Debtor Protection

You have the right to be free from harassing and abusive collection practices. Collection firms are restricted from performing a variety of collection practices. Those practices are often threatening, false, misleading, and can cause serious distress from harassment. Find out whether they violated any laws by calling our firm for an in-depth evaluation and investigation. 

 

Violations by debt collectors are punishable by:

 

  • $1,000.00 fine payable to You

 

  • Attorney fees awarded to You

 

Consult with an attorney to find out if a debt collector has violated Your Rights.

 

Call Now: 419-536-8600

A Guide to Your Rights

Follow These Rules for Surviving Debt


Rule #1: Prioritize Debts Whose Non-Payment Immediately Harms Your Family Non-payment of certain debts have sudden and dire consequences for your family. Either pay these debts first or talk to an attorney. High priority debts are those which can impact where you live and your livelihood. Som examples of high priority debts include: ● Court Judgments. You have been sued on a debt and a court has ruled for the creditor. The creditor has rights to seize part of your wages, bank accounts, and even your home or other property. ● Criminal justice debt. In some cases, non-payment of debt arising from a criminal proceeding (such as fines, fees, and costs) can lead to immediate loss of your driver’s license, loss of income or assets, or even incarceration. ● Auto loans. Nonpayment of car loans or leases can result in a creditor repossessing your car after you miss only a few payments. ● Rent. Rent payments for your residence (or for the lot on which your manufactured home sits). Swift eviction can result if you do not keep up these payments. ● Utility bills. Non-payment of utility bills can lead to termination of gas, electric, water, and other utility service. ● Child support debts will not go away and can result in very serious problems, including prison, for non-payment. Other debts become a high priority debts as those detailed above, and then must be addressed immediately. Most notable are: ● Home mortgage delinquencies. Miss a month or two and you are unlikely to face foreclosure, but if you get behind by enough months, you face loss of your home. In some states this can happen without a court hearing. There are ways to delay and fight foreclosure. ● Real estate taxes. If you do not have an escrow account with your mortgage lender you are responsible for paying your own property taxes. While non-payment of property taxes will not result in the immediate loss of your home, at some point your home will be subject to a tax sale. ● Federal student loans are not in default until you are nine months behind on payments, but then you risk seizure of your tax refund and your Social Security or other federal benefits, wage garnishment without a court order, and denial of new student loans and grants. ● Taxes owed to the IRS. Be aware the IRS can seize your bank account, part of your paycheck and federal benefits, and even your home. Lower Priority Debts. Debts that are low priority should not be paid ahead of high priority debts. Some low priority debts include: ● Medical debt, such as payments due hospitals, doctors, other medical professionals, dentists, and ambulance companies. It is not likely to carry high interest. They cannot seize your home or garnish wages or take other benefits without a judgment. ● Credit card debt. You will not be subject to seizure of bank accounts, income, or property unless they obtain a judgment after suing you. Debt collection contacts can easily be stopped. ● Debt owed friends and relatives. ● Private student loans. These loans typically do not involve collateral, and special remedies available to the government to collect federal student loans do not apply to private student loans. Rule #2: Do not allow a creditor to tell you how to prioritize paying debts. Understand that debt collectors will call and write letters pressuring you to pay their debt first. However, if you neglect a high priority debt just because a low priority debt collector persistently calls you, it could have the effect of further imperiling your livelihood and your property. Decide for yourself with the advice of an attorney which debts are the highest priority. Similar to the issue of debt collector contacts, do not let your credit report decide which are prioritized. Your credit report does not directly impact your income or your property. It effects your ability to obtain credit in the future. If you feel obligated to pay a debt, that is different from determining which debts can have an effect of taking away your property. Rule #3: Consider the long term, not just the short term. If you cannot pay everything, try to delaying can sometimes allow you to bridge the gap to your next payment. We note that you must be careful and again, use the advice of counsel on any impact that delay could have. These are difficult decisions. Once the choice is made, stop making payments on that debt in favor of other pressing items. It is not a good idea to continue paying a debt on property that you will eventually lose anyway. You can save the money to pay for alternative housing or transportation. Rule #4: Do not be suckered in by scams and con-artists making false promises. Many credit repair companies, debt management companies, banks, creditors, and scam artists target those in financial difficulty for some of the worst abuses. Scams to avoid, include: ● Debt elimination scams promise for a fee to eliminate your debts completely—these are all bogus. ● Debt settlement agencies charge high fees and rarely help you settle your debts with your creditors. ● Foreclosure rescue scams offer to save your house but end up stealing it. ● Reverse mortgages that do not meet federal “HECM” standards can get you into big trouble. ● Credit repair charge to clean up your credit record, but you can do it better yourself for free. ● Small loans such as payday, auto title, and installment loans have extraordinarily high interest rates. Walk away from any loan with a disclosed annual percentage rate (APR) more than 200%. Also watch out for loans that add charges for insurance. Auto title loans also put your car at risk. Rule # 5: Determine if a bankruptcy is right for you. Understanding when and if to file bankrupcty can be one more tool in your belt. Many people are reluctant to file bankruptcy because they feel a stigma attached to it. There is no stigma - fortune 500 companies file for bankruptcy often. Bankruptcy is effective dealing with court judgments, stopping wage garnishment, bank seizures and enforcement of judgment liens. It protects household goods collateral. If bankruptcy discharges a debt whose non-payment led to suspension of your driver’s license, you get your license back. Bankruptcy Costs. It is best to hire an attorney help you file bankruptcy. Sometimes you can find a legal services or other attorney who will not charge you. The bankruptcy court charges a filing fee of more than $300, but you can spread this fee out over several months and in some cases it can be waived. Common Misconceptions. Despite what you might think, typically you lose little or no property in bankruptcy. Bankruptcy may not hurt and may even help your standing with creditors. Your reputation in the community is unlikely to suffer. Housing authorities, licensing departments, and other government agencies cannot discriminate against you for having filed for bankruptcy. When to File Bankruptcy. Bankruptcy is not really a “last resort” for those in financial trouble. Legal rights can be lost by delaying a bankruptcy. Get early advice about bankruptcy if you are concerned about saving your home or your car or protecting your bank account or wages from seizure. Rule # 6: Call a lawyer. Do not try to manage everything alone. Lawyers and particularly lawyers that practice consumer protection, understand the law better than you do. While your attempts to protect yourself may be exemplary, obtaining an advice from a professional who understands the law is your best option. Always.




