PRIOR TO LAWSUIT When bill collectors call debtors, debtors often feel guilt, shame, and a sense of powerlessness. These emotions, along with a lack of legal information, often contribute to decisions that are contrary to the debtors' best interests. It is important for debtors to remain objective in evaluating their alternatives. We hope that by offering this information to the public, many consumers will be able to avoid making many of the common mistakes. DISPUTE BILLS WHICH YOU DO NOT OWE OR APPEAR TO BE EXCESSIVE Debtors who dispute owing a bill should do so by sending a letter to their creditor via certified mail. Obviously, debtors should save a copy of the letter, the proof of mailing and the return receipt (the "green card"). AVOID CONSOLIDATION LOANS & MORTGAGE REFINANCINGS In practicing bankruptcy law for approximately ten years, we have observed hundreds of people who deeply regret being unable to pay their debts. Many of our clients have told us that their creditors won't work with them to lower or stretch their payments. Many debtors allow feelings such as guilt to overwhelm them and loose objectivity about what is best for their family. Perhaps many people feel too ashamed to file bankruptcy until they have already inflicted substantial harm on their financial future because they took desperate actions in a losing attempt to avoid bankruptcy. IF YOU ARE CONSIDERING CONSUMER CREDIT COUNSELING, MAKE SURE THAT IT IS APPROPRIATE FOR YOU. Consumers should avoid any consumer credit counseling agency that advertises on television, the radio, etc. Established credit counseling companies do not need to advertise on television! The consumer credit counseling agencies that use high pitched sales or television advertisements often charge excessive fees or abuse the consumer's trust. Unlike the Standing Chapter 13 Trustee, the regulations concerning consumer credit counseling agencies are often insufficient to assure that the agencies actually disburse the funds to the creditors. Likewise, consumer credit counseling payment plans should be rejected if any creditor is simply deferring interest or principal. For more information on questions to ask about consumer credit counseling and how to determine whether you would benefit from consumer credit counseling, click here. ONCE A DEBTOR IS INSOLVENT, IT IS TOO LATE TO TRANSFER ASSETS? Once a debtor is unable to pay his or her debts as they become due, the debtor is insolvent. Many consumers have an deep emotional fear of filing bankruptcy, especially before they meet with an experienced bankruptcy attorney. For example, some consumers fear that they will not receive any credit if they file Bankruptcy. The consumer's fears are often greatly exaggerated. YOUR OPTIONS TO RESPONDING TO BILL COLLECTORS
THINGS TO CONSIDER IF YOU ARE WORRIED ABOUT BEING SUED BY YOUR CREDITORS
The vast majority of debtors should focus on retaining their house. Home "equity" loans or refinancings are rarely, if ever, appropriate to consolidate or pay off unsecured debts (e.g., credit cards). Most families in the greater Orlando area have little disposable income after paying for their homes and their motor vehicles.
If a consumer disputes a credit card or similar bill, the consumer should send a letter via certified mail to both the credit card issuer and the company that billed the consumer's account. The law allows the consumer only sixty (60) days from the date of the credit card statement to deliver the letter to the company that billed the consumer's account.
Probably the worst result of these ill informed choices are the refinancings of mortgage loans and "second" or "consolidation" loans which are secured by the debtor's home. Although the attempt to pay creditors is certainly commendable if one is still able, it is not a wise decision if it endangers the family home to loss through foreclosure.
Many debtors fall prey to mortgage brokers or finance companies that charge excessive fees and/or higher interest rates than the debtors could qualify for if they "shopped around". Certain groups, especially the elderly, women and minorities, seem to be targeted for predatory loans.
Debtors who consolidate loans secured by their homes often find that they are unable to pay their mortgage, car payment(s), the new "consolidation" loan and their normal monthly bills. In order to service the additional "consolidation" loan, many of these debtors use their credit cards for household purchases. These debtors often soon owe substantial credit card debt again but have substantially worsened their financial position because they now also owe a second mortgage. All too often, the lender's appraiser intentionally overestimated the purported value of the borrowers' home leaving the borrower with little, if any, equity in their home and the eventual purchaser of the junior mortgage without adequate security for the second mortgage. By signing away any equity in their home, many middle class families have dramatically compromised their ability to someday retire with dignity.
Sadly, far too many families wait to come to us for advice until after they have refinanced their home, have incurred substantial new debt and are behind on both mortgages. By the time they come to see us, many of them call the consolidation loan which was secured by their house the "worst mistake" that they ever made.
Some consumers, especially those with upper incomes, without children, or who owe less than six months take-home pay, find consumer credit counseling advantageous. For many people, the advantages of a consumer credit counseling program are exaggerated.
Some other debtors enter into consumer credit counseling programs and manage to repay their debts. The debtors who have sufficient income to actually pay off their debt in a reasonable time often prefer consumer credit counseling and gain the satisfaction of paying off their debts. For debtors that have sufficient income, do not procrastinate, and are willing to sacrifice in order to pay their creditors, consumer credit counseling is often a viable option.
