A recent court order requires the three major credit-reporting bureaus — Experian Group Ltd, Equifax Inc. and TransUnion LLC — to clean up the credit files of millions of consumers who have filed for Chapter 7 bankruptcy. The problem: Old debts, which are typically forgiven by the courts in a bankruptcy filing, are still being reported as active on many consumers’ credit reports.

What does this mean? Tradelines of accounts included in a BK will be required to show a zero balance. It appears the Credit Reporting Agencies (CRAs) are showing the “included in bankruptcy” tradelines as having balances and in some cases showing active history which could keep the account on a credit file for longer than the 7 year limit. A bankruptcy on your credit report is bad, but when you have a bankruptcy, and you also have debts showing up as overdue and not paid — that is a double hit. The court order does not order the CRAs to delete the tradelines, it’s just an order to do what they have been supposed to be doing all along. Don’t get too excited about this - some people may not see any change. Many credit reports correctly read a zero balance for any account a consumer includes in a bankruptcy.

This ruling is expected to clean up the credit files — and potentially boost the credit scores — of an estimated six million to 10 million people who have filed for Chapter 7 bankruptcy but still had errors in their files, according to plaintiffs’ attorneys. Consumers with so-called zombie debt — old loans they may have paid off years ago that can resurface when an aggressive debt collector erroneously demands payment — are also likely to get some relief, if those debts also were discharged under Chapter 7 protection.

The judge for the case was David O. Carter of the U.S. District Court for the Central District of California.

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