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Money Matters: Dealing with Creditors


By: the Knoxville Bar Association

Sometimes, the hardest part about dealing with creditors is just figuring out what your debts are. You will need to find some old paperwork and might have to make a few phone calls. But when you have this information, you will be able to move forward to protect your credit and reduce what you owe.

STEP ONE: List the debts. Make a list of all of the debts you have and whether they are "secured" or "unsecured."

" Secured Debts" give the creditor the right to take certain property if the debt is not paid. For example, your house payment is probably secured by the house, and your car payment is probably secured by the car. Sometimes, people get a "second mortgage" on their home to pay off credit card debts or other bills. Even though the money was not used to buy the house, the house is still "collateral" for the debt. This makes it a "secured" loan. " Unsecured Debts" are those that have no collateral. Typically, credit card debts and medical bills are "unsecured."

STEP TWO: Identify the debtors. Who signed the credit agreement?

Individual Debts. If you signed alone, you are responsible for repaying the debt by yourself.

Joint Debts. If you signed with another person, both of you are equally obligated to the creditor.

Co-Signers. If you had a "co-signer," that person guaranteed that you would pay. If you do not pay, the creditor may demand payment from the co-signer--but the creditor will probably try to collect the money from you first. Likewise, if you co-signed for someone else’s debt, the creditor may demand that you pay it if the primary debtor does not.

STEP THREE: Divide the Debts. Ideally, your partner will agree to pay some of the bills. But what happens if he refuses--or if he agrees to pay but then fails to pay? We will come back to that problem in Step Four.


STEP FOUR: How Much Can You Pay?
After you know what bills you will have to pay, you can figure out if you have enough money to pay them. Since you will face unexpected expenses, do not assume that you can devote all of your income to paying your bills. One of those "unexpected" expenses may be a debt that your partner promised to pay. If you signed the credit agreement, you are responsible to the creditor. It does not matter to the creditor that your partner agreed to pay the debt. The creditor may still demand payment from you.

After you finish Step Four, your finances may seem hopeless if you don’t have enough money to pay your bills. But there are things you can do to solve this problem.

Defining the Problem: The Consequences of Not Paying Bills

First, the good news: There is no such thing as "debtor’s prison." You will not go to jail just because you can’t pay all your bills. But there are consequences, including getting nasty letters and phone calls from the creditor and losing your property to repossession or foreclosure (if the loan is "secured) or being sued. We will discuss each of these consequences later, but for now let’s look at how to avoid them.

Reducing Your Debts

There are several ways to reduce the amount that you owe.

  • Do You Want To Keep the "Collateral"?

If a debt is "secured," the lender may take whatever property is "collateral" if you do not pay. Sometimes, you will want to give up this property--just let the lender have it. But giving up the property does not always mean that you will not owe any more money. If the property you are giving up is not worth as much as you owe, the lender may demand additional money. If the lender demands more money and you do not voluntarily pay it, the only way the lender may collect the money is to bring a lawsuit against you.

  • Negotiate with Creditors

Sometimes a creditor will agree to reduce your monthly payment. In most cases, the creditor will insist that you pay part of the payment every month. If you get such an agreement with a creditor, put it in writing.

  • Letters from Creditors

When you have been late in making payments, most creditors will notify you by mail. At first, the letter may be a gentle reminder to make a payment. Eventually, the letters may seem very hostile and threatening. The intent of such a letter is to make you afraid of what will happen to you if you do not pay. But the letter itself cannot hurt you.

  • Phone Calls

If a letter campaign does not make you pay, the creditor often follows up with phone calls that are usually even more unpleasant than the letters. Once again, however, the calls can make you feel bad; but that’s the only thing that the phone calls can do. Only the next step--a lawsuit--has any real consequences.

Federal and state law protects you from creditors who are too aggressive. Contact a lawyer if the person trying to collect a debt does any of these things:

  • threatens violence;
  • uses obscene language;
  • communicates by a postcard;
  • calls you frequently (so often that the only real purpose is to annoy you);
  • calls you without identifying who is calling;
  • pretends to be connected with the government;
  • lies to you about the debt or the creditor’s rights;
  • lies to someone else to get information about you; or
  • threatens to put you in jail for not paying your bills.

Some of these rules apply only to collection agencies and not when the creditor contacts you directly. But if the creditor violates the law, you may be able to sue for damages.

  • Foreclosure & Repossession

If the debt is "secured," the creditor has the right to take the "collateral." When the creditor takes real estate, it is by "foreclosure." When the creditor takes other types of property (such as a car or TV set), it is by "repossession."

