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Damaged credit: Can you sue?

Courts are recognizing that good credit is a valuable asset

By Minda Zetlin

If your credit has been damaged and it isn't your fault, you may be able to sue -- and possibly collect a large settlement.

While holding others accountable for inaccurate and costly credit hits is a relatively recent legal phenomenon, courts are beginning to recognize that a good credit standing is a valuable asset, and someone who devalues that asset should be made to pay.

One groundbreaking case in the arena took place in 2002, when Home Depot took a million-dollar hit for its credit reporting actions. The company accessed the credit report of a California businessman named Alan Sporn 12 times -- each time resulting in a hard inquiry, which negatively impacted his credit score. Sporn had been a victim of identity theft, and the thief was attempting to open a line of credit with Home Depot. Sporn contacted the company, saying that he had no business with them and instructed Home Depot to stop checking his credit. Then it happened again.

Damaged credit: Can you sue?

"This time he got mad enough that he contacted several attorneys," says independent credit evaluator Georg Finder. "They told him this kind of stuff happened all the time and to suck it up. He finally got to an attorney who said that if he could prove he'd been damaged in some way, he had a case."

Which he did. Sporn was trying to refinance his house during that period and was denied a low interest rate due to the numerous inquiries that lowered his credit score. He hired Finder to calculate how much his damaged credit had cost him. After doing some analysis, "the case that all these other lawyers had turned down ultimately resulted in Home Depot having to pay more than $1.3 million," Finder says.

However, while a payout for damaged credit can be spectacular, getting there isn't easy. Finding an attorney to take on even a good case such as Sporn's can be a challenge. And proving credit damage usually requires hiring an expert researcher.

"To get a good valuation is expensive, so be careful of your expectations," warns Doug Koenig, an attorney in Hillsborough, N.C. "Could it work for you? Absolutely. Will it? I can't say until I've spent a lot of time reviewing your case."

Only an attorney, after careful review, can tell you whether you could win money for damaged credit. But your odds go up if you can answer "yes" to the following:

1. Did a person or company do something wrong that damaged your credit?

In order to sue, you have to have a cause of action -- something specific the other party did that was illegal or malicious or infringed on your rights. For instance, when Nashun Robinson, an active-duty military officer, tried to buy a home in 2012, he failed to qualify for a Veterans Administration-backed loan because Chase bank showed him as delinquent on an existing mortgage. But he had actually sold the home in a short sale, with the bank's agreement, a year earlier.

Any sort of legal action where economic damages or compensation are sought, such as a divorce, wrongful dismissal or personal injury could qualify.

-- Georg Finder
Independent credit evaluator

A short sale (sale of a home for less than is owed on it) always has a negative effect on the borrower's credit, though many experts believe the effect is less than with a foreclosure. Generally, the former homeowner must wait at least two years before qualifying for another loan, but because of his military status and good credit since the sale, Robinson would likely have been able to qualify sooner, according to James Wrider, a real estate broker in San Diego who is assisting Robinson.

"We brought it to the attention of the law firm that handled the [short sale] settlement," Wrider says. "They sent it to Chase. Chase said that he owes this money and that they would continue reporting him late every month. I went back and said, 'Here's your agreement saying it was settled.'"

This dispute is likely to wind up in court, Wrider says, and he believes it has all the elements of a big win. "Whatever his past issues, he had gone a solid year without any derogatory credit and had good standing as a military officer," Wrider says. And even if the bank subsequently removed the delinquent notation, the damage is already done. "He can't buy tomorrow what he could have bought a year ago," Wrider says. "Property prices may now exceed what he could comfortably afford to purchase." (Chase declined to go on record on the case).

You may also be able to collect if someone damages your credit indirectly, for instance by preventing you from being able to pay your bills. "Any sort of legal action where economic damages or compensation are sought, such as a divorce, wrongful dismissal or personal injury could qualify," Finder says.

For example, if you're laid up because of an accident that is someone else's fault, are unable to work and pay your bills and, as a result, your debts go unpaid and your credit suffers -- damages for that lost credit can and should be added to whatever compensation you're suing for, Finder says. "In that case, it has to be clearly established that, but for this collision, the economic damage wouldn't have happened," he adds. "The key to compensation is the cause of action."