How To Talk to Debt Collectors (and what not to do)


-Always be professional. There is no reason to yell, swear or engage in conduct that would not be acceptable in a courtroom. The reason I say that is because debt collectors often record phone calls. Sometimes those phone calls are played in trial. - Do not be pressured by a debt collector. Make your own choices about which debts to pay first based on what is best for you. The most common reasons most people cannot pay their bills are job loss, illness, divorce, or other unexpected events. And, creditors and collectors know this. The debt collector’s job is to try to convince you to pay their debt first. Your job, however, is to make the right choices for you and your family. - Do not let a debt collector tell you what they can do. Just because they threaten you does not mean the threat is true or that they are being honest. Consulting with an attorney is the best way to find out your rights and protections. A debt collector is not necessarily going to tell you information that is helpful to you and prevents their ability to collect the debt. - Do not give the debt collector your personal information. There is no need to give the debt collector your social security number or other private information on a call. Sometime they will claim it is necessary to verify who you are or pull up an account. However, if that information falls into the hands of a scam artist, the risk to you is too great. - Investigate the collector. Do they really own debt that you must pay? Did they really obtain an assignment of a loan that you took out? Just because they are aware of a debt you took out with a different creditor does not mean it is their debt to collect. - Send a "stop contact" or "cease" letter to the creditor. The simplest strategy to stop collection harassment is to write the collector a “stop contact” letter, also called a “cease” letter. Then the collector can only acknowledge the letter and notify you about legal steps the collector may take. Make sure the letter is sent certified mail return receipt requested so that you have proof of it being sent. Below is a sample letter: [Your name] [Your return address] [Date] [Debt collector name] [Debt collector address] Re: [Account number for the debt, if you have it] Dear [Debt collector name], I am responding to your contact about an alleged debt you are attempting to collect. You contacted me by [phone/mail], on [date]. You identified the alleged debt as [any information they gave you about the debt]. Please stop all communication with me and with this address about this alleged debt. Thank you for your cooperation. Sincerely, [Your name] Important: Even if debt collector stops contacting you because of the letter, you will still owe the debt. Keep a copy of the letter and send the original by mail, return receipt requested. If a debt collector still continues to contact you, send another letter and once again keep a copy. - Be wary of making small payments on old debts. Creditors can only collect debts for a certain amount of time. After that, they are barred from collection. If you make a payment, that restarts the clock on when they can collect. - Keep records of all contacts. Hold onto all creditor letters, keep all phone records. If you have an app on your phone that records calls automatically, hold onto the call recordings. If the collector engages in harassing or illegal conduct, it is difficult to dispute whether they engaged in the conduct if there are recordings, records.




Credit Report - What You Need to Know


Knowing how a credit report works and how it affects a family is critical in allowing families to make the right choices in dealing with their debts and other obligations. This chapter explains how information gets into your credit report, what information is in your report, who sees it, and how it affects your life. Your credit report is a record of how you have borrowed and repaid debts. Almost every adult American has a credit file with each of the three major national credit bureaus: Experian, Equifax, and TransUnion. Each account includes a code that explains whether the account is current, thirty days past-due, sixty days past-due, or ninety days past-due, or if the account involves a repossession, charge off, turned over to a collection agency, or other collection activity. The report will also list under “inquiries” the names of creditors, employers, or insurers who have requested a copy of your credit report during the past year or two. It also includes creditors who have looked at your account to decide whether to send you an offer of new credit, but other creditors do not see this last item. Many creditors will not even review all of this individual information in your account, but will only look at your credit score, which is a number that summarizes all the individual items in your credit report. There is no one scoring system that all credit bureaus and creditors use, but about 90% of the credit scores used by creditors are issued by FICO. A FICO credit score ranges from 350 to 900. FICO considers the following as detracting from your credit score: ● History of missed payments (about 35% of the score). ● High debt in comparison to your credit limits (about 30% of the score). ● Small number of years of credit history (about 15% of the score). ● Opening too many new accounts (about 10% of the score). ● All credit of the same type (about 10% of the score). Consumers are rightfully concerned about their credit score, but you should not respond to debt collector pressures by paying overdue low priority debts ahead of high priority ones just because of these concerns. An overdue bill may damage your credit score but very often the damage has already happened by the time a debt collector is threatening you. For credit card debt and other debt payable on a monthly basis, the creditor will report the status of the debt to credit bureaus every month. The biggest impact on your credit score will be when the debt is reported as 30 or 60 days overdue. When your account is referred to a collection agency, and the collection agency reports the debt to a credit bureau, your credit score will take a big hit. Continued non-payment after that will not change your score nearly as much. By the time you are being contacted by a debt collector, it is too late to do much about your credit score—rushing to pay the debt won’t really help your score. As a result, worry about your credit score should not be a reason to pay a late bill. Responding to the collector’s pressure may not help your credit score, but it will put at risk payments on higher priority debts, whose non-payment will have far more serious consequences. Also, if you pay off a debt that was already reported by a collector, the collection item will show in your report as “paid,” but your credit report will still show that the debt was in collection. If you want that information removed, you must get the collector’s written agreement to delete it and not all collectors will agree to do so. Typically, hospitals, doctors, and other medical providers will not report your debt to a credit reporting agency. It is only if and when a medical debt is turned over to a collection agency that many—but not all—collection agencies will report the overdue debt to a credit bureau. In addition, the three major credit bureaus have agreed not to include any report on medical debt if that debt has been outstanding for less than six months. Reporting of a medical debt over six months will hurt your credit score. But after that first report, continued non-payment to the collection agency will not affect your score much. Most negative information stays on your credit report for seven years, and then the credit bureau must remove it from your report. Bankruptcies stay on your report for ten years from the date of filing. While your credit report will affect you in a surprising number of situations, it will not affect many other aspects of your life. You can expect that your report will be viewed by the following: ● Creditors when you apply for credit. A low score can mean you will be denied credit or pay a higher interest rate. ● Employers in most states to evaluate you for hiring, promotions, and other employment purposes. ● Government agencies trying to collect child support and when considering your eligibility for public assistance. ● Insurance companies using special credit scores for homeowners and auto insurance. ● Landlords when deciding whether to rent an apartment to you. ● Utilities are more commonly reviewing your credit score to determine whether to charge you a security deposit—not as to whether to provide you service. Your credit report should not be a problem in the following situations: ● Your application for federal student loans and grants. Except for parents, graduate students, and professional school students applying for PLUS loans or anyone applying for a private student loan. ● Your credit report will not damage your friends or relations, and need not even affect your spouse. For example, a creditor is not allowed to look at your credit record if your spouse, child, or parent applies for credit and they are not relying on your income or assets. ● Your reputation in the community. No one can obtain your credit record for curiosity, gossip, or to determine your reputation. Your credit record is just between you and creditors—your neighbors and friends should never see it. ● Divorce, child custody, immigration, and other legal proceedings. Your credit report shouldn’t be used in proceedings such as applications for citizenship or to register to vote. When you have unpaid bills damaging your credit score, the last thing you want is inaccurate information in your credit file making matters worse. It is amazingly common to find incorrect information in your credit file, and you can take steps to correct this information. After reviewing the report you received from each of the three major credit bureaus, send a written dispute to each credit bureau that has reported incorrect information. The credit bureau by law must investigate the entry and correct the mistakes. You can also dispute the error with the creditor that supplied the incorrect information to the credit bureau, but you should always make sure you dispute it also with the credit bureau in order to preserve your legal rights. Even if the credit bureau told you they are making the correction, after a period of time obtain another credit report to see if the correction was actually made or whether it has popped up again. If your debt is in fact delinquent, you can try to improve your credit report by entering into an agreement with the creditor to pay all or some of the debt, up front or in installments. But you should get the creditor’s written agreement to inform the credit bureau to delete any reference to the debt ever being delinquent—otherwise the fact that you were previously delinquent will stay on your report. Another option is for the creditor to agree not to affirm the debt after you dispute it with the credit bureau. The bureau must remove the information if the creditor who supplied it does not affirm it is correct. Rebuilding Your Credit Do Not Rush Into New Credit Just to Build Your Credit Score. It is tempting to rebuild credit by getting new credit and making timely payments. You should not start trying to get new credit during times of financial difficulty simply to improve your credit report. This is likely to take your attention away from paying high priority debts first. Definitely do not obtain credit from a creditor advertising “easy credit” or “no credit history required.” Many of these offers are rip-offs from lenders preying on consumers who fear that they cannot get traditional forms of credit. One of the most important steps you can take to cope with a bad credit history is to avoid getting deeper in debt during the bad times. Once you get back on track, each year your older debt problems will have less of an impact on your ability to obtain credit. Seven years will come around sooner than you might think, and then there will be no record of those past problems at all. If your financial problems are behind you, your credit record problems will not go away immediately. Be patient. Your credit profile will improve over time. Establish New Credit Accounts (with Caution). You can improve your credit by getting new credit and paying it back on time. But be careful. Avoid causing yourself more problems by getting unaffordable high-rate credit. One way to avoid this trap is to wait until you are offered a credit card with reasonable terms. You may get credit card offers even though you have a negative credit history, but these offers may be for expensive subprime cards that offer little credit and charge high fees.




