Credit Rating Agencies Get Knuckles Rapped

Tustin, CAA couple of wily bankruptcy survivors noticed something they thought was unfair about their consumer credit information. They noticed despite the fact all their debts had been discharged through bankruptcy proceedings, but credit bureau agencies still had them down on the record as having outstanding bills. "When they tried and failed to get the credit rating agencies to change their records they started calling lawyers," says attorney Lee Sherman.

Allegedly Violated the Fair Credit Reporting Act

Sherman is a litigator from the Orange County law firm of Callahan, McCune & Willis and represents several plaintiffs in a class action lawsuit that alleges 3 of the country's largest credit bureau agencies, Equifax, Trans Union and Experian violated the Fair Credit Reporting Act by failing to maintain accurate records.

"What was happening was creditors were continuing to report debts that were discharged in bankruptcy proceedings as still owing, late and so forth," says Sherman.

Going through Chapter 7 bankruptcy proceedings is supposed to be the first step to restoring your credit rating, but the inaccurate records, Sherman argues, handicapped his clients. "The agency records were negatively impacting these people's ability to obtain credit and obtain credit at low interest rates long after they came out the bankruptcy proceedings," Sherman says.

Credit bureau agencies have enormous power to affect a person's ability to obtain credit or influence the interest rates that consumers are charged. There may be millions of similarly situated Americans that have been denied credit or saddled with higher than necessary interest rates because of incorrect credit reports.

Sherman is reluctant to speculate on potential monetary damages to plaintiffs, but given the length and magnitude of the problem, damages would likely be millions and millions of dollars if the suit is successful.

How Could this Happen?

When consumers disputed their records with credit bureau agencies, they often ran into a brick wall. Rather than rely on the bankruptcy records, the agencies would ask creditors – banks, stores or whoever – if the debt should be erased from the records. "The creditors would say 'No, keep reporting it'," says Sherman, "and even though these consumers had been through bankruptcies and even though Equifax, Trans Union and Experian knew that the bankruptcy was discharged they would not fix these reports."

Sherman argues that the credit reporting agencies first responsibility, as set out in the Fair Credit Reporting Act, is to maintain accurate records. "They have a duty to maintain reasonable procedures to assure maximum possible accuracy in the reporting of credit. That is their obligation," says Sherman.

Credit rating agencies argue that bankruptcy records are not always clear and that is why they consult creditors. Sherman says credit rating agencies put too much faith in creditors' records at the expense of consumers. "They obviously contend that relying on the creditors was reasonable," he says. "We contend that was not reasonable when you had the bankruptcy records in a chapter 7 bankruptcy situation."

Earlier this year, Lawyers working on behalf of the plaintiffs successfully argued that Equifax, Trans Union and Experian be ordered to update their records as soon as possible and clear off debts that had been settled. "I think it is tremendously important for American consumers and a significant move forward for American Consumers and I am pleased to be part of this case," says Sherman.

Lee Sherman is head of the litigation department at Callahan, McCune & Willis in Tustin, California. He holds a J.D. from Western State University College of Law and a B.A. from the University of California at Irvine. Sherman acts for both plaintiffs and defendants in complex litigation cases.