassment. Those days are gone. Over the last twenty years, the bankruptcy stigma has been completely eliminated. In many instances, one's ability to obtain financing is actually improved by filing bankruptcy. With that improved ability to obtain credit, many people are mistakenly beginning to believe that bankruptcy actually improves one's credit and as a result, are making demands upon financial institutions to oblige that mistaken understanding by making corrections, amendments or alterations to credit reports.

You Can't Change History

The filing of bankruptcy does not create an obligation or requirement upon a financial institution to take any affirmative act to go back and change credit history. If, prior to debtor's bankruptcy, a lender reports for six months that the debtor is thirty days past due, those historical facts are not any different just because the debtor files for bankruptcy. Any new reports that an institution chooses to file during the bankruptcy, however, are still subject to the Fair Credit Reporting Act and need to be accurate. Since bankruptcy can discharge debt and because the automatic stay prevents collection, it is inaccurate to report a debt as 30 days past due if the debtor has already filed for bankruptcy. The preferred practice after receiving notice of a bankruptcy (assuming the credit report is accurate) is to leave the credit history intact and simply report the bankruptcy. If credit is reported consistently and accurately as you go there should rarely be a need to go back to amend or make changes. Nevertheless, you should consult your attorney, or us, for any specific demands that a debtor's attorney makes with respect to credit reporting.

©Terry Jessop & Bitner October 2013