For informational purposes only. Always consult an attorney to obtain competent legal advice.

 

Bankruptcy & Debt Collection

Bankruptcy Law

 

In General

  • The federal Bankruptcy Act is one of the oldest federal laws in the U.S., dating back to 1898. At common law, Debtors unable to pay their just debts could be incarcerated in a “debtor’s prison” and thereby became wards of the state. Under the Bankruptcy Act, a Debtor unable to pay his or her debts and who has little or no assets is entitled to have the debts wiped out, or “discharged”, resulting in a “clean slate” for the Debtor.

  • There are some exceptions. In general, a Debtor is not entitled to a discharge of alimony, child support, fines, student loans (in most cases), or judgements for restitution stemming from criminal charges. 

  • Also, for any assets pledged as collateral for a debt to be discharged -- such as a mortgaged house, or a vehicle in the case of a car loan -- that asset must be surrendered unless the Debtor agrees to keep paying that debt.

  • Also, if the Debtor owns assets in excess of the exemptions limits allowed under the law, those excess assets will need to be surrendered to the bankruptcy Trustee, who will then divide any assets among the Creditors.

  • Bankruptcy is a federal law and takes place in the federal Bankruptcy Court.

  • Every bankruptcy case has a "Trustee" assigned to oversee the case from beginning to end. The end of any bankruptcy case is either discharge of debts or dismissal of the case.

  • Once any bankruptcy case is filed, the "automatic stay" provision requires all creditors to cease all collection activity until further order of the Court.

 

Types of Bankruptcy Petitions

Chapter 7 filing:

  • A Chapter 7 bankruptcy is the most common bankruptcy filing for individuals who have little or no assets to surrender. This filing results in a discharge of all eligible debts. All of the debtor's assets and debts and creditors must be listed on the bankruptcy petition.

  • Most Chap. 7 filings are “no asset” cases in which none of the Debtor’s assets are surrendered. Ordinarily, a discharge of all debts will take place within 90 days of filing.

  • A single Debtor can expect to pay $1,500 to $2,000 for attorney fees, filing fees, and the required credit counseling fees. A joint petition for a married couple with common debt may be higher. Shop around -- fees vary.

Chapter 13 filing:

  • A Chapter 13 is a temporary plan typically filed by a consumer who may not be a good candidate for a Chapter 7 filing. For example, the consumer  may have substantial assets that he or she does not wish to surrender.

  • The Chapter 13 allows time for the Debtor to put together a "recorganization plan" whereby his or her Creditors will be paid all or a portion of the debts owed. If the plan is completed, the Creditors are paid and the case is closed.

  • On the other hand, if the Debtor is unable to carry out the repayment plan, the Chap. 13 may be converted to a Chap. 7 so that any excess assets are forfeited and the remaining debts discharged.

  • Fees charged for a Chap. 13 (for the Debtor's attorney and bankruptcy Trustee) are ongoing as long as the plan continues, and can thus become quite expensive. Therefore, it is wise to avoid a Chap. 13 filing unless the Debtor has a realistic plan for repayment that can be completed in the near future.

  • A Chapter 11 is also a reorganization plan, but is for businesses instead of consumers.

 

Effect on Credit Score of Bankruptcy Filing

  • Many Debtors considering bankruptcy want to know how long a bankruptcy filing will affect their credit rating. The answer to this question depends upon the current standards used to calculate a Debtor’s "FICO" score, which is used by the 3 major credit bureaus: TransUnion, Equifax and Experian.

  • In general, a bankruptcy filing will have the effect of lowering a Debtors credit score for a term of years (4 years in some cases). No matter what the Debtor’s FICO score is, it is up to any potential lender that a Debtor is seeking credit from to determine whether it will extend credit to a given borrower and upon what terms.

  • For example, following the Financial Crisis of 2007-2008, so many consumers filed for bankruptcy that many lenders modified their criteria for lending to lessen the time that a borrower would need to wait after filing for bankruptcy before applying for credit.

  • Also, many Creditors recognize that a Debtor may actually be a better credit risk after obtaining a discharge of debts in a Chapter 7 filing. Such a Debtor would have less debt compared to income and would be prohibited by bankruptcy laws from obtaining another Chapter 7 discharge of debts for 8 years.