2. Did this loss of credit harm you?

A credit researcher can assess exactly how your damaged credit may have harmed you and how much it has cost you. Even if, unlike Robinson and Sporn, you can't point to a loan refused or higher interest charged because of a lowered credit rating, you may still be able to collect. "You can also get damages for nonmonetary losses such as aggravation, loss of time, loss of credit reputation. All those things are compensable," says Cary Flitter, partner at Flitter Lorenz in Philadelphia and consumer law expert.

Finder says he looks for three different types of compensable loss from credit damage. The first is increased out-of-pocket expenses, such as when Sporn had to pay a higher interest rate. The second is loss of credit capacity, such as when a card issuer lowers your limit or cancels an unused card because your credit rating has been reduced.

You can also get damages for nonmonetary losses like aggravation, loss of time, loss of credit reputation. All those things are compensable.

-- Cary Flitter
Partner at Flitter Lorenz

The third is loss of credit expectancy. "Let's say someone's going along and is accustomed to being able to walk into a car dealership or a mortgage company and apply for a loan and walk out with whatever they were applying for," Finder says. "Let's say that's taken away, they get turned down because their credit reputation has changed. After getting turned down a few times, they stop applying. That's loss of credit expectancy."

Will every judge in every court recognize all these types of harm and award you damages? No, but more are taking loss of credit seriously. "In several states, there are cases where the court has said that the mere loss of credit is sufficient to warrant compensation," Koenig notes.

Keep in mind that you aren't limited to only collecting what you actually lost. Finder says he reported losses of only about $250,000 for Sporn, but he was awarded punitive damages for a total judgment of $934,000 that increased to more than $1.3 million because Home Depot was slow to pay up.

Punitive damages can be especially hefty if it turns out the company that damaged your credit has done the same to others. "Some states allow for triple damages if you can show a pattern," Koenig says. 

3. Did I alert them to the problem and try to get it fixed?

Flitter advises making every attempt to correct the problem through proper channels before initiating a lawsuit. "If it's a bank or other furnisher of information and they've reported something inaccurate to a credit bureau, the consumer must write to the credit bureau," he says. "Let's say Bank of America shows that you're 60 days late and it's wrong, you must write to the credit bureau and ask them to investigate, not just the bank."

Flitter encourages his clients to send letters on paper, preferably by certified mail, rather than filling out an online dispute form, which may not provide enough space to properly explain the problem. "And one letter per dispute," he says. "Not, 'You got my middle initial wrong, I no longer live on Main Street and the report from Bank of America is inaccurate.' You need a separate letter for each."

"In theory, the credit bureau should investigate and fix any error, but it's seldom that straightforward," Flitter says. He notes that credit bureaus are understaffed and tend to rely on the company that provided the information to the bureau to ensure that information is accurate.

"If they don't fix it, it's time to talk to a consumer lawyer," he says. "But the first thing a lawyer will tell you is to dispute it again. And then again." Though this may seem like an exercise in futility, every attempt you make to resolve the problem before involving the legal system will make your case that much stronger once you do get to court.

4. Did I have good credit before this happened?

It's hard to prove someone has meaningfully damaged your credit if you've already dinged it yourself. "If I ask what happened to get to this point, and the client says, 'I was late by two mortgage payments,' it can be hard to win a case like that," Koenig says. "It doesn't disqualify you, but it can make the damages so low that they aren't worth pursuing.

Even if you've clearly been harmed and your credit is worse than before, this is still a relatively new area of the law and an attorney may be reluctant to take on a case where previous credit problems could in any way confuse the issues at hand. "I'm looking for the clearest, cleanest cases to take before a judge," Wrider says.

But if you think you might have a case, Koenig advises, "There's never any harm in calling a lawyer and saying, 'Hey, do I qualify?' These cases are rare, but it's a good thing if you can get it." 

See related: Why the credit report dispute process is broken, CFPB opens federal complaint system to credit report disputes

Published: April 2, 2013



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