How Should an Account Be Reported When a Consumer Voluntarily Surrenders or Redeems Merchandise in Bankruptcy?

What is the correct way to report an account when a consumer voluntarily surrenders or redeems merchandise during bankruptcy proceedings?

Answer:

When a consumer files for bankruptcy, they may choose to voluntarily surrender or redeem merchandise, particularly in cases involving secured loans like auto loans or mortgages. Properly reporting this to credit bureaus is essential for maintaining accurate credit information and ensuring compliance with the Fair Credit Reporting Act (FCRA). Accurate reporting reflects the true state of the account and provides clarity for both the consumer and lenders reviewing their credit report.

Understanding Voluntary Surrender vs. Redemption

1. Voluntary Surrender: This occurs when a consumer decides to give up the collateral securing a loan, such as a vehicle or real estate, to the creditor. This option is often chosen in bankruptcy cases where the consumer can no longer afford the payments.
2. Redemption: Redemption allows the consumer to retain the collateral by paying the creditor a lump sum equivalent to the current market value of the secured property. This is commonly seen in Chapter 7 bankruptcy filings, particularly for personal property like cars or appliances.

Steps for Reporting Voluntary Surrender or Redemption

1. Report the Correct Account Status:
   • When a consumer voluntarily surrenders merchandise, the account should be updated to reflect this status using the appropriate codes in the Metro 2® Format. The account may also need to be marked as “Closed” or “Charged Off,” depending on the circumstances surrounding the surrender.
   • For redemption, the account should indicate that the consumer has paid off the collateral’s market value in a lump sum. The account status should then be updated to reflect the payment and any resulting changes, such as “Paid” or “Closed.”
2. Use the Correct Special Comment Codes:
   • Special Comment Codes are essential for distinguishing between voluntary surrender and redemption in the consumer’s credit report. The codes ensure that lenders understand the outcome of the account.
   • For voluntary surrender, use the appropriate Special Comment Code that indicates the consumer gave up the collateral as part of the bankruptcy process.
   • For redemption, the Special Comment Code should indicate that the collateral was redeemed through a lump-sum payment.
3. Update the Balance and Payment History:
   • For voluntary surrender, the balance should reflect any remaining debt after the sale of the surrendered property. If the property sale does not cover the entire balance, the remaining amount may be reported as a deficiency balance.
   • In the case of redemption, the account balance should be updated to reflect the lump-sum payment, leaving the account with a zero balance or reflecting any remaining unpaid amounts if applicable.
4. Compliance with the FCRA:
   • The FCRA requires that all credit reporting be accurate, timely, and complete. When reporting an account involving surrendered or redeemed merchandise, it is crucial that the information accurately reflects the consumer’s actions and the current state of the account.
   • If the consumer disputes the reporting of their surrender or redemption, data furnishers must investigate the dispute and correct any inaccuracies within 30 days.

Impact on the Consumer’s Credit Report

1. Voluntary Surrender:
   • Reporting voluntary surrender can have a negative impact on the consumer’s credit score, as it indicates they were unable to meet the terms of their secured loan. However, accurate reporting ensures that the consumer’s credit report properly reflects the resolution of the account and prevents future disputes.
2. Redemption:
   • Redemption is often viewed more favorably, as it shows that the consumer was able to pay off the current market value of the collateral. Properly reporting redemption can help the consumer rebuild their credit by demonstrating their ability to make substantial payments.

Conclusion

Reporting accounts involving the voluntary surrender or redemption of merchandise in bankruptcy requires accuracy and attention to detail. By following the correct steps and adhering to FCRA guidelines, data furnishers can ensure that credit reports reflect the true outcome of the account, protecting both the consumer’s credit profile and the integrity of the reporting system. Properly distinguishing between these two actions helps maintain clarity for lenders and ensures compliance with credit reporting regulations.