Collection Lawsuits: What to Expect and What You Can Do


Debt collectors have to pay fees and costs to sue you. Will they do it? If you are in default on a debt, the creditor can sue you to collect the money owed. Sometimes a creditor will be hesitant to sue because of costs associated with litigation. The following may indicate that a collector will not sue: ● If your home or car is collateral on a loan, the creditor is more likely to foreclose or repossess than sue. A lawsuit is slow, expensive, and may not even succeed in recovering money from the defendant. Home mortgage and auto lenders instead will seize their collateral and sell it. ● Many collectors rarely sue on debts under $1,000 and some don’t sue unless a debt is much higher than that. ● If you dispute the debt and threaten to raise a reasonable defense. The collector not only has to factor in the value of your claim, but also the time and expense to resolve the case. Can You Win the Lawsuit? It depends. In some cases, you may be able to successfully defend against a suit. You will lose any lawsuit if you do not respond to the lawsuit properly. If you do respond properly within time deadlines, and raise reasonable defenses, you have a good chance of winning or of the creditor dropping the lawsuit. The stronger your defenses, the better your chances. Collectors also pay little attention when they file lawsuits to collect on consumer debt. Their paperwork is often sloppy or incomplete. Pointing out these errors can throw the lawsuit out. Whether brought by the debt buyer or original creditor, trying a case may cost the collector more than they could ever recover and just by contesting the case you can lead them to dropping the lawsuit. How to Respond to a Collector’s Lawsuit CONSULT WITH AN ATTORNEY. The best way to find out whether you can defeat the suit is to speak to an attorney to find out your legal rights. Respond promptly. Do not ignore the suit. There are deadlines in place that require you to answer within a certain period of time or the debt collector will automatically win. Common Defenses to Raise The facts of each case are different, and each state has its own laws. Here are some common defenses: The Lawsuit Was Brought in the Wrong Court. If you are not sued in the county where you live or where you signed the contract with the creditor, the action is illegal because it was brought in the wrong court. The Collector Has Not Proved It Owns the Debt. The collector has the burden to prove not only that you owe the money, but that you owe the money to this collector. If it cannot do so, you should win the case. Many collection cases are not brought by the company to which you first owed the debt (such as a credit card issuer), but by someone who has allegedly bought the debt, called “a debt buyer.” Ask that the debt buyer prove that your debt has been properly transferred to it. Amazingly, debt buyers often do not have that proof. It may produce a document indicating it bought thousands of accounts and state that the list of those accounts, including yours, is on a computer tape. This is meaningless until the debt buyer produces the computer tape and shows that your account is one of the accounts on that computer tape. The Collector Has Not Presented Your Credit Contract in Court. Collectors often sue you based upon a contract you entered into with the creditor and then ask the court to make you pay not just the amount owed, but also interest, late charges, and attorney fees—all as provided for in the contract. To recover on the contract like this, the collector must produce the contract. Make sure the collector produces in court the actual contract you agreed to, and not some standard form agreement with no evidence that it was the one you entered into with the creditor. If the collector cannot do so, it may lose the right to collect attorney fees, late charges, and interest, and may even lose the right to recover on the debt. If the collector cannot produce the actual contract, it may sue for money on some other theory. For example, it may say that it sent a statement of how much you owed and you did not object. An attorney will be helpful in advising you whether that theory is valid, but this theory should not allow the collector to recover attorney fees and interest based upon a contract, because no contract has been proved. The Debt Is Too Old to Be Collected. Some debts are so old that they cannot be collected in court (in legalese, this referred to as “that the statute of limitations has run”). If you do not raise this with the court, the collector will win, even if the debt is too old. There is no one simple rule as to when a debt is too old to collect in court. The time period varies by state and even by the type of lawsuit being brought. The time period might be as short as three or four years, but it can be five or more years. On a very old debt, it is risky to make a partial payment or say in writing that you owe the debt, because this can start the time period running all over again. Someone Else Incurred the Debt or You Are Only an Authorized User. You are only liable for your debts and not for someone else’s (unless you are a co-signer or otherwise guaranteed payment.) This means that you are not liable if someone forged your name or used your credit card without your authority (under federal law, you may be liable only up to $50). You are not liable if you are only an authorized user on a credit card. You are not liable for the debts of a family member who passed away (although the debts may be deducted from any inheritance you receive). You may not even be liable for your spouse’s debts, depending on state law. You Have Already Paid, Settled, or Discharged the Debt in Bankruptcy. Virtually all debts are eliminated by a bankruptcy and this is a defense to the lawsuit, as is that you have already paid the debt, paid more than the collector claims, or if you already settled the debt with the collector or the original creditor. Present whatever evidence you can to support your claim. Common Counterclaims to Raise A defense is a reason you do not owe the money being sought. A counterclaim is a reason why the person suing owes you money. If your counterclaims are large enough, they wipe out everything you owe and even allow you to recover money from the collector. These claims often are available even if your claim relates not to the collector’s conduct, but that of the seller or original creditor. Sale of the goods or services. Many debts arise from the purchase of goods or services. Anything unfair, deceptive, or defective in the sale may lead to a counterclaim (other than when purchased with a credit card). The same is true if warranties are not honored or if goods or services are not delivered. Counterclaims may exist even if the car or other goods are sold “as is.” Credit terms. Anything that you find to be outrageous, unfair, or deceptive about the credit terms may form the basis of a valid claim. High-pressure tactics should also be challenged. In addition several laws, including the federal Truth in Lending Act, state installment sales laws, and other state credit legislation, create requirements as to what the creditor must tell you about a loan. These laws are technical in nature and you may need the assistance of a lawyer. Special Rights If You Are Active Duty Military If you are sued while you are on active duty with the military, or within the first ninety days after you get off active duty, you can ask the court for a postponement or “stay” of the case. The lawsuit will not be dropped, but the case will not move ahead while the stay is in effect. Once the stay ends, you have to defend the case. To request a stay, send a letter to the court explaining how your military duties prevent you from appearing in court, when you will be able to appear, and include a statement from your commanding officer that your current military duties prevent you