Foreclosure: A creditor may ask a court to order a foreclosure, but this is rare. Usually, the foreclosure is handled by the following procedure: The creditor sends a letter demanding that the entire debt must be paid in full. Sometimes your contract with the creditor will not require the creditor to give you this letter; but most creditors do. Until that letter was sent, you only owed monthly installments. Now the creditor is demanding all of the debt. After that demand is made, the creditor might agree to let you catch up payments; but the creditor does not have to let you catch up--the creditor can insist that the entire debt be paid. If you cannot pay the entire debt, the creditor may begin the foreclosure. The actual manner in which the foreclosure is conducted is set out in your contract with the creditor; but it usually works like this: The creditor will put an ad in the local newspaper announcing that the property will be sold. (Sometimes the ad is not placed in a widely read paper but is placed in a paper devoted to "legal notices.") The ad usually appears three times over a three or four week period. The ad will tell when the sale will take place (usually at the main entrance to the courthouse in the county where the property is located). A "trustee" representing the creditor (usually a lawyer) will read the ad aloud from the paper and then ask if anyone wants to buy the property. Usually, the creditor bids the amount of the debt (plus the cost of the ad and the trustee’s fee). If no one else bids, the creditor gets the property. If someone bids more, that person pays the trustee, who pays the costs of the foreclosure, then pays the creditor holding the first mortgage, and then pays any other creditors who have a mortgage against the property. If any money is left over, you will get it.

Repossession: Your contract with the creditor will say what rights the creditor has. In most cases, the contract will allow the creditor to take the property by whatever non-violent means are available. After the creditor takes the property, the creditor will usually sell it to raise the money to pay the debt. However, the creditor could ask you to let the creditor keep the property and not sell it. You may object to this plan. If the creditor is selling the property, the sale must be conducted in a "reasonable" manner--that is, the creditor must try to get a good price. In addition, the creditor must tell you the time and place of the sale. The creditor must use the money from the sale, first, to pay the expenses of the sale; then, to pay the first mortgage against the property; then, to pay any other mortgages against the property. You would receive anything left over.

  • Lawsuits

A creditor may sue you to collect a debt. If the creditor wins the lawsuit, the creditor receives a "judgment" against you. If the creditor wins a judgment against you, the creditor can get the court’s help to make you pay the debt. In addition to the debt itself, the judgment could include interest and "court costs."

If the creditor receives a judgment against you, several things could happen:

A "lien" gives the creditor the right to sell your property in order to raise enough money to pay the debt. First, the creditor must take "personal" property (that is, property other than real estate). Some property is "exempt" and cannot be taken, no matter how much you owe. Exemptions are discussed below.

"Garnishment" means that the creditor may require someone who owes you money to pay the creditor instead of paying you. The most common form of garnishment is against your wages. However, the creditor may not take all of your wages; some of it is "exempt."

A judgment may affect your "Credit Rating." Several companies keep track of our credit so that future creditors may decide if we are good risks for a loan. Usually, a judgment will show up on a credit report, which could affect whether you can get a loan or credit card in the future.

  • Exempt Property

A creditor may not take all of your property; some property is exempt. In addition, some forms of income are also exempt, including social security and unemployment benefits, many insurance and pension plan payments, and portions of money paid to you under a judgment for personal injury or wrongful death.

There are also limits on how much of your wages may be taken by "garnishment." The creditor may take whichever is the lower of these amounts:

1. 25% of your net income or

2. An amount calculated as follows:

Federal minimum wage

x 30 = ?

Subtract that amount from your net income.

The creditor may take what is left over.

  • You may also add $2.50 to the exempt amount for each of your dependent children under age 16.
  • If you have to pay alimony or child support, some of these exemptions do not apply.
  • Regardless of the exemptions, if the property is "collateral" for a "secured" loan, the creditor may take it (but certain rules apply for how and when it may be taken).

Bankruptcy

The bankruptcy laws are designed to give people a "fresh start" when their debts become too burdensome. There are two types of bankruptcy protection commonly used by individuals:

"Chapter 7" pools all of the debtor’s property (other than exempt property) to be sold to raise money for creditors. "Secured creditors" may take back their "collateral"; and "unsecured" creditors are paid from the pool of money collected from the sale of the debtor’s non-exempt property. In many cases, none of the debtor’s "unsecured" property is actually sold; and it is all treated as "exempt property." In addition, the debtor may keep the collateral used for "secured" debts by entering into an agreement with the creditor to continue paying that debt after the bankruptcy case is over. The debts to other creditors, however, are canceled. There are limits on how often you may use the "Chapter 7" laws.

"Chapter 13" is available to anyone who has a regular income. For "secured" debts, in most cases, the debtor may either keep the collateral and continue paying the debt or return the collateral and cancel the debt. All "unsecured" debts are then added together, and the court decides how much of the debtor’s income could be used to pay those debts. The debtor then pays that amount to the court, which distributes a portion of it to each creditor. At the end of a certain period of time (usually three years), the case is closed, the debtor stops paying money to the court, and any debt still due to the creditors is canceled.

One of the greatest benefits of the bankruptcy law is the "automatic stay." This is a rule that makes it illegal for a creditor to make any effort to collect a debt from the moment that you file the proper papers with the bankruptcy court. If a foreclosure sale is scheduled, for example, or you are receiving a lot of phone calls from creditors, the automatic stay will stop these actions; and creditors will not be able to do anything with your property or contact you about a debt, except through the bankruptcy court, as long as your case is active.