Removing a Bankruptcy Filing From a Credit Report

It’s surprisingly common for people exiting New York bankruptcy to see their credit scores improve. This phenomenon is generally attributed to the fact that debtors have taken the responsible course of action with their debts, rather than letting them spiral into default. Alternatively, creditors may be interested in taking advantage of former debtors’ inability to discharge their debts again for a few years, depending on the chapter they used.

Despite the benefits of filing bankruptcy to one’s credit score, many debtors don’t want to see it on their credit reports. Unfortunately, there’s little they can do about it—at first. The Fair Credit Reporting Act (FCRA) allows credit reporting agencies to keep a bankruptcy filing on a credit report for no fewer than ten years, and it requires them to disclose the chapter debtors filed in provided they are informed of it. However, there are ways consumers can try to lift a bankruptcy filing from their credit reports.

(1) Ask them. Seriously, sometimes the credit reporting agencies will remove a bankruptcy if they are asked to do so. They’re more likely to agree if it was a chapter 13 filing, and the bureau might agree after seven years rather than demanding the full ten.

(2) Make them. This only works if there’s an inaccuracy on the credit report, such as a bankruptcy the consumer never filed or one that has been on the report for longer than ten years. Consumers can directly challenge the credit bureaus if they can show there is an error.

(3) Notify them that the bankruptcy filing was withdrawn. Doing this won’t lift the bankruptcy from the report, but it will clarify it. The clock for the ten-year limit on the credit report begins when the bankruptcy case is filed, not when the case is closed. That means credit bureaus will include a bankruptcy filing even for debtors who do not receive a discharge. The FCRA, though, allows debtors to require the credit agencies to note that the filing was withdrawn. This can be beneficial for debtors whose debts may not have been dischargeable, for example, but who nevertheless began successfully paying down their debts outside of bankruptcy.

Although it’s a slightly separate topic, errors on credit reports can be corrected, and for New Yorkers, it’s now easier to do. Credit scores are not the be-all-end-all of credit access, but they can be important. Fortunately, the FCRA gives consumers (and former bankruptcy debtors) some tools to ensure their creditworthiness is properly reported. For people who have significant debts, it’s helpful to hire an experienced New York bankruptcy lawyer to handle the matter. It’ll be better for a credit score than defaulting.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

‘Business Debts’ Might Keep Debtors in Chapter 7

Debtors considering chapter 7 New York bankruptcy often learn that if their incomes are above their state’s median family income, they must take the means test. The consequence of failing it would be converting their cases to chapter 13 (or, less commonly, chapter 11). This isn’t true for all debtors, notably business debtors, and some exceptions are built into the Bankruptcy Code for them. One worth discussing is the means test’s debt requirements.

Section 707(b)(1) of the Bankruptcy Code, which authorizes the means test, specifies that the bankruptcy court, the trustee, the U.S. trustee (who is different), or any “party in interest” (usually creditors), may move the bankruptcy court to dismiss a case that is filed by an individual debtor whose debts are “primarily consumer debts,” if the chapter 7 filing is found to be abusive. This means that the means test applies to non-corporate entities that owe non-consumer debts. “Consumer debts” are defined in Section 101(8) of the Bankruptcy Code as, “debts incurred by an individual primarily for a personal, family, or household purpose.”

For business debtors, it should be clear that if they can show their debts are “primarily” non-household debts, then they can argue that their above-median-income status should not exclude them from chapter 7. What it takes for a debtor’s debts to be “primarily” consumer debts isn’t clear from the statute, but it’s usually just a bare majority of their debt.

As for what “business debts” are, the Bankruptcy Code defines “small business debtor,” but that’s not really relevant to the distinction between “business debts” and “consumer debts” as defined. Rather, oftentimes bankruptcy courts will look at the “profit motive” behind the debts, so household credit card debt, mortgage debt, auto debt, and usually student loans are usually not considered “business debts” while individuals’ debts to purchase inventory for their businesses are.

It’s a good idea for debtors who are running unincorporated businesses to separate their businesses’ debts from their households’, for instance, by obtaining a new credit card for the business only, or ensuring that money from a home equity loan is exclusively used for the business and not family expenses. (For debtors who do incorporate: If their businesses fall on hard times, often the business will file in chapter 7, which won’t be subject to the means test since it’s not an individual, while the owner does as well, but his or her debts will probably be household debts anyway).

Bankruptcy courts might nevertheless dismiss business debtors’ cases for reasons grounded in Section 707(a) of the Bankruptcy Code. This section is often construed as a “good faith” requirement for filing, so business debtors might be stymied if the creditors or trustee can convince the bankruptcy court that the filing is in bad faith.

Business bankruptcies, especially when they’re unincorporated personal bankruptcies, are almost always more complex than the typical chapter 7 case. It’s crucial to have an experienced New York bankruptcy lawyer handle the matter.

For answers to more questions about business bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.