from appearing in court and that military leave is not authorized for you. Once the court gets this letter, it must order a stay for at least ninety days. If you need more time, ask for it in the original letter, or send a second letter that includes the same information as the initial request. If the court refuses to give you a longer stay, it has to appoint a lawyer to represent you. A JAG Corps attorney may be able to help you ask for a stay. Courts also have authority to stay enforcement of judgments, including orders for attachment and garnishment, against servicemembers. A court may stay collection of a judgment if it finds that military service impairs the servicemember’s ability to comply with an order to pay the debt. Going to Court Attend All Court Proceedings and Respond to All Papers You Receive. Attend all hearings that are scheduled in your case. If you don’t show up, a default judgment will be entered against you even if you filed an answer or appearance earlier. If you cannot attend, send someone else to ask for a delay (usually called a “continuance”) and explain the reasons why you could not attend the hearing that day (such as illness, family emergency, preexisting and unavoidable work conflict, or unusual transportation problems). In small claims court, you usually only have to go to court once to resolve the case. Whenever possible, let the collector or the collector’s attorney know in advance if you have a good reason for not attending the hearing. Often, they will agree to a delay in the case. If a delay is agreed to, you should put it in writing in the form of a letter confirming the agreement. Summary Judgment. In more formal courts, either side can ask for a judgment before the trial even begins if there are no important facts in dispute. This is usually called a “motion for summary judgment.” If you receive a copy of a motion for summary judgment, you must respond to it or the collector may automatically win the case. Describe all facts that you dispute that relate to whether this collector has the right to obtain a court order against you for the debt. Most courts require the disputed facts to be stated in affidavits signed under oath by people who have first-hand knowledge of the facts. When you file a response, always send a copy to the collector’s lawyer. Preparing for a Court Hearing. At the hearing both sides tell their story to a judge or magistrate. In many small claims courts, the hearing is informal. Usually, the collector first explains why it is suing. Make sure the collector gives the judge a copy of the credit contract as well as the accounting records showing any missed payments. If the collector is not the original creditor to whom you owed the money, make sure the collector shows sufficient paperwork that it in fact is the current owner of the debt. You then present your response. Be as prepared as much as possible, preferably with the advice of an attorney. Here are some tips to help you prepare: ● Bring all relevant documents. This is usually your only chance to present documents, and courts pay a lot of attention to written documents. Try to have extra copies available, because the court and the collector will keep copies of the documents you present. ● Bring witnesses if there are any. Witness testimony may be important, especially if the witnesses are not friends or relatives. For example, if the dispute is about an item which does not work properly, a mechanic or another witness can testify from their own experience in using that item. ● Do not rely on written statements of your witnesses because the court usually will not allow them into evidence. Have the witnesses attend the trial. ● Consider going to court beforehand to get a feel for where the courtroom is, how the court works, how people dress, when to stand, how to tell when your case is called, where you sit during the hearing, whether a microphone is used and how to use it, the judge’s personality, whether an interpreter is available, etc. ● Take a companion to the actual hearing if possible to offer emotional support, to give you feedback and other help, keep track of your documents, and offer a second opinion if you must respond on the spot to a settlement offer. ● Prepare a written chronological report of events in advance, as well as a checklist of points to make and documents to give to the court, and bring these with you. Judges may be impatient if you are disorganized. Mention all of your defenses and counterclaims. ● Assume that the judge has not read any of the documents already presented to the court and does not know the facts of the case. Start at the beginning and tell your story in a clear and organized fashion in the order it happened. ● Do not be afraid to be forceful, but do not make personal attacks on individuals, including lawyers, witnesses, or the judge. A display of anger will usually hurt you more than it helps. Be Wary of Deals You May Be Asked to Make in the Court’s Hallway The collector’s attorney will not want to try the case and often will collar you in the courtroom hallway and try to work out a deal. The collector’s attorney is only looking out for the collector’s interest and not yours. No matter what the collector’s attorney tells you, he is not there to help you and may be taking unfair advantage of you or even misrepresenting things to you. In return for giving up your right to go to court and force the collector to try the case, expect a substantial reduction in the amount you owe. The more defenses you have, the greater the reduction. Also think about other settlement terms. You might ask the collector to help you clean up your credit record, by agreeing in writing that it will no longer report that you owe the money and that the collector will tell the original creditor to do the same. If you reach an informal agreement with the collector, still go to court to file an appearance and answer. The safest course is to file a copy of the written agreement with the court clerk to be entered into the court record. No deal should include a judgment being entered against you unless you have no defense and the settlement is for only a fraction of the debt owed. A judgment being entered against you is a very dangerous thing—this can lead to your bank account being frozen and the amount owed whisked out of your account in no time. If you are not represented by an attorney, you may need help to determine if a settlement is fair and reasonable. Never agree to anything you do not understand or which you think is unfair. Whenever possible, wait until you see the terms of the settlement in writing before you agree. Undoing a Default Judgment Not filing a written answer or appearance within the specified time, or by failing to attend the hearing, or by missing other deadlines may lose you the opportunity to raise your defenses. This is usually called a “default.” Try never to lose by default. If a default has been entered against you, you may be able to still get another chance to be heard by asking the court to “set aside” the default. A default can be set aside only for specific reasons and most often only within a short time after the judgment has been entered into the court records. To set aside the default, act immediately, presenting reasons why you did not respond to the court case, such as that you never knew about the case or that there were unavoidable circumstances that made you unable to answer within the required time. In some courts, you will also have to tell the court briefly about your defenses or counterclaims so that the court will know that you have a chance to get a different result if the default is lifted. Usually, a request to “remove,” “lift,” or “set aside” a default has to be made to the court in writing. A copy of your request should be mailed to the collector’s lawyer. It is difficult to set aside a default. You can avoid the problem by instead responding on time to all deadlines.




