what’s in a credit report?...credit score of 680, a foreclosure would drop the credit score to...

What’sinaCreditReport?

TheHonorableJanKarlin,U.S.BankruptcyCourtfortheDistrictofKansasProfessorKatherinePorter,UniversityofCaliforniaIrvineSchoolofLaw

TableofContents

1. SummaryofResearcha. Introductionb. EffectofBankruptcyonCreditREPORTc. EffectofBankruptcyonCreditSCOREd. SecuredLendinge. CreditCardOffersf. Differencesbetweenchapter7andchapter13filersg. EffectsofReaffirmationh. OngoingFinancialDifficultiesi. ConsumerReluctancetoBorrowj. BeyondBorrowing:EffectsofLowCreditScore/BadCreditReport

2. FairCreditReportingActandFTCStaffCommentary3. ExcerptsfromFICO(FairIsaacCo.)site4. Advice:It’sEverywhere

a. Creditreportingagenciesb. Lawyersc. TheWeb

5. Credit:It’sNOTEverywhere(despitetheplacards!)a. Collateralized,termloansb. Revolving,unsecuredcredit

6. Bibliographyforfurtherreading

©ProfessorKatherinePorterandJudgeJanKarlin,2014.

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SummaryofResearch

IntersectionofBankruptcyandCreditReporting/Scoring

Introduction

Bankruptcygivesindividualsafreshstartbyallowingthemtodischargemuchof

theirunsecureddebt.But,theconsequencesofbankruptcydonotendwhenthelegal

processiscomplete.Afterbankruptcy,familiesstillmustfigureouthowtomakeendsmeet

andhowtointeractwiththecrediteconomy.Inthissummary,Ihighlightkeyfindingsfrom

researchonhowconsumersborrowafterbankruptcy.

Thereare3creditreportingbureaus:Equifax,TransUnion,andExperian.Each

bureaumaintainsafile—i.e.,acreditreport—oneveryborrower,listingthe“typesofcredit

youuse,thelengthoftimeyouraccountshavebeenopen,andwhetheryou’vepaidyour

billsontime.”Thereportalsolists“howmuchcredityou’veusedandwhetheryou’re

seekingnewsourcesofcredit.”Thisinformationcomesfromcreditfurnishers,whosend

updatestoeachofthecreditbureausontheiraccounts.

Thecreditreportalsoincludespriorandcurrentaddresses,anylawsuitsorarrests,

andbankruptcyfilings.Thisinformationcomesfromcourtrecords.Delinquencieson

utilities(cable,cellphone,electricity,etc.)andrentalpaymentscanbelistedinacredit

report,althoughagoodhistoryofutilityandrentalpaymentsisnotlistedonacredit

report.Anindividual’ssalary,occupation,title,employer,datesemployed,oremployment

historyarenottypicallyincludedonacreditreportorusedtocomputeacreditscore.

Theinformationinthecreditreportisusedtocalculatethecreditscore,ameasure

oftheriskassociatedwithextendingcredittoanindividual.Themostwidelyusedcredit


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scoreistheFICOscore,anumericalscorerangingfrom300to850.Eachcreditreporting

bureaumayhaveadifferentFICOscore,becausethecreditscoreisbasedonasnapshotof

theparticularinformationheldbythatcreditbureauattheexactmomentintimethescore

isgenerated.Page13showsmoredetailonhowscoresarecalculated.

EffectofBankruptcyonCreditREPORT

Therearetwodistinctissueswithrespecttobankruptcyandcreditreports.First,is

thelegalrequirementthatbankruptciesmaynotappearmorethan10yearsafterfiling(in

contrasttothe7yearsformostotherkindsofseriousdelinquencies).Thisisnota

mandate,however,andsomecreditbureausappeartoremovebankruptciesfromreports

atthe7‐yearmark.Thisisparticularlylikelyforcompletedchapter13bankruptcies.

Usingdatafrombankruptciesfiledinthe1990s,DavidMustofoundthatconsumer

borrowingincreasedsignificantlyattheten‐yearmarkwhenbankruptcieswereexpunged.

DavidMusto,WhatHappensWhenInformationLeavesaMarket?EvidencefromPost‐

BankruptcyConsumers,77J.BUS.725(2004).Heattributesthisincreasedborrowingtothe

improvedcreditscoreresultingfromthechangeincontentofthereport.

