Application of the Fair Credit Reporting Act to Debts Discharged in Bankruptcy

A recent federal court opinion regarding the applicability of the Fair Credit Reporting Act (“FCRA”) to consumer reports obtained on accounts that have been discharged in bankruptcy highlights the need for creditors to be mindful of the FCRA’s permissible purposes for obtaining consumer reports. The opinion also represents potential departure from the prior interpretation of the permissible purposes contained in the FCRA.

Fair Credit Reporting Act

Pursuant to the FCRA, a creditor may obtain a consumer report for certain permissible purposes. Those permissible purposes include a consumer report needed in connection with a credit transaction involving the consumer, or review or collection of an account of the consumer. The FCRA also allows a consumer report to be ordered where the creditor has a legitimate business need for the information in connection with a business transaction initiated by the consumer or to review an account to determine whether the consumer continues to meet the terms of the account.

The availability of the permissible purposes under the FCRA are heavily impacted when the consumer in question receives a discharge in bankruptcy. Two federal court opinions analyzing the impact of the bankruptcy discharge on a party’s ability to obtain a consumer report under the FCRA both reached the conclusion that the bankruptcy discharge limits the scope of permissible purposes that a creditor can use to obtain a consumer report due to the discharge severing the account relationship between the creditor and the consumer. These opinions highlight the risk of violating the FCRA for creditors attempting to obtain a consumer report on a discharged debt.

Goodby v. Wells Fargo Bank, N.A.

In Goodby v. Wells Fargo Bank, N.A., 599 F. Supp. 2d 934 (S.D. OH 2008) the United States District Court for the Southern District of Ohio dealt with an alleged violation of the FCRA arising from a creditor ordering a consumer report on an individual who had a joint property interest in mortgaged property with her ex-spouse. The individual had previously discharged her personal liability on the underlying mortgage in bankruptcy but remained a titleholder on the property. The creditor conducted an account review pursuant to the mortgage instrument and obtained consumer reports on all the individual titleholders, including the discharged debtor. The discharged debtor subsequently filed an action against the creditor for a violation of the FCRA. The creditor asserted that the consumer report obtained was a “soft hit” only viewable by the consumer and that it had a legitimate business need to obtain the report in connection with its review process.

The court ultimately found that due to the bankruptcy discharge, the stated account review was not in connection with a transaction initiated by the consumer because the only transaction between the parties was the discharged debt. The court found that the review was only tangentially related to the extension of credit and that it was not connected to any benefit being sought by the consumer, making it a violation of the FCRA. The court found the lack of guidance regarding the treatment of consumer reports for discharged debts available at the time weighed in favor of finding that the creditor’s violation was negligent and not willful, which subjected the creditor to only actual damages instead of both actual and punitive damages.

Persinger v. Southwest Credit Sys., L.P.

In the more recent case, Persinger v. Southwest Credit Sys., L.P., 20 F.4^th 1184 (Seventh Circuit 2021), the Seventh Circuit Court of Appeals determined that a collection agency lacked a permissible purpose under the FCRA where it obtained a consumer report for collection purposes on a discharged account; however, because the agency did not have actual knowledge of the bankruptcy and it maintained reasonable procedures accounting for discharged debts, the court found that the collection agency was not liable for violation of the FCRA.

In discussing the interpretation of the permissible purposes found in the FCRA, the court in Persinger reasoned that a bankruptcy discharge did not categorically render any consumer report obtained in connection with the discharged account impermissible. The court left open the possibility that permissible purposes other than collection may apply to accounts discharged in bankruptcy; however, the court did not provide further guidance on what purposes may be applicable. Presumably, a consumer report on a discharged account may be obtained in connection with the permissible purposes listed in the FCRA; however, as noted in Goodby, the function of the bankruptcy discharge may be interpreted to render those listed purposes inapplicable with respect to the discharged account, in the absence of a new credit transaction.

Takeaways

There are no reported cases from the federal courts in Virginia or the Fourth Circuit dealing directly with the issue of permissible purposes for obtaining a consumer report where the underlying account has been discharged in bankruptcy. Given the ambiguity found in the statutory language, creditors should be cautious when dealing with processes and reviews related to accounts discharged in bankruptcy and remain mindful of the possible limitations imposed by the FCRA on actions related to such accounts.

Karl A. Moses, Jr., is an associate at Spotts Fain PC in the firm’s Creditors’ Rights, Bankruptcy, and Insolvency practice group.

Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.