Choices to Avoid at All Costs


Below are “quick money” strategies that you should avoid at all costs. An entire industry of unscrupulous businesses exists to pressure you into making costly mistakes. These businesses know that people in financial distress often make desperate or poorly informed choices. They also know that people who feel that their options are limited are likely to be willing to overpay for credit and other services. Unfortunately, even reputable companies operate businesses that take advantage of consumers in financial trouble. You cannot assume that because a company is well known or because it advertises on TV that it will give you a fair deal. Also be suspicious of companies that use names which are designed to create confusion about their identity, such as using the name “United States.” Some companies use names very similar to legitimate organizations just to confuse you. There are two cardinal rules to follow: ● If it seems too good to be true, it probably is. ● If you are in financial trouble, be wary of anyone seeking you out and offering you a way out of your problems. Most legitimate options wait for you to contact them. The following list warns you to avoid twenty practices that may increase your financial problems, not solve them. This is not a complete list of scams. New scams constantly emerge, and old ones change form. The main message is that services aimed at people with bad credit or other financial problems are often rip-offs. If the services seem too good to be true, they probably are. Debt Elimination Scams These are internet offers to totally eliminate your debt. They are bogus, will just cost you money, and will prevent you from taking the proper steps to deal with your debts. See Chapter 12 for more on debt elimination. Debt Settlement Offers A whole industry advertises the ability to settle your debts for less than what you owe. They claim that you put away money each month in a special account and at some point they will settle the debt for the money in the account. This rarely happens—they rarely settle your debts, always take a lot of your money in fees, and get you into trouble with your creditors. Since your payments are going into a special account and do not go to the creditor, you will be subject to debt collection, negative reports to credit bureaus, and even collection lawsuits. More on problems with debt settlement is found in Chapter 12. Foreclosure Rescue Scams and Sale and Lease Back of Your Home Some scam operators read published foreclosure notices, and then seek out the homeowner with a plan to “rescue” the home. Other companies advertise “We Buy Houses”—stay away from them as well. Often these scammers buy your home at a low price (or for nothing at all) and lease it back to you, with promises that you can get the home in the future. You may not even know that in the mound of paperwork that you have sold them your home. You will be overpaying them for rent, and may never get your home back. Rip-Off Reverse Mortgages As explained in Chapter 6, reverse mortgages are complex loans that have benefits and costs. Evaluating whether to take out a reverse mortgage is a difficult decision and requires consultation with a knowledgeable nonprofit counselor. Both your home and a sizeable amount of money are at stake. For this reason, the federal government creates standards for legitimate reverse mortgages, called HECM mortgages. Be extremely suspect of any reverse mortgage offer that is not a HECM mortgage, because you risk losing not only a lot of money, but even your home. Credit Repair Credit repair agencies, sometimes called “credit services” or “credit clinics,” offer to clean up your credit record. They charge a hefty fee and usually cannot deliver what they promise. You generally can do a better job cleaning up your own credit record at no cost. These agencies may even make matters worse for you or cause you legal problems. Payday Lenders Payday loans go by a variety of names, including “deferred presentment,” “payday advances,” “deferred deposits,” or “check loans,” and operate out of check cashers, over the internet, and elsewhere. They all work in the same way. You write a check or sign an authorization for the lender to take money out of your account electronically. The amount on the check equals the amount borrowed plus a fee. The check is due to be cashed or the electronic debit due to be initiated on your next payday or receipt of a government check. Too often you will find that when it comes time to repay the loan, you do not have sufficient cash in your bank account or you need the funds there for more pressing purposes. You then have no choice but to roll over the loan into a new loan with a new fee. The effective annual rate of the loan is often as high as 400% or 700% or even higher. As you roll this loan over each time, the balance quickly grows, making it more and more difficult to repay. You become caught in a spiral of rolling over the loan each month, accumulating ever more fees and interest at astonishingly high interest rates. Auto Title Lending Auto title lending, often called “auto pawn,” “auto title,” or “auto equity” loans, are legal in some but not other states. You borrow money at very high interest rates (for example, 240% or 500%) and put up your car title as collateral for the loan. If you are unable to repay the loan when it becomes due or pay another fee to refinance the loan, your car will be repossessed and sold. Automobile title lending is not as simple and hassle-free as the title lenders advertise it to be. You can borrow money elsewhere at lower interest rates without endangering your car. High-Cost Installment Loans There is a growing industry offering high cost loans of anywhere from $300 to $3,000 or more that you pay off in monthly installments over anywhere from six months to five years. These loans come in all kinds of shapes and sizes. Some are by licensed lenders in your state and charge interest rates in the 30% to 60% range. On top of that they may sell you overpriced credit insurance. The real risk with these loans is that very often these loans are rolled over into new loans when you have trouble paying them off with their high interest charges, meaning that your indebtedness grows to much more than you originally owed, and keeps growing each time you roll over the loan. Not to mention that your car or home might even be taken as collateral. Other installment loans are sold over the internet and seek to avoid state regulation. Then the sky is the limit as to interest rates, which can be as high as several hundred percent. Make sure to look at the Annual Percentage Rate (APR). Avoid any loan with a high APR number—certainly any rate above 36%. Some high cost loans today are claiming to have a zero percent APR, but then charge high fees based on your outstanding balance. This is a sure sign of a predatory lender to be avoided at all costs. Refinancing and Consolidation Loans Any offer to consolidate your loans or refinance existing loans must be carefully considered. Too often the end result is that you are worse off than before. Your old low interest or no interest loans are turned into high interest loans. Prepayment penalties to pay off your old loans early are added to the new loan. Closing costs and other up-front charges and