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"
" 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?
If you signed alone, you are responsible for repaying the debt by yourself.
If you signed with another person, both of you are equally obligated to the creditor.
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
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
- 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.
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.
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.
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
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
- 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
- pretends to be connected with the
- lies to you about the debt or the
- 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
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
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.
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
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
- 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).
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.