Thesecondissueiswhatgetsreported.Whilefilingisnearlyalwaysnotedfromthe

publicrecords,manyotherkeyaspectsofthebankruptcyarenotcaptured.Thereportdoes

notshow,forexample,thepercentageofdebtproposedorpaidinachapter13case.

FederalTradeCommissionguidanceindicatesthatcreditbureaus“should”noteifa

bankruptcywasdismissedorifadebtwasdischargedinbankruptcybutthisinformation

appearslessreliablyreported.


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EffectofBankruptcyonCreditSCORE

Themostrecentstudiesindicatethatcreditscoresarenotenduringlydiminishedby

bankruptcy.Forfourdifferentgroupsoffilers(spanning2002:Q1‐2005Q3,2005:Q4‐

2007:Q2,2007:Q3‐2009:Q4,and2010:Q1‐2010:Q4—essentiallybeforeandafter

bankruptcyreform,andbeforeandafterthefinancialcrisis,)creditscorerecoveryis“very

dramatic.”Jagtiani&Liat11.BothChapter7andChapter13filersseemtoreturntotheir

previousriskscorelevels(asoffourtosixquarterspriortothebankruptcyfilingwithin

aboutoneyearafterfiling).Id.Somemightquibblewithwhetherfourtosixquartersprior

istheappropriatebaselineforcomparison,giventhatdatafromthe2001and2007

ConsumerBankruptcyProjectsshowmorethanhalfofdebtorsreportseriouslystruggling

withtheirdebtsformorethantwoyearsbeforefiling.RonaldMann&KatherinePorter,

SavingUpforBankruptcy,98GEO.L.J.289,313‐14(2010).Nonetheless,JagtianiandLi’s

findingseemstocontradictthecautionarytalesthatitwilltakemanyyears—includingthe

seventotenyearsuntilthebankruptcyisremoved—forcreditscorestoincreasemarkedly.

Atthetimeoffiling,theaveragescoreforbankruptcyfilersisbetween520‐540.Ittypically

recovers60ormorepointsinthefirstsixmonthsafterfilingandthenflattensoutforthe

nextyear.Jagtiani&Liat29(Fig.1).

Infact,forconsumerswithlowcreditscores,abankruptcyfilingmayactually

increasecreditscores.Cohen‐Cole,etal.,at5.3.Comparingagroupofnon‐filerswithfilers

(casesfiledin2004),theauthorsfoundthat18.3%offilersimmediatelyhadgreateraccess

tocreditafterfilingthanbefore,andthosewiththelowestpre‐filingcreditscoreswere

mostlikelytobeinthisgroup.Id.


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FICOitselfsaysthatforapersonwithacreditscoreof680,abankruptcywould

dropthecreditscoretobetween530and550.Forapersonwithacreditscoreof780,a

bankruptcywoulddropthecreditscoretobetween540and560.Thesenumberswillvary

significantlydependingonindividualfactors.Foreclosuregenerallyhasalessdeleterious

effect,butagainvariesbyindividual.FICOdoesoffersomeexamples.Forapersonwitha

creditscoreof680,aforeclosurewoulddropthecreditscoretobetween575and595.For

apersonwithacreditscoreof780,aforeclosurewoulddropthecreditscoretobetween

620and640.

SecuredLending

Securedlendingforthosewithblemishedcredithasbeeninfluxforthelastfew

years.Inthepast,bankruptcydebtorsexperienceda“paradoxofsecuredcredit,”withsuch

loansbeingsignificantlyhardertoobtainthanunsecuredcredit.KatherinePorter,

BankruptProfits:TheCreditIndustry’sBusinessModelforPostbankruptcyLending,93IOWA

L.REV.1369,1402,1406(2008).Usingdatafromchapter7filersin2001,Porterfoundthat

55%ofthosewhosoughtacarloaninthenextthreeyearsself‐reporteddifficultyin

obtainingaloan.Id.at1406.

Today,nearlyallborrowersfacesomeconstraintsinthemortgagemarket

comparedtobeforetheforeclosurecrisis.Theneedforalargedownpaymentandfull

incomedocumentation,however,contributeassignificantlytobankruptcydebtors’barrier

asdoeslowcreditscore.Inthelastfewmonths,severallendershaveloweredtheir

minimumrequiredcreditscoreandanewwaveofspecialtysubprimemortgagelenders

hascroppedup.