fees are also added to the new loan. Be especially wary of anyone who sought you out for the new loan or anyone that is not an established lender in your community. If you have federal student loans, it is generally not a good idea to consolidate them into a private student loan. Federal student loans come with all kinds of rights, including rights to cancel the loan, defer any payment for a year or more, and payment plans that match your income. These rights are generally unavailable if you consolidate into a private loan. On the other hand, there are good reasons to consolidate federal student loans into a federal student consolidation loan. For more, see Chapter 13. Student Loan Debt Relief Scams For-profit private companies charge high fees to assist you in dealing with your student loans, when what you should do is contact your servicer to obtain relief at no charge. These companies prey on students to recover large fees for unnecessary work. See Chapter 13 for your rights to cancel, delay, or reduce student loan payments you can obtain directly by working with your servicer or the Department of Education. Rent to Own Appliances, furniture, electronic equipment, and even used cars are offered on a rent-to-own basis where you do not own the item until you consistently have made years of weekly or monthly payments, and where the effective interest rate on the purchase can be 300% or even 500%. Auto Brokers When you are having trouble keeping up with your auto loan or lease payments, these brokers offer to lease or sublease your car for you for a fee. The practice is illegal in many states. Moreover, the broker may try to keep payments it receives from the person using your car and may not even obtain permission from your creditor or lessor for the arrangement. Subprime Credit Cards Some credit cards marketed to those with low credit scores charge so many initial fees that 25% of the credit limit is already taken up by fees, and very high interest rates are then applied to the fees as well as any purchases. As a result, the effective interest rate on your credit card charges is much higher than you think it is or than is indicated by the disclosed interest rate. Bouncing Checks and Postdated Checks It is tempting to write a check or authorize an electronic debit when you have insufficient funds in your account to cover it. At best, you may hope to make a deposit before the check is cashed. At worst, you may be deliberately using the check payment as a way to make the creditor leave you alone for a few days. Avoid this temptation. Bouncing checks is never the answer. You will be charged a hefty fee, often by both the bank and by the creditor each time the check is presented for payment. And creditors may present the same check for payment a number of times. You could also face criminal prosecution for fraud. Although you may be able to defend yourself successfully if you are prosecuted, it is better not to have to deal with this problem at all. When in doubt, look up your account balance before writing a check or authorizing an electronic debit. Your balance may seem higher than it really is because other checks you have written have not yet been deducted from your account. If you have a joint account, coordinate your check writing carefully with any other person who has power to write checks and make withdrawals. You might also be tempted to write a “postdated check,” that is a check dated later than the date on which you write it. You do this assuming it will not be cashed until the date written on the check, when you hope to have sufficient funds in the account. Despite what you may think, the check can be cashed immediately and the bank need not wait until the date written on the check. Instead, delay payment until you are sure you have sufficient funds in the account. That way you are not surprised that the check is cashed early. If things change in the interim, it is not too late to direct your funds to something else more important. And you avoid the cost of bouncing a check. Using Overdrafts As Credit Many banks and other financial institutions permit you to deliberately overdraw your account. The bank will honor a check, debit card payment, or ATM withdrawal even if you do not have sufficient money in the account. This is often an incredibly expensive way to pay your obligations. Banks charge high fees for each overdraft, up to $35 per transaction. Some banks also charge a fee of up to $5 every day or $30 every few days until you repay the overdraft. Banks pay themselves back the amount of the overdraft and fees out of your next deposit, before you can use the money for other essential bills like your mortgage or utility payment. A $100 overdraft with a $30 fee has an interest rate of 780% if the overdraft lasts two weeks. For ATM or one-time debt card transactions, the bank can only honor the payment and charge you a high fee if you affirmatively consent or “opt in” to this arrangement. Do not do so and revoke your consent if the bank already has gotten you to opt in. Selling or Giving Away a Creditor’s Collateral You may have a car or other property that serves as collateral for a loan from one of your creditors. It is a bad idea to give away or sell a creditor’s collateral without the creditor’s permission. This is called “conversion” of collateral. You may of course sell collateral if the sale price you receive is enough to pay off the existing loan. If the collateral is a car, typically you will need to pay off your loan and have the lender release the lien in order to give good title to the buyer. If you are selling the car to an individual, you may need to work with the lender to determine the amount of the payoff and the release of the lien in order to transfer title. If you have already lost, given away, or sold collateral, you may be prosecuted for a criminal offense. A defense to a criminal prosecution is that your conduct was not intentional, that you did not understand that the property was collateral or that you did not know the consequences to the creditor of disposing of the property. In addition, most such prosecutions and lawsuits can be ended by payment of the value of the collateral either in installments or in a lump sum if you have it. Jail time is rarely or never imposed. Still, this is not a risk worth taking. Get-Rich-Quick Schemes Many products and jobs are advertised with the promise that you will make a lot of money quickly. These are almost always scams. For example, real estate investment seminars are sold with the promise that you can make a bundle by buying and selling investment property. The reality is that the only one making a bundle is the person selling you the seminar. When seminars of this type are offered for free, the person running the seminar will usually aggressively try to sell you something very expensive. A similar problem involves jobs which are offered with the promise of making quick financial returns. A common example is an advertisement with a bold heading such as “Make up to $1,000 a week immediately—working at home.” The vast majority of these offers require payment of substantial “set up” or “one-time start-up” fees to a person or company that promises you a money-making plan in return. The company keeps these fees and you end up with no real way of making money.