Even successful consumer credit counseling plans adversely affect the debtor's credit. According to a mortgage broker, the mortgage lenders treat applicants who have completed a counseling plan which paid off the full amount of the debts the same as a Chapter 13 Bankruptcy.
A common problem with consumer credit counseling programs are programs that accept consumers who are not appropriate because they have insufficient income, owe too much, or have creditors that are unwilling to write off a substantial portion of the debt or reduce the interest rate.
We frequently represent clients in Bankruptcy who first sought consumer credit counseling and made their plan payments for a few years before discovering that their consumer credit counseling plan was only servicing the debt and the payments that they could afford were insufficient to pay off the debt in several years. Their "counselors" failed to inform them of the length of their plan and/or any amounts that the creditors would claim upon "completion" of their plan payments.
Consumers should request that the consumer credit counseling agency provide them with a written itemization of any charges, interest, or principal that will not be included in their payment program. For example, what debts will not be included in the payment program? Can you get my creditors to lower or eliminate interest and finance charges or waive late fees?
Another basic problem with consumer credit counselors is that they represent the interest of the credit card industry, not the consumers. The credit card industry provides much of the funding for many of the credit counseling agencies.
Consumer credit counseling agencies that solicit or offer consolidation loans or refinancings, especially loans secured by the debtor's home, should be avoided at all times.
If a major creditor refuses to participate in the payment program, debtors should treat the consumer credit counseling payment program with great skepticism. The debtor should amortize the debt to determine if the debtor is also financially able to pay off the uncooperative creditor "outside" the consumer credit counseling payment program. Few debtors are realistically able to do so and stay current with their other obligations.
If a creditor obtains a judgment against a debtor who transferred an asset to a friend or relative for less than reasonably equivalent fair market value, especially within the past three years, the creditor can request that the court set aside the transfer and seek additional sanctions.
If a debtor files Bankruptcy, the trustee can request that the Bankruptcy Court set aside the transfer, deny or revoke the debtor's discharge, obtain attorney's fees and costs, and other sanctions against the debtor. Under this scenario, a debtor could still be stuck paying a substantial portion of the debt because the trustee and/or creditor's legal fees are often a substantial portion of the proceeds from the sale of the concealed or transferred asset. The denial of the Bankruptcy discharge means that the debtor's Bankruptcy did not terminate the debt (including accrued interest) unless the trustee obtained sufficient funds to pay the creditors after paying trustees expenses.
Debtors who have substantial non-exempt assets that they want to retain can do so through Chapter 7 Bankruptcy by paying the Trustee in an abbreviated payment plan or through a Chapter 13 Bankruptcy plan that lasts between 36 to 60 months as selected by the debtor.
REBUILDING YOUR CREDIT AFTER BANKRUPTCY OR THROUGH CONSUMER CREDIT COUNSELING
Bankruptcy will remain on a debtor's credit record for up to ten years. But, delinquencies and not paying a debt will remain on their credit record for up to seven years. So even if a consumer's primary concern is to rebuild his or her credit, bankruptcy is often the most practical way to resume a more normal financial life. Even if a consumer was one of the consumers who would be able to pay off their debts through a consumer credit counseling program, many of these consumers could have acquired a better credit rating in less time if they had filed bankruptcy promptly and maintained their monthly payments to the creditors that they reaffirmed in their bankruptcy.
Perhaps the most important use of credit is to purchase a family home and a motor vehicle. These are consumer durables that are appropriate for financing with long-term credit.
The impact of Bankruptcy on a credit record will vary according to the lender, the debtor's income, the debtor's post-bankruptcy payment history, and the debtor's other financial obligations (e.g., payments to secured creditors, non-dischargeable debts like child support, and the obligations that the debtor incurred since the bankruptcy).
For many moderate to middle income debtors, the debtor will be classified as "sub prime" financing if the debtor seeks to borrow money to purchase an automobile within two years of the Bankruptcy filing. Traditionally, these were the consumers that shopped at "buy here-pay here" car lots until the established dealerships began offering sub prime loans.
The largest purchase for most consumers is their home. According to a syndicated article published in the Orlando Sentinel, at least one of the large pool operators will allow borrowers access to their program (e.g., Freddie Mac) if the debtor has maintained a perfect payment history for a period of five years after filing a Chapter 7 Bankruptcy or three years after completion of a Chapter 13 Bankruptcy Plan.
There are reasonable ways for many families to purchase homes even faster than that. The law firm's progress letters includes information on rebuilding the client's credit and how to shop for a home mortgage even within 6 months of the conclusion of a client's Chapter 7 Bankruptcy.
We hesitate to encourage debtors who have filed Bankruptcy to incur any new debts after the Bankruptcy for fear that by obtaining credit cards, there is a greater risk that the debtors will incur new obligations that they can not repay.