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Carlendershaveaddressedincreasedriskbysimplychargingmuchhigherrates

andincreasingtheirdefaultstrategies.“Buyhere,payhere”autodealersactuallyincreased

marketshareduringtherecessionasdefaultedhomeloansloweredthecreditscoresofa

largerfractionofconsumers.KatherinePorter,BuyHerePayHereDealerships,CREDITSLIPS

BLOG(Jan.4,2012),http://www.creditslips.org/creditslips/2012/01/buy‐here‐pay‐here‐

dealerships.html;KenBensinger,Ahardroadforthepoorinneedofcars,LATIMES(Nov.3,

2011),http://www.latimes.com/business/buy‐here‐pay‐here/la‐fi‐buyhere‐payhere‐

20111103‐story.html#page=1.

Someautolendersmarketdirectlytobankruptcyfilers.Nearly90%ofchapter7

filersinthe2001ConsumerBankruptcyProjectreportedreceivinganofferforacarloan.

Porter,BankruptProfits,at1403(Fig.3).Anotherstudyfoundthat48%offilersobtainone

ormorevehicleloanpost‐bankruptcy.Han&Li,at504.

Immediatelyfollowingfiling,thedollaramountofautoloansandhomemortgage

loanstendstobelow,butincreasessignificantlyabouttwoyearsafterfiling.SeeJagtiani&

Li,at12.Thissuggeststhatsecuredlending,whichareoftenfairlyhigh‐dollarloans

comparedtounsecuredcredit,mayrequirealongerwaitingperiodbeforecreditiswidely

available.

CreditCardOffers

Han,etal.,foundthatfilersareatleastaslikelyandsometimesmorelikelyto

receivecreditcardoffersthannon‐filers,supportingtheideathatlenderstarget

bankruptcyfilerswhowillnotbeabletofileforbankruptcyagainforseveralyears.See

Han,etal.,at3.ThissupportsPorter’shypothesisthatthereisaspecializedmarketfor


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postbankruptcylending.Porter,BankruptProfits,at1398(“Nearly88%ofdebtors

reportedthatlendershadreferencedthedebtor’sbankruptcyintheircreditmarketing”).

Despitetheseoffers,thereissomeevidencethatdebtorscurbtheircredituse.

Porterfoundthatonly65%ofchapter7filershadacreditcardatthethree‐yearpost‐filing

mark.Amongthosewhohadcards,themediannumberwas2.Porter,LifeAfterDebt,at13.

Thosedebtorswithcardsreportedanaveragedebtof$1092.Comparedtothosewhohave

nobankruptcyrecord,filershavefewercreditcards,arelesslikelytousecreditcardsin

general,andhavecreditlimitsthatare$12,000lowerthannon‐filers.Han&Li,at492,501,

504.However,filerswhodohavecreditcardsaremorelikelytoborrowhigheramounts,

carryanunpaidbalance,andpayhigherinterestratesthanaresimilarlysituated

individualswhohavenotfiledbankruptcy.Han&Li,at504.Existinglenderstendto

dramaticallylowerindividuals’creditlimitimmediatelyfollowingabankruptcyfiling,and

anynewlenderstendtooffersubstantiallylessfavorableterms.Han,etal.,at15‐16;

Jagtiani&Li,at15.

Filersaremorelikelytouseexpensivecreditsources,suchaspaydayloans,

suggestingalackoflessexpensiveborrowingoptions.Han&Li,at492.

Differencesbetweenchapter7andchapter13filers

Thereappearstobeonlyonestudythatexaminesthedifferenceincreditaccess

betweenchapter7filersandchapter13filers.Thisislargelyduetodatalimitations.Itis

alsodifficulttoaddresstheprohibitiononborrowingwithoutpermissioninachapter13

case.


