A serious car accident (and the medical bills), fraud, construction defect, wrongful termination, contested divorce, insurance rescission – there are many ways clients can experience credit loss by the actions of a third party.
No matter how successful a plaintiff attorney is in replenishing a client’s bank account through settlement or trial, the efforts will not resolve one of the most over- looked injuries in tort litigation: damage to credit and credit reputation. Credit damage occurs when negative information appears on a credit report or other credit file that causes an individual or business to lose access to credit that was available prior to the damage. Credit reputation damage involves increased out- of-pocket costs, loss of credit capacity and loss of credit expectancy because of third-party actions that cause negative information to appear on a client’s credit report; in some cases credit reputation damage may cause job reassignment or even termination. When injuries or wrongful acts force people to default on their credit obligations, they suffer financial harm. Including credit damage as a part of a tort damage demand can change the value of a case by thousands of dollars.
The Initial Assessment
Some basic steps during the intake conference with a client can reveal whether a credit damage claim is worth pursuing. Find out if the client has been contacted by bill collectors, or is facing bankruptcy, foreclosure or repossessions. If it appears that the credit damage is not self-inflicted but is the result of third-party misconduct, advise the client to save all monthly statements, collection demands, rate adjustment letters–any items that could prove damage.
Confirm the Client’s Credit Status
There are typically three types of credit accounts:
- Authorized user – These accounts are solely in another party’s name, but your client is permitted to use the account. Credit damage to your client does not result in limitation with respect to these accounts but may result in loss of authorization to use the account from the account holder.
- Co-borrower – For these accounts, your client has equal responsibility for payments with another borrower(s).
- Solo account holder – These accounts are in your client’s name
A common mistake by attorneys is to ask the client to provide a copy of his or her own credit report from one of the big three credit reporting agencies (Experian, TransUnion, and Equifax). These kinds of credit reports are unusable not only because of their inaccuracies, but most importantly, because a consumer credit report is inadmissible in court due to lack of foundation or authentication. Using a consumer credit report obtained by the client will likely cause the judge to dismiss your credit damage claim.
Commercial businesses, such as lenders, creditors, employers and insurance companies, use a different credit report to assess the creditworthiness of an individual. Known as a Tri-Merged subscriber report (one report from each of the three national bureaus), it is much more accurate than consumer reports. In addition, these reports provide information for the preceding 84 months, longer than records kept by most consumer reports. Your client will need to request the subscriber credit report. They are usually available from a mortgage lender. These reports offer the most thorough snapshot of an individual’s creditworthiness. Prior to making a damage demand to the defense, have the client request a second report, especially if more than 30 days have passed since the last credit check. Much can change. You will want the latest report when determining damages.
Specific items to look for in this more detailed and accurate report include:
- New derogatory account remarks – such as late payments and accounts that have moved forward to collections
- Added public records – including bankruptcies, judg- ments and liens
- Account closures – accounts that have been closed for non-payment
- Application denial(s) – refusal of credit
In order to prove causation, it is important to examine your client’s credit immediately before and after the actions causing the damage. Ideally, you would have qualified subscriber credit reports for both times. However, in the current regu- latory environment it may not be possible to obtain a report effective as of a prior date. Therefore, it may be necessary to use a somewhat older report, appropriately adjusted, or-where no prior report is available–have an expert extrapolate the current report backward. This process is similar to the use of before and after appraisals for real property.
Surprisingly, the amount of assets a client owns has little to do with determining credit damage. Credit damage is determined by evaluating a client’s payment history to creditors before the injury versus post-injury. Assets come into play when the damage to credit makes it impossible to acquire, borrow against, hold onto or replace assets.
For example, prior to the injury the client could borrow up to 80 percent of the home value. After the injury, the amount available was reduced to 60 percent of the value. The amount of money that can be borrowed declined so credit damage could be argued. Additionally, when credit is damaged, the interest rate to acquire assets increases, so not only was the amount of credit available reduced, but the cost of borrowing increased, making it more expensive to borrow against the value of the real property.
Admitting a Credit Economic Damage Claim in Court
Gathering all of the background information is valuable when determining whether there has been economic damage to your client’s credit reputation, but only in general terms. Four specific steps must be taken to ensure the claim is admissible in court.
- Present the proper foundational documents. Even a subscriber credit report may not be sufficient. An assortment of other documents may be required to prove your cas Additional documents include monthly statements from creditors that cite account changes such as lowering credit limit or changing interest charges, notices of liens or judgments, application denials including loan, employment, rental, and collection notices.
- Confirm the validity of documents that may be obtained through discovery if they are not in the client’s possession, such as account records and application review Verify the sources from which the documents were obtained.
- Cite applicable case law for guidance, when It may be necessary to show how a prior case applies to the current case.
- Provide a judicially sufficient credit damage report of economic damage This step is, perhaps, the most challenging aspect of the entire process because the raw numbers do not equate to an accurate or acceptable credit damage assessment, which is what the court requires. For lawyers who are not thoroughly familiar with how to evaluate a client’s actual economic damage, it is worthwhile to consult a credit damage expert to assess the matter.
Pre-empting Defense Objections
Since the mid-1990s, injury to financial reputation has been proven objectively measurable and able to add substantial monetary damages to settlements and jury awards. Since damage to credit is not a theory of liability, but rather a type of injury, no separate cause of action is required.
Even with its 20-year track record, expect the defense to use the “subjective” argument against credit damage measurement. The key to a successful argument for credit reputation damage and to maximize damage value is to present a thorough analysis of the before and after credit picture of the injured party followed by a rationale for the monetary costs of the damage.