Medical Debt


Don’t Pay Medical Debt Ahead of Other Debt or Borrow to Pay Medical Debt Most families encountering financial difficulty have overdue medical debt. You should treat medical debt as a low priority debt to be paid only after you pay more pressing types of debt, such as your mortgage, car loan, or criminal citations. Almost any other type of debt will be more pressing—medical debt should typically be a lower priority. Similarly, never pay medical debt by incurring other debt. The worst thing you can do is take out a second mortgage to pay off medical debt. Also don’t put medical debt on your credit card, even a “medical” credit card, unless you can pay the card and all your other obligations that month. Unlike credit card debt, medical debt will often carry low or no interest payments and late charges. While the medical debt may eventually end up on your credit report, it will not show up for at least six months. Delinquent credit card debt affects your credit score immediately. You are also less likely to be sued on medical debt than credit card debt. Some medical debts can go unpaid for long periods of time without any significant adverse consequences. Nonprofit hospitals have written policies to reduce or even eliminate certain medical charges if you are eligible for financial assistance. Many states have laws that reduce or even eliminate medical debt for eligible families. Whether or not you qualify for such financial assistance, health care providers are often more willing to reduce the amount of a delinquent debt where you can show financial hardship. Once you put medical debt on your credit card, you lose all of these opportunities. Some doctor or dentist offices may encourage you to sign up for a special credit card to pay your medical bills, but these cards are usually not a good choice for paying medical bills. The credit cards often have high interest rates or unfavorable terms. You lose the option of negotiating with your health care provider over the bill. Using this type of card turns your medical debt into credit card debt. Medical debt’s status as a low priority debt does not mean that one should ignore medical debt. You have special rights concerning medical debt, and it is important to know these rights to be able to reduce the amount of your medical debt and its adverse consequences. Debt Collectors and Medical Debt Hospitals and other health care providers are quick to turn over medical debt to debt collection agencies—some will do so after a month or two, while others may wait six or more months. The job of these debt collectors is to try to get you to pay medical debt even if this is not in your best interest.They will push you to put medical debt on your credit card—don’t fall for that. They will try to get you to pay these bills ahead of more important bills, such as your rent or home mortgage. They will threaten to ruin your credit rating, but they may not even report the collection effort to a credit reporting agency. If they do report the debt, the reporting agency will not even include the debt in its reporting unless it is over six months old. Just as importantly, paying your medical bill instead of your mortgage or car loan will end up damaging your credit report a lot more than not paying your medical bill.Debt collectors also will call you and constantly press for payment. But this is easy to stop, particularly for medical debt. Few hospitals and health care providers will be collecting on their own debt, but will instead hire third-party collection agencies. Under federal law these agencies must stop contacting you if you simply send them a letter telling them to stop, above.Another approach to avoid debt collection harassment is to contact the hospital or health care provider early about your inability to pay, before the matter is turned over to a collection agency. Explain that you are unable to pay at present and that you will not pay the collection agency either. Since the health care provider must pay the agency, the provider may be better off waiting for you to pay the provider directly when your financial situation improves. Preventing your debt from going to a collector will also help your credit standing because typically only collection agencies and not medical providers report your debt to a credit bureau. Limits on Credit Reporting of Medical Debt Health care providers will probably not report your debt to a credit bureau. Instead, when your debt is eventually handed over to a collection agency, that collection agency may (or may not) report the debt to a credit bureau. In addition, in almost all cases, your credit rating is determined by one of the three major national credit bureaus. All three of these agencies have agreed not to include any medical debt in your credit report if the debt is less than 180 days delinquent when reported to them. This means that medical debt will not affect your credit rating unless a provider’s collection agency makes a new report to a credit bureau after the debt is over 180 days old. For more on credit reporting, see Chapter 3, above. Can a Hospital Turn You Away If You Owe It Money? If medical debt goes unpaid for a period of time, a hospital or other health care provider may decide to stop providing you services. In some areas, you may have few other options for medical care, but in other locations you should be able to find other health care providers to take care of your family. That you owe money to one hospital or one health care provider should not prevent you from obtaining services from other hospitals or providers. This will particularly be the case with public hospitals and community health centers. Even if you owe a hospital for past-due bills, the hospital cannot turn you away from its emergency room. This is your right under a federal statute called the Emergency Medical Treatment and Active Labor Act (EMTALA). If you request financial assistance from a nonprofit hospital, the hospital cannot deny you care in any part of the hospital because of an old bill until it determines whether you are eligible for financial assistance. You usually have about eight months (240 days) from when you first received the old bill to request such financial assistance. If you are a Medicaid recipient and you owe a doctor or other health care provider for co-payments or deductibles, Medicaid prohibits health care providers from denying you future services. Correcting Your Medical Bills One way to reduce a medical debt is to review it carefully for errors and unauthorized charges. Also review any explanation of benefits (EOB) form you receive from your insurance company to see if it is consistent with the medical bill. If you see errors, contact the health care provider or your insurance company to have the erroneous charges taken off your bill. Check also for charges based upon unauthorized balanced billing. The EOB may disallow a portion of the health care provider’s bill, pursuant to its agreement with the provider. Balance billing is when the health care provider bills you for the disallowed portion of the bill. Balance billing is prohibited in certain states. If you have Medicare or Medicaid, providers are usually not allowed to bill you for rates higher than what these programs are willing to pay. They can only bill you for copays and deductibles. If you have both Medicare and Medicaid coverage and are enrolled in a Qualified Medicare beneficiary program, providers are usually not even allowed to bill you for the Medicare co-pays and deductibles. If you receive a bill that you believe should be covered by insurance, Medicaid, or Medicare, contact your insurer to find out why the service was not covered. You may need to contact your health care provider also. If the insurance company made an error, they might be able to fix it when you call. If your insurance company, Medicaid, or Medicare will not pay for a service that you needed, you have a right to appeal. Call your insurer and tell the insurer that you want to appeal their decision. Do this as soon as you can before the deadline for requesting an appeal. Contact your state insurance commissioner or state attorney general’s office if you need assistance. Requesting Financial Assistance Federal law requires nonprofit hospitals to establish policies for offering patients financial assistance, such as free or discounted medical services for eligible patients. The policies and how to apply for financial assistance must be in writing and available from both the hospital and on the hospital’s website. Hospitals often charge an uninsured patient high “retail” prices for services, but charge significantly less for the same service to a health insurer, Medicare, or Medicaid. If you are eligible for financial assistance from a nonprofit hospital, the hospital should not charge you the “retail” price but instead should charge a price similar to what it charges insurance companies, Medicare, and Medicaid. The hospital even has to go back and reduce bills you received even before you established eligibility for financial assistance. The “retail” price is sometimes called the “chargemaster” price, and hospitals are currently required to post these chargemaster prices on their websites. Federal law does not otherwise specify standards for financial assistance, but about half the states have medical debtor protection laws that specify who, based on family income, is eligible for financial assistance and what type of assistance a hospital must offer. For example, the hospital may have to offer an interest-free installment plan, reduced cost medical care, or even free medical care. The hospital’s financial assistance plan will set out exactly the type of financial assistance that it provides to those who are eligible. In at least some states you can also apply for Medicaid and if you are found eligible, Medicaid will cover retroactively medical bills incurred over the last three months. This retroactive coverage is not available in every state. Other hospitals or health care providers may agree to reduce bills based on your financial hardship even if not required to do so by federal or state law. Explain your financial situation and that you will pay when you are financially able. You can ask for a payment plan, but do not agree to a payment plan if you cannot afford the payments. Chapter 8 discusses ways before you incur a medical bill to obtain medical and dental care at reduced prices, such as applying for Medicaid or obtaining low cost dental care from a dental school. But even after you have incurred medical bills, there are charities and other programs that may help pay for some of your medical bills.




