Series: Too Broke for Bankruptcy How Bankruptcy Fails Those Who Need It Most

For what appears to be decades, the credit rating agency Equifax has quietly layered three more years of tarnish on the credit histories of hundreds of thousands of people who had filed for bankruptcy under Chapter 13.

While its competitors, TransUnion and Experian, placed a flag on such histories for seven years, Equifax left it on the reports of Chapter 13 filers who failed to complete their bankruptcy plans for 10.

After ProPublica asked about the difference in its policy, the company said it now leaves the flag on for seven years, but refused to say when and why the change was made.

The consequences of Equifax’s harsher policy were likely life-changing for some unlucky people. As Experian warns consumers on its website, “having a bankruptcy in your credit history will seriously affect your ability to obtain credit for as long as it remains on your report. It can also affect your ability to qualify for things like an apartment, utilities, and even employment. Even car insurance rates may be affected.” Without knowing why, consumers could have been turned down for apartments because landlords checked their Equifax report rather than those from Experian or TransUnion.

Why Equifax’s policy was different is unclear and the company would not address it. But that such a discrepancy had gone unnoticed and unaddressed for so long underscores how lightly regulated the industry is.

ProPublica contacted all of the major credit agencies earlier this year as part of our ongoing series on consumer bankruptcy. The policies of TransUnion and Experian were similar: People who filed under Chapter 7, which wipes out most debts, would have a flag on their report for 10 years; those who filed under Chapter 13, which usually involves five years of payments before debts are forgiven, would have a flag for seven.

Equifax had the same Chapter 7 policy. But the company had a key difference in its policy for Chapter 13 filers: Those who were unable to complete their five years of payments and had their cases dismissed were saddled with a flag for three additional years.

This difference had the potential for widespread impact. About half of Chapter 13 cases are dismissed, usually because debtors fall behind on payments. From 2008 through 2010, 574,000 Chapter 13 cases were filed and subsequently dismissed, according to our analysis of filings. Under Equifax’s policy of keeping the flag on for 10 years, all those debtors would have a flag on their Equifax report through the end of 2017, but not on their TransUnion and Experian histories.

“It’s a problem, because you have a disparate treatment of debtors depending on which credit rating agency is reporting,” said Tara Twomey, an attorney with the National Consumer Law Center. “We really need consistent credit reporting for this system to work.”

Equifax’s policy also disproportionately affected black consumers, because, as our analysis showed, black debtors are more likely than whites to choose Chapter 13 and have their cases dismissed.

ProPublica wrote the company again in July, prior to its recent disclosure that its records had been hacked, laying out the potential impact of its policy on consumers and asking why it differed from competitors. In an email, Equifax spokeswoman Nancy Bistritz-Balkan wrote that the company had “recently modified the length of time for how long a dismissed Chapter 13 bankruptcy remains on file.” Under the new policy, she wrote, “Equifax removes the flag for a Chapter 13 bankruptcy after seven years, regardless of outcome.”

She would not say what “recently” meant, only saying, “The change we referenced was not implemented after we received your inquiry.” As to why Equifax made the change, she wrote, “At this time, I do not have additional details about how the change was made.”

How the Bankruptcy System Is Failing Black Americans Black people struggling with debts are far less likely than their white peers to gain lasting relief from bankruptcy, according to a ProPublica analysis. Primarily to blame is a style of bankruptcy practiced by lawyers in the South.

It might seem puzzling that such a meaningful policy is not governed by law. While some aspects of credit reporting are, others are simply decided among the agencies themselves. Bankruptcy is a mix of the two. Under the Fair Credit Reporting Act, the longest a bankruptcy can stay on someone’s credit report is 10 years. The credit rating agencies have voluntarily decided to treat Chapter 13 cases differently because Chapter 13 typically involves the repayment of some debt, while Chapter 7 does not. Bistritz-Balkan made a point of saying that Equifax’s previous policy had been legal.

Initially, Chapter 7 and Chapter 13 have a similar effect on debtors’ credit scores, one that diminishes over time. Bankruptcy is a negative mark on a debtor’s history, but that doesn’t mean that declaring bankruptcy will invariably damage someone’s credit score. In fact, research shows that most people who declare bankruptcy actually see their score rise in the following months. That’s because the typical score is so low that the negative effect of the bankruptcy is outweighed by the positive effect of wiping out debt.

According to Zachary Anderson, a spokesman for FICO, the median FICO score for consumers who declared bankruptcy between October 2009 and October 2010, when filings peaked during the Great Recession, was 558 — lower than all but 20 percent of consumers with a credit score.

A recent analysis of credit files by Paul Goldsmith-Pinkham, an economist with the Federal Reserve Bank of New York, shows how scores change before and after bankruptcy. In the months prior to filing, as consumers fall deeper into debt, the average credit score plunges. The analysis, using a credit score generated by Equifax that works similarly to a FICO score, found that the average score fell to a low around 520-530, but recovered sharply over the next 6 months, then gradually increased thereafter.

Average Credit Scores Plunge Before Bankruptcy, Rise After FICOchart_final Chapter 13 failure Chapter 13 success Chapter 7 bankruptcy case filed 4 years before filing 15 years after filing 5 10 650 550 500 450 600 700 average credit score Equifax flag removed New York Fed Consumer Credit Panel / Equifax

The next noticeable bump was seven or 10 years later, depending on the chapter, when the bankruptcy flags were removed. Consumers’ credit scores then jumped by about 10 points.

The consumers with the lowest credit scores, the analysis found, were those who had their Chapter 13 cases dismissed. That would be due, in part, to the fact that they tend to be disproportionately low-income and black, two groups with lower credit scores on average.

As we showed in our story about bankruptcy in Memphis, where Chapter 13 dismissals are incredibly common, these debtors can find themselves worse off for having tried bankruptcy. They might be even further behind on their debts after their cases are dismissed, making it harder to re-establish their credit. The effect of a dismissal lasts for years. At the very least, Equifax’s change in how it handles Chapter 13s means that the shadow cast by a past bankruptcy isn’t quite as long.