Can a creditor accelerate my debt? Can a creditor accelerate my debt?
Are there steps the creditor cannot take?
Can a creditor have me put in jail?
Can a creditor seize my property?
Can a creditor seize my tax refunds?
Can a creditor have my wages garnished?
What should I do about creditor harassment?
What protection will the consumer protection agencies give me?
Can creditors file a lawsuit against me?
How is a judgment entered against a debtor?
How does arbitration work?
What happens if I have a judgment against me?
Can a creditor have my property taken to satisfy the judgment?
What is a judgment lien?
How does a foreclosure work?
Can my assets be seized without court proceedings?
A bank may accelerate (ask for full payment of) loans and freeze (prohibit any withdrawal of) money held in your account to cover debts owed to the bank holding the account.
Owing money you cannot pay is stressful partly because you feel guilty and maybe like a failure. The other source of stress is from bill collectors and their tactics. When you start receiving phone calls from collections people, they are often quite aggressive, if not abusive. We have been told many times that creditors threaten to have the debtor arrested and put in jail, or to have his or her salary or tax refunds garnished. Creditors often tell people that it is fraud to not pay back the money they borrowed. However, you, the debtor, have legal protection, and there are things the creditor cannot do.
One cannot be arrested and put in jail for a civil debt owed to a credit card company or a bank. Normally, the only time you can be put in jail is when you break a law or fail to obey an order of the court in a family matter. Owing money to a person is not a crime and is not something for which you can be jailed. The United States has done away with debtors’ prison. Nowhere in the United States can a creditor seize your paycheck or property without a lawsuit or the opportunity for a judge to order it.
Creditors will sometimes say things such as, “We are going to take all your property,” or if they are particularly sadistic, say, “We are going to take your kids’ furniture and pets.” People have visions of their things being taken from their home and piled up in their front yards for everyone to see. This is almost certain to never happen, so try not to let this threat bother you. A creditor cannot just call a police officer and start hauling furniture out of your house. Even if a creditor wanted your furniture, he or she would have to get a court order before invading your home or office. This means that your creditor will have to go through the expense of a lawsuit.
A private company cannot have the government seize your tax refunds. If you owe taxes or money on a government-guaranteed student loan, then you can have your tax refund seized by the government, but a private company does not have this authority. If someone who is not affiliated with a government entity or collecting for a government entity threatens to seize your tax refund, take this threat with a very large grain of salt.
It is quite common for creditors to threaten to have your wages garnished (money removed from your paycheck to send directly to the creditors). This is a powerful collection tool if you are earning a wage. This is allowed in most, but not all, states.
Given the limited range of what credit collectors can do without filing a lawsuit, they often start by pestering or harassing you to distraction. We have had reports of people getting calls from the same creditor several times a day. Calls start at seven o’clock in the morning and go to eleven o’clock at night. Collectors often call debtors at work after being asked not to, and many times the receptionist or other employees are told about the person’s financial problems. Family members are often called and told about the person’s debt problems. We have even had cases where collection people talked to neighbors and told them the person was not paying his or her bills.
Books on debt management often advise readers who are having extensive financial problems to contact their creditors, explain the situation to them, and try to work out a reduced payment schedule. In our experience, this almost never works. It may be possible to work out something with one creditor, but if there are several, there are almost always some who will not work with you and insist on full payment. Some will insult you as you pour out your heart to them. Unless every one of your creditors agree to a reduced payment, it’s unlikely that setting up a system of reduced payments will work.
The other problem with this advice is that you often talk to a different person every time you call the creditor or the collection agency. You can make an agreement with one person at the agency, and then a few days later get an abusive collection call from someone else at the same company. When you try to explain to the new person that you have worked out a reduced payment plan, he or she frequently will deny any knowledge of it and demand full payment at once. Often they will say, “I have never heard of that person,” or, “There is no such arrangement noted in the computer.” It is emotionally exhausting trying to explain the same thing over and over again every few days while being abused.
We have heard this sequence of events told to us so often that we are convinced the collectors are using one of two techniques. One is good cop–bad cop, where one collector will be nice and understanding and the next will be hateful and try to break you down. The other is the wolf pack method. When wolves hunt a deer, one doesn’t run up and kill the deer. Rather they will take turns running up to the animal and biting a bit of flesh away. No one bite kills the deer. The deer bleeds to death or just gives up in exhaustion.
People who are subject to harassing collection actions often ask whether there are laws against what their creditors are doing— calling three to four times a day, plus calling coworkers, the family, and neighbors.
The Fair Debt Collection Practices Act of 1978 (FDCPA), bars all of these acts and is said to offer strong laws regulating the activities of debt collectors. The law bars almost all collector contacts with family, except spouses. It bars contact with neighbors, except to learn a consumer’s address and phone number or work address. However, in these contacts the collector may not say the consumer owes money or volunteer the collection company’s name.
