Validity of CAIVRS flag after discharge

[sheilad]

Veterans filed Chap 13 then converted to Chap 7 and were discharged 3 years ago. Credit stabilized subsequently. Now they seek to refinance but are being flagged by SBA which refuses to unflag. I contend that to flag a debtor for an unenforceable debt is discriminatory and in violation of bankruptcy code.

[sheilad]

I need perspectives on whether application of flags placed by CAIVRS can be justified after discharge.

[justbroke]

First, welcome to BKForum and thank you for protecting America through your service.

Maintaining a borrower's history of payments is not in violation of bankruptcy law. The Fair Credit Reporting Act allows a bankruptcy to remain on a credit report for 10 years, as it reflects both the derogatory credit event and the debtor's discharge of some (or all) debt. The credit reporting agencies voluntarily stop reporting Chapter 13s after 7 years because they figure that the debtor paid back something. In the end, the laws allow the fact of a bankruptcy, lawsuit, or tax liens, to be reported as a significant credit event.

As you likely know, the time period for CAIVRS is measured from the date that the claim was paid by the government-sponsored entity (GSE) to the noteholder. This is usually not a bankruptcy date (filing, discharge, close) or the date of a foreclosure sale. It's also not the date that a foreclosure sale was completed (a new deed/title issued). The fact is that the date of the payment of the claim could be a year from the date of the foreclosure sale. (This is similar to foreclosure waiting periods, for the same GSE loans, which are based on the foreclosure date and not the bankruptcy date.)

If you can get an output from CAIVRS for the date on which the claim was paid, you would add 3 years to that date, unless you have extenuating circumstances (see below).

I would fashion a guess, that you may not have caused a loss, but you did discharge the mortgage debt? If there was no loss to the Federal government, then you should be able to get the flag cleared by going back to the Federal Housing Administration (FHA), the Veteran's Administration (VA), of the United States Department of Agriculture (USDA). If the flag was purely by mistake because you still have the same (guaranteed) mortgage and never caused a loss to the government entity, then you should be able to go back to that agency (FHA, VA, USDA) and have the flag flipped.

justbroke's additional thoughts on CAIVRS and extenuating circumstances: The rules related to CAIVRS are that the loss must be "seasoned" for 3 years before the flag can be cleared. Unfortunately, and even for me, a bankruptcy is a serious credit event and unless you can show extenuating circumstances (1), the flag will remain. You write that "to flag a debtor for an unenforceable debt is discriminatory," but the flag is not related to the collect-ability of the debt. It's related to the fact that the creditor, or the guarantor in this case (the Federal government), suffered a loss and wants to prevent the debtor from obtaining guarantees in the future. This is no different than a credit union (CU), which suffered a loss due to bankruptcy, not allowing a debtor to have any future credit products. It's also no different than the notorious American Express black-listing of those that cause them a loss.

I would also fashion to guess that the Federal government would never write bankruptcy rules which would prevent it from enforcing its other collection rules. Take, for example, the super-priority of Federal tax debt, the non-dischargeability of Federally guarantied student loans, and in some cases the inability to sue the Federal government. The Federal government "allows" a citizen to sue them for some reasons, but they control for which things they will allow a suit. You can thank sovereign immunity for that.

(1) extenuating circumstances are of such a nature, that FHA names only 2 examples of extenuating circumstances and both banks and brokers adhere to those two; death of the principal wage earner, or a serious illness.

[justbroke]

I need perspectives on whether application of flags placed by CAIVRS can be justified after discharge.

(I moved your post as your two threads are very similar and having two threads would only dilute the answers.)

Adding on to what I wrote above, the flags are justified unless you can either show a.) that there were extenuating circumstances (see above), or b.) there was actually no loss to the government-sponsored entity.

If this was a VA or USDA loan, the extenuating circumstances provisions may be less strict than FHA's (which are the most strict), but you'd need to seek redress specifically from those agencies.