Collection Boot Camp: Bankruptcy Pitfalls and How To Avoid Them

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Sending a collection notice after a bankruptcy can end up costing your agency in many ways. On the surface, doing so wastes time by trying to collect on an account that cannot be collected. More importantly, if you send a collection notice in violation of a stay, your agency (and maybe even your clients) will be out of compliance and subject to lawsuits.

CEO of Continental Credit Control and CAC Collection Boot Camp panelist, Shawn Suhr, has some expert tips on dealing with bankruptcy during the debt collection process. Here’s what you need to know to keep your agency and your clients compliant.

Identifying Bankrupt Consumers

Suhr advises collectors to use a scrub service prior to first contact. “It is increasingly expected that professionally run agencies are using scrub services such as Banko and Pacer.” He also mentions the use of Experian and Transunion score data can provide some valuable information to you before you begin the debt collection process.

If your client, the original creditor, does not handle a bankruptcy notice correctly and the account is sent to collections, you should be able to catch this with a scrub tool. If you find this has happened, you should inform your client in order to avoid violations. Not using one of these tools can be costly. If you are given an account after a bankruptcy that you don’t catch, you will likely send them a collection notice in violation of the automatic stay a bankruptcy provides a consumer. This is a violation for both you and your client, making you both potentially liable, and subject to an adversarial proceeding.

Get Your Bankruptcy Data How You Want It

To ensure you are paying attention to your notices, it helps to receive them all in a standardized format. You can register with the National Creditor Registration Service at ncrs.uscourts.gov.   

If you’d like your notices in electronic format, sign up for Electronic Bankruptcy Noticing at ebn.uscourts.gov.  

Whatever method you decide, you should have a process in place, and most importantly, you must stick to it. A policy doesn’t count for anything unless you maintain it.

debt collection process
debt collection process

Creating Bankruptcy Policy

Develop effective policies to process bankruptcy notices. If you’re not familiar with creating policies and procedures, you can review the basics in our Boot Camp: Compliance Management System article. Here are a few elements that should be included in your policy:

  • Process bankruptcy notices daily – Suhr suggests these should be done in a timely manner just as you would process a dispute.
  • Search every name and every address every time – This can identify spouses on a bankruptcy notice with separate accounts. Searching by address can also help identify individuals with common names, making it easier to pinpoint the consumer correctly.
  • Determine the next step – Create policies to determine if you should suspend all activity, what you file claims on, and when you should cancel accounts.

What If I cannot Identify a Debtor In a Bankruptcy?

Upon receipt of a BK notice, you are deemed to be a ‘creditor with knowledge.’ However, court delivered bankruptcy notices may only provide you with the debtor’s name, current address and a partial social security number. What are your options if you cannot locate an account in your system?

  • Consider writing a letter requesting more information.
  • Look into the bankruptcy case – the documents are public record
  • Do not use skip trace services that require a ‘permissible purpose’ (if you don’t know whether that consumer is in your system).

Have a plan for your unidentifiable bankruptcies. Suhr suggests scanning them or filing them by name so they can be easily found in the future. He detailed their practice at Continental Credit Control to reach out to the attorneys representing unidentifiable consumers.

Suhr’s agency notifies consumer attorneys that their consumer can’t be identified, and inquires the reasoning the agency is seen to be the creditor. “You might not get a response, but it gives you an evidence chain. If you have that in a policy, it may mitigate your risk of an unintentional violation.”

Notify Your Client When They Mess Up, But Tell Them You Have Their Back

You should have an agency policy that can identify risk. If your client violates a stay, you should notify them of the bankruptcy and tell them you caught the error. Suhr says this can be a teaching opportunity as well as a way to demonstrate your value to clients. You can use these mistakes to train them to be more cautious, and it can also prove that your agency is competent and well-versed in compliance. Below is a sample policy for how to update your client if a bankruptcy is identified:

Client Update After Discovering Bankruptcy:

Many clients assign electronically and do not associate like-consumers within their billing system. Several of these clients have been flagged internally as high-risk because accounts assigned for collection after bankruptcy filing. (Bankruptcy date is prior to assignment date.) To mitigate risk of bankruptcy stay violation, [COMPANY NAME] provides the following information (electronically or via secure Client Access portal) to the Creditor/Client when an account is determined to be part of a bankruptcy:

1. Creditor Account #
2. COMPANY NAME Account #
3. Account Status –Status indicates if
bankruptcy is filed and/or discharged
4. Account Assigned Date
5. Bankruptcy Date Filed
6. Bankruptcy Case #

Credit Reporting Strategies

There is some debate on how to handle disputes on a credit report. Per the Fair Credit Reporting Act (FCRA), the code used in credit reporting to indicate a dispute (XB) must be listed any time a debt is disputed. Some in the credit reporting industry feel it is fine to change a dispute to XH – Account previously in dispute now resolved or XR – Removed the most recent reported compliance condition (so if you’ve reported an XB, that the account is disputed, you can remove the entire XB, removing the dispute from the credit report).

While this feels correct from a data reporting standpoint, it may open you up to legal trouble in the future. June Coleman, the CAC’s MAP attorney, cautions that legally you are obligated to report accurately and completely on credit reports. Meaning, a debt must be noted as disputed if the consumer has disputed it in your debt collection process. You may have oral confirmation that they no longer dispute this debt, but without proof, this could come back to legally harm you in the future.

She says to be very cautious of removing a dispute from a credit report “unless you have some confirmation from the debtor that they no longer dispute the debt.” The safest way to gain this confirmation is in writing from the debtor, and extensively documenting file notes. That way you can be as prepared as possible if an issue arises later. Written permissions can be easily obtained through electronic document delivery programs. Ask your payment processor whether they offer a secure document delivery and eSignature solution.

Will Following the FCRA and Metro2 Reporting Guidelines Keep You Safe?

  • Consider a policy of canceling all bankrupt accounts, therefore deleting all credit reporting after receiving notice of a bankruptcy.
  • Clean up your reporting by analyzing your system data and finding issues before they find you. Search for Metro2 Compliance Codes and Consumer Info Indicator Codes that do not match your policies.
  • Lock out these unused codes to be sure your collectors do not use codes that do not match your policies.

Download a checklist of items to keep in mind while dealing with bankruptcies within your agency:

Download Bankruptcy Checklist