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A2013researchpapershowsthatchapter13filersfareworseintermsofcredit

access.Chapter7filers’creditcardusagetendstorecoverapproximatelysixquartersafter

filing,butchapter13filers’creditcardusagetendstocontinuetodecline.Jagtiani&Li,at

12.Thisdifferencesuggeststhatthepatternofnichebankstargetingfilerhouseholds

identifiedbyHan,etal.,appliesonlytoChapter7filers.Seeid.at13.Chapter13borrowers

alsoreceivehigherinterestratesthanchapter7filers.Id.at18.Thebanonreceivinga

dischargeforeightyearsfollowingachapter7dischargelikelymakestheseconsumers

moreattractivethanchapter13filersinongoingcases,whicharemorelikelythannotto

bedismissedwithoutdischarge.Also,chapter13filersareobligatedtofollowtheir

repaymentplans,meaningtheirdisposableincomeisalreadycommittedtoexisting

lenders.Seeid.at14.

EffectsofReaffirmation

Manycreditorssuspendreportingtocreditbureausonaccountsthatareeitherina

pendingbankruptcyorhavebeendischargedinbankruptcy.Thereasoningisthatthe

bankruptcydischarge,whichwipesouttheloanbutnotthesecurityinterest,leavesthe

creditorwithnoreportingrequirements.Asaresult,onceabankruptcypetitionisfiled,

debtorswhocontinuetomaketimelypaymentsmaynotgetthebenefitsofthosetimely

paymentsontheircreditreports.Ifadebtorsignsareaffirmationagreementwiththe

creditor,however,thecreditorwillcontinuetoreportthemonthlypayments.Thisisthe

logicthatreaffirmationcanhelpdebtorsrebuildtheircreditscores.

Theprosandconsofsigningreaffirmationagreementsonsecureddebtin

bankruptcyarewidelydebated.Ofcourse,signingareaffirmationagreementreaffirmsa


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debtor’spersonalliabilityfordebt,andthisisoftennotinthedebtor’sbestinterestwhere

thedebtexceedsthevalueofthecollateral,employmentincomeisuncertain,ortheterms

ofthesecuredtransactionareotherwiseunfavorable.Despitethesecons,debtors’

attorneysarestillcognizantthatsomepersonalpropertysecuredcreditors(e.g.,Ford

MotorCredit)requireareaffirmationagreementifadebtorwishestoretainthecollateral.

Italsomaynotbeinadebtor’sbestinteresttolockincredittermsastheyexistat

thetimeofthepotentialreaffirmation,e.g.,ifadebtorcanforeseerefinancinglaterduetoa

homevaluationincrease.Ontheotherhand,somecreditors,suchasWellsFargo,refuseto

refinanceamortgageloanunlesseitherthedebtorreaffirmeditinbankruptcyorthecourt

issuesacomfortorderthatsuchareaffirmationwouldnotviolatethedischarge.The

obviousalternativeisforthedebtortorefinancewithadifferentlender,i.e.,onenot

involvedinthebankruptcy.

Thepotentialbenefitofreaffirmingforcreditscorepurposesissmallatbest,and

likelynegligible.Althoughtimelymonthlypaymentsareimportantforadebtor’scredit

score,theyareonlyonefactorinthecreditscorecomputation.Otherfactorsarealso

important.Forexample,ifaloanbalanceishighandthedebtwouldcauseahighutilization

ratioorariskofover‐extension,thenthenegativesofhavingthedebtlistedmayoutweigh

thebenefitofhavingthemonthlypaymentsappearonthecreditreport.

OngoingFinancialDifficulties

Afterbankruptcy,consumersstruggletopayroutinebills,suchasutilities.

KatherinePorter&DeborahThorne,FailureofBankruptcy’sFreshStart,92CORNELLL.REV.

67,86(2006).Thosewhoaremostlikelytostruggleafterbankruptcyarethosewith


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incomesthatcontinuetodeclineafterfiling.Id.at124.ZagorskyandLupicaanalyzeddata

fromtheNationalLongitudinalStudyofYouth,whichregularlysurveyedasampleofbaby

boomersbeginningin1979.JayL.Zagorsky&LoisR.Lupica,AStudyofConsumers'Post‐

DischargeFinances:Struggle,Stasis,orFresh‐Start?,16AM.BANKR.INST.L.REV.283,292

(2008).Inaregressionanalysiscontrollingforseveralfactors,theyfoundthatfilerswere

lesslikelytoownahomeorhaveacreditcardthannon‐filers.Id.at314.Whilefilers

eventuallyseemedtocatchuptotheirnon‐filingpeers,incometookatleast13yearsto

equalize,savingslevelstookatleast12years,andnetworthtookatleast20years.Id.