 
 

Creditor and Debtor Law

 

In General

  • When a person owes a debt to another and fails to pay according to the terms of the debt -- because of job loss, unexpected medical expenses, or other reason-- collection of the debt is governed by a combination of federal and state law.

  • The person owing the debt, or “Debtor”, may be a person who borrowed money from a "Creditor", or may be a co-borrower or a person who personally guaranteed the debt of the borrower. In either case, the Debtor owes the principal amount of the debt as well as any interest and late charges provided by contract that are allowed by law.

  • State law governs most collection activity to acquire property that was pledged as collateral for “secured” loans that have gone into default. Such activity includes foreclosures of mortgaged real estate and repossession of vehicles for auto loans.

  • The federal Fair Debt Collection Act as well as state law govern many types of collection activity for “unsecured” debt, such as credit card debt and store charge accounts.

 

Resale of Delinquent Debt

  • Especially in the case of unsecured debt, if the original “Creditor” is unable to collect the debt by a certain number of months, the Creditor will often sell the debt for cents on the dollar to a new Creditor that will then make an effort to collect some amount on the debt. If unsuccessful, the debt may be sold for less cents on the dollar to another Creditor, which begins the cycle all over again.

  • Thus, it is not unusual for a Debtor to receive, over time, multiple demands of payment from multiple Creditors for the same debt. Ordinarily, several months will pass before a new Creditor sends a new demand letter. In these cases, Debtors can become confused as to which original debt is being collected and the amounts being claimed.

 

Federal Fair Debt Collection Act

  • Under the Fair Debt Collection Act, typically a 30-day letter will be sent to a Debtor that demands payment of a fixed amount and also informs the Debtor that he or she has 30 days in which to contest the amount of the debt being claimed.

  • In order to have a clear understanding of the amount being demanded, the Debtor should always send a written letter contesting the debt and demanding a complete itemization of the amount claimed as well as the identity of the original Creditor (if this is not clear from the letter). Always sign the letter and keep a copy of the letter you sent.

  • Sending the letter by certified mail is not required, but is an excellent way to prove that the letter was sent. Always keep the white date-stamped receipt and the green card returned by the post office. If the demand letter only has a Post Office Box number, call the toll-free number to get the mailing address of the creditor.

  • A Debtor should never rely on anything said over the phone by an employee of the creditor or the creditor’s attorney’s office, especially if a court hearing is scheduled and the debtor is told that he or she “need not appear”. Get any such  representation in writing.

 

The Legal Process of Debt Collection

  • If demand letters and phone calls to the Debtor fail, a Creditor has the option of filing a law suit

  • If the debt is less than $10,000, the law suit may be filed in the District Court; if over $10,000 the suit must be filed in Superior Court.  

  • A Debtor should have notice that a law suit was filed against him or her because he or she needs to be "served" with the Complaint and Summons by a state sheriff or constable.

  • Once served, the Debtor has 20 days to file an "Answer" with the court or a "default judgment" may be entered. If this occurs the Debtor will typically receive no further notice of court dates, or will receive notice after it may be too late to do anything.

  • After the Debtor has been served, the Creditor's attorney  will seek entry of "judgment" for a fixed amount. Once judgment is entered, the attorney can seek an Execution, which is then served on the Debtor. If the Debtor cannot pay the Execution amount, the attorney can proceed to "supplementary proceedings" in order to attach assets and/or garnish the wages of the Debtor.

  • If the amount demanded in the demand letter or law suit is accurate, the Debtor should contact the Creditor to see if a realistic repayment arrangement can be worked out. Do not agree to repayment terms that are unrealistic.

  • If you can't afford the repayment terms demanded by the Creditor, attend every court hearing and explain this to the judge. At some point in the process, you will be afforded an "ability to pay" hearing where the Creditor can ask you questions about your income and expenses. Based upon this information, the judge may decide that your ability to pay is much less than the amount being demanded by the Creditor. For example, the Creditor may be demanding payments of $400 per month, but the judge may find that your ability to pay is limited to only $100 per month. 

  • If you can borrow money to pay the debt in full, ask the Creditor for a reduced lump-sum payment option. Creditors are almost always willing to take a lesser amount in the near future rather than small amounts over time.