The collector cannot contact the consumer at inconvenient times, before 8:00 a.m. and after 9:00 p.m ., or at inconvenient places. He or she cannot make burdensome, repetitive phone calls or use obscene or abusive language. Work is considered an inconvenient place unless there is no other way to reach the consumer. The collector cannot threaten to file a lawsuit when there is no intent to do so. He or she cannot take any other actions that would serve to harass, oppress, or abuse the consumer. Debt collectors cannot continue to contact you after being told you are represented by a lawyer.
The FDCPA states that the consumer may write the debt collector or creditor that the consumer refuses to pay the debt or wishes to have all further communication cease. If this is done, the only communication the debt collector or creditor can have with the consumer is to:
• advise the consumer that debt collection efforts are being terminated;
• notify the consumer that specified remedies (normally lawsuits) may be invoked; and,
• notify the consumer that the debt collector or creditor intends to invoke a specified remedy.
While the FDCPA bars almost all the collection actions that bother people with money problems, its enforcement provisions offer little help when creditors violate the law. If an individual brings suit, the damages that can be collected are small and proving your case is rather difficult. For this reason, lawyers are reluctant to bring individual suits for violations of the FDCPA. Almost all the cases brought under this law are class action (groups of people with similar issues) lawsuits, and an individual’s odds of having his or her creditor’s violations turned into a class action lawsuit are small.
What about the consumer protection agencies? Government agencies and consumer protection lawyers are set up to institute class action lawsuits rather than help individuals.
Basically, you are on your own, and as a practical matter, the creditors can do just about anything they want. There are only two avenues to get help. One is Consumer Credit Counseling, and the other is a private debt manager who, if you can pay enough, may be able to set up a payment program that will satisfy all your creditors. These options will be covered in detail in Section 7.
When creditors give up on calling you, the next step is a lawsuit. Suing you is not an abusive collection method. You owe the money to the creditor, and the creditor has the right to go to court to try to collect it.
People are often thrown into a panic when they first hear about a lawsuit. Some creditors will describe a lawsuit in such a way as to make people think they will be put in jail. They will say things like, “I’ll send the sheriff out with papers.”
As noted earlier, you cannot be put in jail for a civil debt. The normal way to serve lawsuit papers is to have a sheriff or other process server deliver them. Sometimes they are simply mailed to you, but many states require notice of a lawsuit to be personally served. Service by sheriff is a favored threat of creditors because it upsets people, and people fear the vision of having a law officer come to where they work or live and serve papers on them in front of coworkers or neighbors.
When the papers are served, they often say that you must answer within so many days, usually thirty. You will not get in trouble if you do not give the court an answer or go to court. It is only criminal court where you can be arrested for not appearing in court. Debt collection lawsuits are civil suits. In fact, there is not much point in going to court if you are being sued for a debt and owe the money. The court cannot excuse you because you have had bad breaks, so going and telling your story does not help at all.
While you are not required to go to court, it is not a bad idea to check with a lawyer to see if you have any defenses against the lawsuit. At the same time, you can get detailed information on what collection actions the creditor can take against you after it has obtained its judgment. A general overview of collection actions is set out below.
If a creditor wins a lawsuit against you, it will be awarded a judgment against you. However, there is another way you can have a judgment made against you.
Most loan contracts today have arbitration clauses that will allow the creditor to avoid the trouble of filing a lawsuit against the borrower. The collection process is started by a letter invoking the arbitration rather than a sheriff serving lawsuit papers on the debtor. The letter notice is much easier to overlook than lawsuit papers. We have had many people who have thought they didn’t have any judgments against them, who turned out to have judgments through the arbitration process.
In theory, it works as follows.
1. Either the creditor or the debtor elects to have arbitration.
2. An arbitrator hears both sides’ versions of the dispute (this is normally done in a different city than the one where the debtor lives).
3. The arbitrator gives his or her decision. This decision is normally binding.
4. The decision is then transformed into a judgment in the county where the debtor lives.
The debtor community feels that arbitration is unfair because it forces the debtor to give up his or her protection under the legal system, travel away from his or her home, only to have the arbitrator almost always rule against the debtor.
A judgment against you may have very little effect, or it can be a disaster. The collection process after a lawsuit or foreclosure hearing is the danger point for any debtor.
Creditors are allowed to take steps to collect a judgment, and now they have a court order on their side. In cases of secured property, the court will direct that the property be turned over to the creditor if the creditor has not been able to pick it up on its own.