Bankruptcyfilershaveenduringfinancialvulnerabilities.

AnanalysisofdatafromtheFederalReserveBoard’sSurveyofConsumerFinance

showsthatalthoughbankruptcydebtorsweremorelikelytoberiskaversethanarenon‐

filersasmeasuredbyseveralcriteria,debtorsweremorelikelytohaveoverspentinthe

yearpriortothesurvey.Han&Li,at495,501.Strugglingtomakeendsmeetafter

bankruptcy,debtorsmayturntoborrowing,particularlyastheirresistancetocredit

erodes.

ConsumerReluctancetoBorrow

Debtorsgenerallyborrowatmuchlowerlevelsandhavefeweraccountsforyears

afterfiling.Whilethesupplysideeffectsdiscussedabovehaveobviousinfluence,thereis

bothsurveyandcreditbureaudatathatsuggestdebtorsthemselvesavoidcredit.Inthe12‐

18monthsafterfiling,debtorshadoneorfewer“hardinquiries”percalendarquarter.

Jagtiani&Liat29(Fig.3.)Thesehardinquiriesreflectacreditorevaluatingthereportto


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makeadeterminationonanapplicationforcredit(“softinquiries”arethosewhere

creditorsmightpullreportstoselectconsumersformarketing).

BeyondBorrowing:EffectsofLowCreditScore/BadCreditReport

Inrecentyears,creditbureaushavemarketedconsumercreditdataforpurposes

beyondassessinglikelihoodofrepayment.Creditchecksareroutineformanyjobs,

includingentry‐levelpositionssuchasretailclerks.Maroto,at103.Creditdataalsoinform

insurancedecisions(specifically,carinsurance)andapartmentrentals.Thereare

sometimesspecificscoresforthesedecisions,suchasinsurance,thatdifferfromthetypical

FICOscoreforcreditassessment.Informationonbankruptcy’seffectonthesescoresisnot

available,butsurveydatashowthatbankruptcyfilersreportbeingtoldbynon‐lendersthat

theirbankruptciesarethereasontheyweredeniedasapplicants(forjobs,insurance,

apartments,etc.)DeborahThorne,PersonalBankruptcyandtheCreditReport:Conflicting

MechanismsofSocialMobility,11JOURNALOFPOVERTY23(2007).


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FairCreditReportingAct,15U.S.C.§1681c§605.Requirementsrelatingtoinformationcontainedinconsumerreports(a)Informationexcludedfromconsumerreports.Exceptasauthorizedundersubsection(b)ofthissection, no consumer reporting agency may make any consumer report containing any of thefollowingitemsofinformation:

(1)Casesundertitle11[UnitedStatesCode]orundertheBankruptcyActthat,fromthedateofentryoftheorderforrelieforthedateofadjudication,asthecasemaybe,antedatethereportbymorethan10years.(2)Civil suits, civil judgments,andrecordsofarrest that fromdateofentry,antedate thereportbymorethansevenyearsoruntil thegoverningstatuteof limitationshasexpired,whicheveristhelongerperiod.(3)Paidtaxlienswhich,fromdateofpayment,antedatethereportbymorethansevenyears.(4)Accountsplacedforcollectionorchargedtoprofitandlosswhichantedatethereportbymorethansevenyears.(5)Anyotheradverseitemofinformation,otherthanrecordsofconvictionsofcrimeswhichantedatesthereportbymorethansevenyears

FederalTradeCommission,OfficialStaffCommentary,§607(b)(3)ReasonableProcedurestoEnsureMaximumPossibleAccuracy.F.Reportingofcreditobligation—

