Consumer Debt and Bankruptcy FAQ
One of the most frequently asked questions I hear from people worried about paying off debts is "will I lose my home"? When someone is overwhelmed with debt and creditors are threatening legal action, it is helpful to know what the laws are that protect consumers from losing everything they own in order to pay off creditors. Here are some answer to frequently asked questions about debtors' and creditors' rights. This is intended to be a general outline and not legal advice. You should consult an attorney if you have questions regarding these issues.
Can I work out payment plans with creditors?
Many creditors are willing to work out terms for debtors to pay off the bills over several months. A creditor's cost of turning the account over to debt collectors, filing court actions, or pursuing other remedies may be higher than writing off the debt or the interest expenses on collecting the debt over a period of time. If you are worried that you have no negotiating power or lack the skills to enter into discussions with creditors, there are entities that can help you work out problems with debtors, and help you learn to manage your finances.
Creditors are calling my home, office, and friends. Is this legal?
The Fair Debt Collection Act enacted by the federal government sets limits on actions of debt collectors in their pursuit of debtors. This law does not apply to creditors who attempt to collect the debt themselves. Debt collectors cannot call you at unreasonable hours, cannot make calls to you or others if you have notified them in writing that communications must stop, cannot threaten you or use harassing techniques in an attempt to collect the debt, and must give you notice of the purpose of their communications. The law imposes sanctions on debt collectors who violate this statute. If you feel you are being unduly harassed, consult an attorney to determine if the actions of the creditor's agent can be stopped.
Are there some debts that I should pay before others?
If you don't make child support payments, or court ordered maintenance, you can be fined, be held in contempt of court and may even end up in jail.
Creditors with secured debts have the right to take the property back if payment is not made. The most common secured debts are mortgages on your home and car loans. If you don't make car payments, your car may be repossessed by the lender and sold for well below what you owe on the vehicle. You may be held liable for the difference between the sale value and the amount you owe on the loan, as well as the costs of the repossession, sale, and attorney's fees. If you don't make house payments, lenders can foreclose on the mortgage (or cancel the contract for deed). If you don't catch up on the payments in the time frame allotted by law, you can lose your house.
You are required by law to carry automobile insurance. A court can impose criminal penalties for failure to carry the proper insurance.
You can also face being cut off from services for failure to pay your electrical, gas, water, and other such utilities. A utility provider cannot cut you off from heat and electricity during winter months, and must give notice prior to cutting services.
A deputy sheriff just served me with a summons and complaint from one of my creditors. What should I do?
You must answer the complaint within the time allotted by law (the time frame should be stated in the summons. It varies by state.) If you do not answer, the court will grant a default judgment in favor of the creditor. If you have a valid defense for not paying the debt sued on, you can contest the complaint by filing an answer. If you agree that you owe the debt, you can attempt to negotiate a settlement with the creditor, or allow judgment to be entered against you in the amount requested by the creditor.
Once a creditor obtains a judgment against you, the creditor can collect the amount you owe by garnishment or execution, as set forth in the law. These are proceedings in which your assets, including your wages from employment, are taken from you in payment of the judgment.
Can the creditor take everything I own to collect the judgment?
No. State law protects a debtor from becoming destitute when a creditor collects a judgment. Certain property is exempt from execution or garnishment. Exactly what property and up to what value is exempt depends on your state of residence. It may be possible to keep your home and most of the furnishings, your wearing apparel, and your car. There are limits on the value of the property you can keep, so you may not be able to keep all of these assets if they are worth more than the law allows. Other assets you can keep, with limitations depending on the state, include life insurance proceeds, certain retirement benefits, property you use in your trade or farm business, some personal injury awards.
I just got a letter stating that my wages will be garnished. What does this mean?
If you have a job, are not or have not recently been receiving public assistance or unemployment compensation, and your income is over the poverty level, a creditor may be able to obtain a court order to have your employer take a percentage of your disposable income, as determined by state law and give it to the creditor in partial payment of your debt. You should receive a notice of the creditor's intent and have an opportunity to oppose the proposed garnishment.
Can I keep my assets if I declare bankruptcy before the creditor collects on the judgment?
Even if you declare bankruptcy, you may still have to give up your non-exempt property to pay off some creditors. There are different types of bankruptcy. Which one is right for you will depend on the nature of your assets and debts. Your non-exempt assets will be given to a trustee, who will convert them to cash. In one type of bankruptcy, creditors may receive cents on the dollar in payment of your debts, and your debts will be forever discharged. In another type of bankruptcy, the trustee will arrange a payment schedule for you to pay back the debts over a period of years.
Will all my debts be discharged in bankruptcy?
No. There are some debts that cannot be discharged, such as recent tax obligations, child support or spousal maintenance, or student loans. Additionally, creditors are allowed to petition the court for a ruling that certain debts are not dischargeable, such as recent purchases of non-essential items like vacations or debts incurred by fraud.
The information contained in this article is not intended to be legal advice or to create a contract between the reader and the author. The reader is encouraged to seek appropriate legal counsel and not to rely on the information contained herein.