Debt Collection in Texas: The Bankruptcy Discharge and “Passive Reporting”— A Texas SpinRead Time: 1 min
An increasingly important facet of debt collection is the packaging and sale of consumer accounts. While the process is no doubt familiar, it is helpful to remember in the context of this particular problem that the original owner of the accounts either transfers the ownership of the debt or, in a minority situation, assigns the collection of the account to an outside firm. While assignments initially were limited to consumer credit card accounts, it now appears the practice has spread to other types of consumer accounts, so that there are millions of accounts in which the original owner no longer has possession and therefore credit updating becomes an issue. Further, of those accounts, there is a certain percentage of customers who have taken bankruptcy. As indicated above, notwithstanding the good faith efforts of the original owners to update the information, there may be isolated examples of accounts in which the credit report of a customer may still show a delinquency (or similar) on an account which has been discharged in bankruptcy.
The remedy in many places—those without state debt regulations—is to resort to FCRA or some other federal regulation to obtain recourse. We will briefly examine that issue. In Texas, however, the Texas Debt Collection Practices Act offers possible additional avenues of recovery to consumer plaintiff lawyers.
As discussed previously, bankruptcy courts have been reluctant to tag credit furnishers with liability for “passive reporting.” For example, in a recent case, the Bankruptcy Court of the Western District of Illinois, held that, so long as the creditor merely reported the existence of the debt without taking any further action, nothing in either the Bankruptcy Code or FCRA punished that activity. The Mogg Court stated: “The plain language of Sec. 524 and the prohibitions contained therein do not encompass or otherwise proscribe passivity.” at 4. The theory behind this conclusion is that the Bankruptcy Code, when granting a discharge, intends to bar collection of the debt, but that the debt itself is not eliminated. It is still owed to the creditor although the creditor is barred from taking any overt or coercive action seeking to collect the debt and any such attempt could be a violation of the discharge injunction. Therefore, so long as there is not some “overt act” evidencing an intent to pursue the debtor, the discharge injunction is not violated. See Mahoney. Of course, continuing to report the debt subjects the creditor to a risk that the fact finder will conclude that the creditor intended to collect the debt as the court pondered in In re: Torres, Adv. Pro. No. 06-01576 which refused to dismiss plaintiff’s complaint alleging violation of the discharge injunction. In addition, it could be concluded that courts—and consumers—are frustrated by what may appear to them to be unwillingness on the part of the creditor to request that the credit reporting bureaus update an account that was discharged through bankruptcy especially when that account has been sold or assigned so that the creditor is no longer able to change the information.¹
Unlike many states, Texas has its own Debt Collection Practices Act, found in the Texas Finance Code at 392.001(5).² Section 392.304(8) of the TDCPA decrees that a debt collector “may not misrepresent the nature or character” of a consumer debt. Aggressive plaintiff’s counsel are now arguing that failing to update a credit report to show a zero balance and “included in bankruptcy” misrepresents the character of the debt. While there are no reported cases on this claim, it reflects that consumers are becoming increasingly hostile to a perceived failure to update a credit report to show a bankruptcy. The complaints are structured in such a way that makes removal difficult because all federal causes of action have been disavowed. We are not aware of any decisions yet on this latest cause of action being asserted by the Plaintiff. Further, an attempt to raise the TDCPA may raise issues of preemption by the Fair Credit Reporting Act because it addresses a credit furnisher’s role of credit reporting.
¹Differing conclusions may be reached under the FDCPA, which is beyond the scope of this article.
²Note that the Texas Act applies to creditors collecting their own debt, see Section 392.001(5) of the Texas Finance Code.