(1)Pastdueaccounts.Aconsumerreportingagencymustemployreasonableprocedurestokeepitsfilecurrentonpastdueaccounts(e.g.,byrequiringitscreditorstonotifythecreditbureauwhenapreviouslypastdueaccounthasbeenpaidordischargedinbankruptcy),butitsfailuretoshowsuchactivityinparticularinstances,despitethemaintenanceofreasonableprocedures to keep files current, does not violate this section. For example, a consumerreportingagencythatreportsaccuratelyin1985thatasof1983theconsumerowedaretailstoremoney,withoutmentioningthattheconsumereventuallypaidthedebt,doesnotviolatethissectionifitwasnotinformedbythestoreortheconsumerofthelaterpayment.(2)Significant,verified information. A consumer reporting agencymust report significant,verifiedinformationitpossessesaboutanitem.Forinstance,aconsumerreportingagencymaycontinuetoreportapaidaccountthatwaspreviouslydelinquent,butshouldalsoreportthat the account has been paid. Similarly, a consumer reporting agency may includedelinquenciesondebtsdischargedinbankruptcyinconsumerreports,butmustaccuratelynote the status of the debt (e.g., discharged, voluntarily repaid). Finally, if a reportedbankruptcyhasbeendismissed,thatfactshouldbereported.

FederalTradeCommission,OfficialStaffCommentary§607,item6.Content of ReportAconsumerreportneednotbetailoredtotheuser'sneeds.Itmaycontainanyinformationthatiscomplete,accurate,andnotobsoleteontheconsumerwhoisthesubjectofthereport.Aconsumerreportmayincludeanaccountthatwasdischargedinbankruptcy(aswellasthebankruptcyitself),aslongasitreportsazerobalanceduetoreflectthefactthattheconsumerisnolongerliableforthedischargeddebt.Aconsumerreportmayincludealistofrecipientsofreportsontheconsumerwhoisthesubjectofthereport.


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ExcerptsfromFICOsite

Paymenthistory(35%):Looksatwhetherpastcreditaccountshavebeenpaidontime—includingcreditcards,retailaccounts,installmentloans,financecompanyaccounts,andmortgageloans.TheeffectofmissedpaymentsontheFICOscorevariesbasedonhowlatethemissedpaymentwas,howmuchwasowed,howrecentlythemissedpaymentsoccurred,andhowmanymissedpaymentstherewereintotal.Ontheotherendofthespectrum,agoodrecordofpaymentincreasesaFICOscore.

Thiscategoryalsoincludesanybankruptcies,foreclosures,lawsuits,wageattachments,liens,andjudgments.Olderitemsanditemswithsmallamountscountlessthanneweritemsoritemswithlargeramounts.

Ingeneral,mostnegativeinformationremainsonthecreditreportfor7years(missedcreditaccountpayments,collectionaccounts,andalljudgments).Paidtaxliensremainonfilefor7yearsfromthedatethetaxlienispaid;unpaidtaxliensremainonfileindefinitely.Chapter7,11,and12bankruptciesremainfor10yearsfromthedatethebankruptcywasfiled.CompletedChapter13bankruptciesremainfor7yearsfromthedatefiled,butremainfor10yearsifnotcompleted.Amountsowed(30%):ThiscomponentoftheFICOscoreitselfcompilesinformationfromfivedifferentfactors:(1)theamountowedonallaccounts(thetotalbalanceowedforalldebt);(2)theamountowedondifferenttypesofaccounts(creditcardsversusinstallmentloans,etc.);(3)theamountowedoncertaintypesofaccounts(creditutilizationratio);(4)thenumberofaccountswithbalances(whetherthereisariskofover‐extension);and(5)theamountofinstallmentloanowedcomparedtotheoriginalloanamount(i.e.,thepercentageoftheinstallmentloanthathasbeenpaid).Lengthofcredithistory(15%):Thelengthofcredithistorycomponenthasthreefactors:(1)howlongcreditaccountshavebeenestablished,whichincludestheageoftheoldestaccount,theageofthenewestaccount,andanaverageageofallaccounts;(2)howlongspecificcreditaccountshavebeenestablished;and(3)howlongithasbeensincecertainaccountswereused.Generallystated,alongercredithistorywillleadtoahighercreditscore.Newcredit(10%):ThenumberofaccountsopenedandthenumberofrecentinquiriesbylendershaveasmallimpactontheFICOscore.Alargenumberofrecentinquiriesornewaccountscanindicategreaterrisk.Typesofcreditused(10%):Considersthemixofcreditcards,retailaccounts,installmentloans,financecompanyaccounts,andmortgageloans.Thiscomponentmeasuresaborrower’sexperiencewithdifferenttypesofaccounts,andthetotalnumberofaccountsheld.


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Advice:It’sEverywhere


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Credit:It’sNOTEverywhere(despitetheplacards!)


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