But, re-establishing credit is not as difficult as many of our clients believed prior to filing Bankruptcy. For example, we have observed creditors' representatives passing out credit card applications at the meeting with the bankruptcy trustee and the creditors! Some of our clients obtain "secured cards" to establish a payment history. Some debtors in Chapter 13 Bankruptcy have refinanced their homes while still in Chapter 13 Bankruptcy. If the Chapter 13 debtor has made twelve (12) timely payments to the Chapter 13 Trustee and does not seek to withdraw equity from his home, the debtor is often eligible for the Ginnie Mae rates.
Many of our Bankruptcy clients are able to avoid "secured cards", subprime car loans, and other predatory lending practices, continuing to make timely payments for their mortgage(s) and/or vehicle payments after they discharge their other debts in Bankruptcy. This usually establishes a "new" credit history fairly soon after they complete their Bankruptcy. Again, the substantial problems that debtors fear arise when debtors need credit soon after their Bankruptcy (generally within two years) and can't demonstrate at least twelve on-time payments to a major creditor (e.g., a mortgage or a car).
Creditors' threats to file a lawsuit are often very intimidating. But, many threats are just that --- threats, many of which are never carried out. Debtors should exercise rational judgment by not sending money to creditors simply because they threaten to sue or have filed a lawsuit.
When debtors are sued, it is essential that the debtor answer the lawsuit within the time period stated on the summons.
In reviewing a complaint, a defendant debtor should respond to each allegation. If the plaintiff creditor did not attach a copy of the contract upon which the action is based, the defendant debtor should pursue this and consult with an attorney if the plaintiff is attempting to conceal fraud.
Many consumers have meritorious claims against their creditors and don't realize that they have grounds for suing their creditors. Debtors can pursue their claims against their creditors even after the creditor has served the debtor with a lawsuit. But, it is extremely important for the debtor to seek legal counsel who is experienced in consumer law to evaluate the debtor's potential counter-claims. If an attorney recommends bankruptcy without some evaluation of the consumer's legal alternatives, the consumer should be wary of that attorney.
If a consumer believes that he or she does not owe the money or may have a defense or counter-claim against the creditor, it is extremely important for the consumer to consult with counsel. Failure to assert these counter-claims or defenses within strict time limits may preclude the debtor from raising them later.
Our office is usually willing to review certain types of lawsuits for counterclaims against the lenders. Presently, we frequently offer brief consultations without charge for the purpose of evaluating potential counter-claims which often arise in the following situations:
There are many other factual patterns that may afford the debtor relief under debtor-creditor, lending or other consumer laws. If a debtor has a good faith reason for believing that he or she does not owe the debt, we encourage the debtor to call and provide a concise summary of the facts supporting this belief. The law firm's intake staff will provide a brief summary about your case to the attorneys. If the attorney believes that it is reasonably likely that they may be able to help the consumer, the attorney may recommend follow-up.
EFFECT OF A JUDGMENT AGAINST THE CONSUMER
If the debtor loses the lawsuit, the court will enter a judgment against the debtor for the amount of the debt, pre-judgment interest, court costs, and, if allowed by contract, the creditor's attorney's fees. The judgment will bear interest thereafter.
The creditor's attorney will usually subpoena the debtor to a deposition in aid of execution. The purpose of this deposition is to ascertain what property the debtor owes and the amount and sources of the debtor's income.
The creditor's attorney will probably immediately file a certified copy of the judgment in the property records for the county where the debtor owns any real property. If the judgment is recorded against the debtor's homestead and the homestead qualifies for the exemption from forced sale, the creditor will not be able to force the debtor to sell his or her home to pay the judgment. However, the creditor can continue to record the mortgage so that it will be effective for a period of twenty years during which it will continue to bear interest. The interest is often very substantial. For example, a judgment bearing interest at 12% will double in just over five years.
The creditors may also attempt to garnish the debtor's paycheck. Florida law affords some judgment debtors limited protection from garnishment --- if a judgment debtor is the "head of a household", the judgment debtor may exempt up to five hundred dollars ($ 500.00) per week in take-home pay. A debtor is the head of household if the debtor provides over one half of the support to a defendant.
If the debtor's spouse is also liable for the debt, both spouses will seldom qualify for the head of household. Creditors will typically be able to garnish at least one of the spouse's paychecks. Creditors are usually allowed to garnish up to 45% of the debtor's paycheck.
Even the debtors who are not subject to garnishment often chose to file Bankruptcy because they recognize that eventually, their children will grow up and then they will owe a substantially greater amount of money to the creditor because the judgment continued to accumulate interest for many years.
WHEN TO CONSULT WITH AN ATTORNEY
Debtors who are unable to pay their regular monthly bills and are considering "consolidation loans", home refinancings, second mortgages, or consumer credit counseling should consult with an experienced consumer protection attorney before entering into any of those transactions.
If the debtor is being sued by a creditor, we recommend that consumers consult with us concerning the effect that the lawsuit may have on their property as soon as possible after receiving the summons and complaint.
Often Bankruptcy is the most practical option but, as noted above, many clients have potential counter-claims or defenses. The law firm is committed to evaluating our potential clients' non-bankruptcy alternatives when it may be practical for the client to pursue such remedies.