Lawyers routinely hear complaints from clients who have had their credit cards cancelled, are getting collection calls and letters, are facing foreclosure, or are filing for bankruptcy because they are experiencing loss of employment or a financial crisis due to eroded credit scores and negative remarks on their credit report. However, family lawyers can now more efficiently and effectively present an expert economic damage report that will monetize a client’s credit reputation harm for recovery.
Since the Family Law Act of 1970 greatly expanded the topics addressed in divorce, more courts and arbitrators/mediators allow awards for credit reputation damage. Credit reputation damage occurs when negative remarks appear on a credit report that cause an individual or business to lose access to credit that was available prior to the damage.
Credit reputation damage involves: 1) increased out-of-pocket costs, 2) loss of credit capacity, and 3) loss of credit expectancy caused by actions of the spouse that resulted in negative remarks appearing on the client’s credit report. A client may suffer financial harm when spousal negligence or willful behavior results in late payments or default on their joint credit obligations.
Credit reputation damage first received court recognition as a form of economic damage in 1912. Currently, the three national credit report repositories are TransUnion, Experian and Equifax, each of which provides subscriber reports to businesses and Consumer Disclosure reports, also known as the Free Credit Report.
Introducing the Credit Damage Measurement Report
A client’s credit does not have to be perfect to be eligible for compensation; however, sufficient credit must be in use to be considered damaged. During the intake interview, be sure to ask about loans, credit cards, and business guarantees. Has the client been contacted by bill collectors? Are they facing bankruptcy, foreclosure, or repossessions?
If the credit damage is the result of spousal negligence or misconduct, in violation of a TRO or a settlement agreement, then recovery of the measured harm may be awarded.
The client can provide all the necessary initial documentation for this purpose, such as monthly statements, collection demands, and rate adjustment letters—which are industry standard forms. Confirmation documents of the damage may include credit denial notices or collection letters. Each document must identify the sender, the date, and a dollar amount. These credit documents are essential in establishing the client’s pre- and post-injury credit value.
Establishing Monetary Value
Common forms of credit reputation damage are identified as an increase in credit interest rates, loss of existing credit accounts, denial of credit that would have lowered the cost of an existing loan (i.e., refinancing a mortgage), or higher interest charges for future purchases. As a result of those increased costs, debt service becomes more expensive. When debt service becomes more expensive, the injured person loses the ability to continue to use credit in the way they did before the credit damage occurred.
The economic damage is identified as the difference between pre-injury and post-injury harm and costs. For instance, say the injured party had a pre-injury aggregate credit card limit of $50,000, but after the violation, the injury reduced the aggregate credit card limit to $20,000. The injured party’s credit capacity was decreased by $30,000, and part of the decrease became collection accounts, causing further credit damage.
The ability to borrow against the value of real property is also affected by credit reputation damage. Prior to injury, for example, an injured party could borrow up to 90 percent of the value of the property. After the injury occurred, the amount available was reduced to 70 percent of the value; the amount of money that could be borrowed was reduced. Additionally, when credit is damaged, the injured party’s interest rate increases. So not only was the amount of credit available reduced in this example, but the cost of borrowing that amount increased, making it more expensive to borrow against the value of the real property. Credit capacity was decreased by 20 percent, plus the property owner experienced increased borrowing costs.
Prior to injury, a person with excellent credit can often purchase a new car with little or no down payment. After an injury and damage to credit, that same person might have to make a down payment of 15 percent or more and be subject to a higher interest rate on the balance owed. Thus, the amount of credit available decreases while the cost to manage the debt increases.
Arguing for Credit Reputation Damage
Expect the defense to continue to use the “subjective” argument against credit damage measurement. The key to a successful argument for credit reputation damage that will maximize damage value is to present a thorough analysis of the before and after picture of the injured party’s credit situation. The best approach is to seek an expert opinion to support monetization of the damage. With more courts accepting credit reputation damage as a special injury, this “invisible” damage can now become a sizable portion of an injured party’s damage award. The attorney recognition of this invisible injury, damage to credit reputation, may be the difference between leaving the money on the table and getting it for the client.