  • The important point is to never miss a court date. Nothing good will result from your failure to appear in court.

 

Bankruptcy Option

  • An attorney can advise a Debtor on the feasibility of filing for bankruptcy in order to eliminate the debt entirely (see Bankruptcy Law topic, above); or can often negotiate better terms of repayment, especially if the Creditor does not have proper documentation needed to prove the amount of the debt.

  • Also, a Debtor that feels his or her credit report contains inaccuracies has remedies under the federal Fair Credit Reporting Act (FCRA). 

 

Rhode Island Laws Governing Credit Card Interest & Fees

  • Under Rhode Island laws, virtually any provision in a credit card agreement is permissible. As long as the agreement spells out the method of calculating interest, late fees, administrative fees, and any other fees, the consumer is generally on the hook.

  • In effect, the Rhode Island usury law that limits interest rates charged to 21% per year, do not apply to credit agreements between a Rhode Island resident and a credit card company that is incorporated in another state, such as Delaware.

  • The bottom line: do not enter into a credit agreement unless you absolutely trust the Creditor. Carefully reviewing the credit agreement is another option; but realistically consumers will not take the time to read the fine print, and even if they do they likely won’t understand exactly how interest, late charges and penalties will be applied.

  • Pay particular attention in the agreement to the interest rate and fees that can be charged in the event of a “default” and exactly what constitutes a “default”. If it seems like the Creditor can charge exorbitant fees for even a simple late payment, or two late payments in a 12-month period, beware.

 

Disputing Credit Card & Finance Charges

  • If you do enter into a credit agreement and at some point feel that you are being charged excessive interest and fees by your credit card or finance company (for example, a company that financed your “no money down” purchase of furniture), you should immediately do two things.

  • First, send a written dispute of the charges and keep a copy of the letter for your records. When doing this, strictly follow the instructions in the credit agreement for disputing a charge.

  • Second, rather than gearing up for an expensive legal battle with an uncertain outcome, try to pay off the account right away, even if you need to do this by transferring the balance to a new credit card. If so, be very careful to not be late on a single payment on the new card and pay down the balance as soon as possible. There is no pre-payment penalty for paying off a balance, so this is always an option. After you have paid off the balance, you can continue to dispute any charges you feel were excessive.

  • Simply sitting back and not paying the disputed charges is the worst response because more interest and late charges will continue to accrue and you will soon have double the debt or more and the possibility of adverse reporting on your credit report.

  • If you were a victim of “identity theft” whereby you did not make a purchase that appears on your statement, report it to your credit card company right away. Ordinarily you will not need to pay these amounts and the matter will be resolved. But always follow through until the matter is fully resolved in your favor. Occasionally, reports surface in the media of how innocent victims lives’ are turned upside down through no fault of their own.

 

Credit Reports & Credit Scores

  • A consumer’s credit score is used to determine the interest rate charged for many types of loans and credit accounts. A low credit score can cost a consumer thousands of  dollars in interest payments over time.

  • Under federal law a consumer has the right to examine his or her credit reports from each of the three major credit reporting agencies and can challenge any information that may be inaccurate. The agencies must investigate all such claims and correct the credit report and adjust the consumer’s credit score if errors are found.

  • By law, a consumer has the right to obtain one free credit report per year from each of the three major credit agencies (TransUnion, Equifax and Experian). The website annualcreditreport.com was established for this purpose. (Beware: similar sounding websites charge fees.)

  • Any consumer with substantial debt should avail themselves of this free service to ensure they are not overpaying for debt due to inaccuracies resulting in a lower credit score and higher interest payments.

  • Other services are also available, often for a fee, to automatically alert a consumer of any adverse reporting to their credit report, which can be useful in discovering identity theft. 

 

Pay Day Loans & Pawn Shops

  • The effective interest rates of these short-term loans are exorbitant -- far more than credit card companies charge. These lenders prey on the desperate, who are often caught in a cycle of debt from one paycheck to the next, never being able to free themselves from paying sky-high interest rates that they are least able to afford. At all costs, avoid these options.

  • As of 2016, federal law is being proposed to curtail the excesses of the payday loan industry.

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Copyright 2019.  All content copyright of Kenneth Kando. No content may be

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