One step creditors take is to have a sheriff take the debtors’ property to collect the judgment. Normally, this involves first sending notice to the debtors that they have the right to protect certain assets if they are listed on a form turned into the court within a limited number of days. Because the form is often a bit complicated, and because ignoring the creditor has worked in the past, some people do not fill out the form. This is a serious mistake. If the form is not filled out, the creditor can seize any property the debtor owns, often including his or her home. A favorite target when the debtor does not fill out this exemption form is the debtor’s car. This puts maximum pressure on the debtor as he or she needs the car to get to work, and there is a ready market for used cars.
The form normally has different types of property that can be protected. Depending on the state, this protected property area may be sufficiently generous that the creditor cannot seize any property. Should this be the case, the debtor is said to be judgment proof.
If your property in a given category is worth more than can be protected, which is often the case for business owners, the creditor can send a sheriff out to pick it up and sell it. At these sales, the property is often sold for far less than it is worth. This amount is subtracted from the amount owed, and the debtor is still responsible for the remaining debt.
There is another way a judgment can harm a debtor. The judgment becomes a judgment lien against land and homes, which means that when the property is sold, the money owed must be paid to the creditor. Land, other than a person’s home, can often be taken at once. (It is harder to make a general statement about a person’s home. It may be protected or not depending on the state one lives in.)
Example: Suppose Sue owns a home worth $100,000 in a state where she can protect $10,000 of home equity. There is a judgment lien against the home for $3,000. She owes $95,000, so she only has $5,000 worth of equity ($100,000—$95,000 = $5,000). Her home is protected.
However, if she should sell the home, the $95,000 mortgage and the judgment lien must be paid from the money she receives for the sale of her home.
In this example, the judgment lien could be discharged in bankruptcy if the debtor elected to file a bankruptcy petition.
Because of this fact, creditors oftentimes do not bother with trying to take personal assets, but merely wait for the debtor to sell his or her home. They know that almost all buyers will require any judgment lien to be paid off as part of the purchase of the land or home.
Another legal process that may come into play is foreclosure (forced sale of a home by a lender). Foreclosure is threatened more often than it is done because creditors know it will upset the home owner. Creditors do not really want your home if there is a good chance they can get the money owed them in a reasonable, timely way. Creditors, however, will often be demanding about house payments because they know they have such a powerful weapon to use against you. The foreclosure process works as follows.
1. First, you are served a notice of a legal hearing. This gives you the chance to offer any legal defense you may have. Suffering from an illness or other problems is not a legal defense. You do not have to attend this hearing, and your time would be better spent talking to a lawyer about bankruptcy because some bankruptcy procedures can stop a foreclosure. But you may wish to consider seeing a lawyer to examine whether you have any defenses.
2. Once the foreclosure hearing has been held, the property is advertised for a foreclosure sale. Because these advertisements are designed to inform as many people as possible about the availability of the property, they can be quite embarrassing.
3. On the sale day, the property is auctioned off to the highest bidder. This is often done in an obscure part of the local courthouse. After the sale is done, there is often a limited amount of time for an upset bid. At the end of the process, your home is no longer yours, and you must move out.
Note: Bankruptcy is a powerful tool to stop a foreclosure. You may not qualify, but rather than lose your home, you should investigate the possibility.
There are two notable exceptions to creditors immediately filing a lawsuit. One is the right of offset. If you owe money to a bank or credit union and have money on deposit there, the bank or credit union can take enough of your money to pay off all or part of the debt. Be careful to remove any money from a financial institution that you owe money to. If you are in a financial crisis with a tight budget, it will be even tighter if the bank seizes what little money you have on hand to pay your mortgage or buy food.
The other exception is the right of repossession. A creditor who loaned you the money to buy your equipment, car, or truck can take the equipment or vehicle back if it has a security interest in the vehicle. Leasors—those who lend property on lease—can take back leased equipment because it belongs to them. No one else can take it without a court order or permission. If creditors have a security interest, they can take the property and sell it to recover the money you owe them. They cannot use force or violence to take the property and often must stop if you act like you will fight them for it. This is why repossessions are often done at night or while the owner is away. Creditors are not allowed to trespass on private property to do their work, but because they often act when no one is around, some violate this rule. Once they have the vehicle, it is your word against theirs as to where the car was parked.
Once the creditor has the property, it will give you a little time to pay off the loan, and if you do not pay the entire loan amount, the property is sold at auction. The auction sale price is almost always far less than what you owe on the property. You are responsible for the difference between what you promised to pay and what was received for it at auction. This difference is called the deficiency. The debt is not extinguished merely because the creditor has the property back—you still owe the money you promised to pay them, less the bit the creditor received at the auction. This is why a voluntary surrender does not help you. You will still be responsible for the deficiency after the property is sold. Often, the fact that you voluntarily gave back the property does not even help you on your credit report. A voluntary surrender is often shown as a repossession on your credit report.