Credit Card Debt


When to Pay on Your Credit Cards and When to Use Them Credit card debt is relatively low priority debt. If you do not pay it, you do not face immediate loss of your car, home, wages, bank account, or other property. If you do not have enough money to pay all your bills, you should generally not make significant payments on your card debt ahead of your mortgage, car loan, utilities, food, medicine, and the like. Keeping this priority in mind, this chapter provides advice on paying down your credit card debt. Just because credit card debt is low priority does not mean that you should pay off other debts with your cards. As described in the chapter on medical debt, you should not pay off medical debt with a credit card if you will have trouble paying these credit card charges, no matter how much a debt collector is hounding you to do so. You have better choices concerning your medical debt than you do concerning your credit card. For example, with the help of our firm, there may be a way to negotiate your medical debt and reduce the overall amount. On the other hand, it may be a smart choice to put necessities on your card (or use your card for a cash advance) if that is the only way to free up cash to make your mortgage, rent, car, or utility payments. Similarly, paying a criminal citation with a credit card (if available) is better than losing your driver’s license or even being incarcerated for non-payment. How a Delinquent Credit Card Account Affects You In making judgments about paying and using your credit card, you should understand what does and does not happen if you fail to pay your credit card. You are only required to make the required minimum payments on your credit card, but if you do so it will take many years to pay off your debt and you will likely pay thousands of dollars in finance charges. Nevertheless, if you consistently make the minimum payment, you will be avoiding late charges and your credit report will show your payments are on-time and current. The card issuer cannot raise your interest rate on charges you have already incurred if you keep current on your minimum payments. It is unlikely that you will lose the ability to use your card—assuming you have not maxed out the card. If you stop making even the minimum payments, then your overdue credit card payments will almost certainly show up on your credit report, first as overdue, then 30 days overdue, then 60, then 90, etc. Your credit score will likely take its biggest hit when the card is 30 and then 60 days overdue. After the card is 60 days overdue, the card issuer can then increase the interest rate on your card even for existing charges that you have already made. At 180 days, the card issuer is likely to “write-off” or “charge off” your debt. This does not mean it will stop trying to collect on the debt or that you do not owe on the debt. It just means the card issuer will treat the card account differently for their internal accounting purposes. Most card issuers at 180 days will stop sending you statements and also stop assessing new interest or new late charges. They will cancel the card if that has not happened already and turn the account over for collection if that has not already happened. Being contacted by a debt collector is never fun, but you can stop the collector from contacting you. The debt collector may also threaten to ruin your credit score, but by the time the account is turned over to the collector, your score has already been lowered a lot. Not paying the collector will have little additional effect on your score, no matter how much the collector threatens to ruin your credit rating. Also, if you pay off a debt that was already reported by a collector, that collection item will show as “paid” but will not be removed from your credit report—if you want it removed, you must get the collector’s written agreement to delete it and not all collectors will agree to do so. A written agreemen is something to pursue with an attorney to make sure it is drafted properly. If you are sued and the judge rules for the creditor, then the debt becomes much more serious. You do not have to pay the debt all at once. But it is possible part of your wages will be garnished, your bank account seized, or even some of your property sold. Even if you lose the lawsuit, you may not have to pay the debt all at once. If your income and bank accounts are protected by law, you may not even have to pay anything on the debt. For more information on what may or may not happen when you lose a collection lawsuit, see Chapter 21, below. Special Cards Create Special Problems The above description of the implications of a delinquent credit card applies to most credit cards. But a few special types of cards create additional concerns when you are delinquent. Some cards are specially marketed to people who have low credit scores or no credit history. Beware of these cards! They come loaded with high fees that can eat up to 25% of the credit line. In some case, you may even need to pay a fee to apply for the card. These cards usually do more harm than good for your credit score. Some credit cards are marketed as helping you reestablish credit, and are secured by a certain amount of funds in your bank account. You cannot withdraw that amount from the account and your card’s credit limit matches that amount. If you do not pay the card, the card issuer just seizes that amount from your bank account. These cards can be helpful in establishing credit, but only if you’re careful not to max out and to make the minimum payment every month. Avoid Debt Settlement and Debt Elimination Companies You may hear about companies that claim they can help you reduce your debts or eliminate them. These companies are a total rip-off. Never use them. Some say they can send you documents or sell you tips that will eliminate all your credit card debt. They offer a “bond for discharge of debt,” “a declaration of voidance,” or a “redemption certificate.” Or they tell you that “monetized” debt need not be paid. Other times, they claim to be “sovereign citizens” or offer to set up sham arbitration proceedings to eliminate the debt. These are totally bogus offers. They will cost you money, and just make matters worse. Another scam is often called debt settlement. The company claims that it can negotiate with your creditors so you can pay off your debts for less. They may even advertise examples of how they have saved people thousands of dollars. Some debt settlement companies claim that they have a special certification by the Better Business Bureau or other organizations. But this is all meaningless. Debt settlement is actually illegal in some states and a bad idea everywhere. Typically, debt settlement companies instruct you to put money away in a special account each month. When there is enough in the account, they claim they will use it to settle your credit card debts. Some want to be paid upfront and others say they only get paid if they settle your debts. But they always manage to charge you monthly fees even if they never settle your debts. Or they may settle one or two small debts and claim their fee. But this still leaves you with your bigger debts—which often grow even larger while you wait for the company to do something. These companies have no special connection to card issuers and some credit card companies even refuse to talk to debt settlement firms. While you are putting money in the special account, nothing is going toward to your card companies; interest and late charges are mounting; the total amount you owe is growing; the non-payment is being reported to credit bureaus; and you are likely being harassed by debt collectors or even sued on the debt. Even if the company eventually settles some debts, your total amount of debt will be bigger than when you started, especially after all the fees you must pay to the company. Credit Counseling and Debt Management Plans Credit counselors offer budgeting advice. Sometimes they also offer debt management plans. The difference between a debt management plan and debt settlement is that a debt management plan requires you to pay all of your debt. While you usually get a discount on the interest rate and late fees, you are still paying the full bill. It may take years to pay off your credit card debt under a debt management plan—are you prepared to continue to make payments to the credit counselor for that long a period? In addition, most credit counselors require you to stop using any of your credit cards that have not already been cancelled. Some counselors will allow you to keep one card only for emergencies. You must also still pay a monthly fee to the credit counselor, but this should be far less than what debt settlement companies charge. Legitimate credit counselors only charge small fees and are nonprofit organizations. They do not make grand promises; they offer budgeting assistance; and they provide consumer financial education. If you cannot afford their fee, a legitimate credit counseling agency will help you for free. Sometimes they recommend a debt management plan, but only if you can afford it. Shop around; do not go with the first company you see and certainly do not go with the first company that reaches out to you or that you see in advertising. You might even go to an agency in person to see what it looks like. Nevertheless, even legitimate credit counselors work closely with credit card companies and may even receive funding from those companies. They may not be quick to recommend a bankruptcy option even when that makes sense for you, and are unlikely to consider the fact that you should pay your rent, mortgage, and car payments ahead of credit card debt. Typically, they offer you no help on these other types of debt, although sometimes a credit counselor will be affiliated with a housing counselor. Being a nonprofit organization is not enough to make a credit counselor trustworthy. Avoid any credit counseling agency that charges high fees or promises you it has special methods to reduce your debt that no one else has. Even when advertised as nonprofits, these agencies are not legitimate credit counselors and are trying to make as much money off you as possible. They will not help you in the long run. Another tip-off for a shady credit counselor is if it only offers to work out a payment plan with your credit card company and does not offer budgeting or financial education services. Even a legitimate credit counseling agency is not for you if you are having trouble paying your rent or mortgage, car payments, utilities, student loans, or other higher priority debt. Most credit counselors only help with credit card debt and require you to make payments that only go to the card companies. You shouldn’t devote money to credit card debt when you have more important obligations to deal with. On the other hand, if all you are worried about is credit card debt, a legitimate credit counselor may make sense. They should help you work out a realistic budget that meets your living expenses and higher priority debt before they recommend a debt management plan. If you cannot pay your basic expenses and high priority debt, do not sign up for a debt management plan. The Bankruptcy Option Bankruptcy is an option that can legitimately eliminate all your credit card debt. A chapter 7 bankruptcy can wipe out all of the typical credit card debt (unless you go on a shopping spree just before filing bankruptcy). A chapter 13 bankruptcy can reduce how much you pay and spread payments over three years or more—it is more typically used if you want to protect against the loss of your home or car. While many people file for chapter 7 bankruptcy to get rid of crushing credit card debt, do not rush into bankruptcy with just a minor credit card obligation. There are limits to how often you can file bankruptcy and this option is best saved for when you are having trouble paying many of your debts and not just a relatively small credit card debt, and when the total amount of your debt is substantial. Bankruptcy is also not free. If you are very low income and file under chapter 7, you may be able to waive the bankruptcy filing fee. Otherwise, as of 2018, you will pay $335 to file a chapter 7 bankruptcy or $310 to file a chapter 13 bankruptcy. You can pay these fees in installments. It is also highly recommended that you file with the help of an attorney who may also charge a fee. Bankruptcy will, however, give you a fresh start without the credit card debts hanging over you. Your credit report will show that your credit cards are not delinquent, because the bankruptcy has cancelled them out and many creditors may find you more creditworthy for having passed through bankruptcy rather than being buried under debt. On the other hand, the fact that you filed bankruptcy will be on your credit report for ten years, while the credit card delinquency stays on your credit report only for seven years. A good rule of thumb might be that it is too soon to file for bankruptcy when you just have a relatively small amount of delinquent credit card debt, but that it may make sense to file once the creditor has won a lawsuit against you and you have wages or bank accounts you want to protect from seizure.




Student Loans


Most student loans are backed by the federal government. The federal government has extraordinary powers to collect defaulted student loans if you don’t pay. It can seize tax refunds, deny you new federal student loans and grants, garnish a percentage of your wages without a court order, charge you very large collection fees, and even take a portion of your Social Security benefits. To make matters worse, there is no time limit for collection on federal student loans. The government can keep trying to collect for twenty, forty, or even more years. Consequently, federal student loans require your immediate attention, both because of the federal government’s special collection powers and because of the special rights you have to cancel, reduce, or delay your payment obligations. However, these special rights require you to take action to request them—you cannot wait for the government or the loan collector to offer these options to you. These special collection tactics and student rights apply only to federal student loans and not loans made by your school, a bank, or another financial institution without any backing from the federal government. Those are called private student loans. How you deal with private student loans will differ greatly from how you deal with federal student loans. Private student loans are discussed at the end of this chapter First Identify What Kind of Loan You Have Your rights and strategies will vary depending on the type student loan you have. Access information about your federal loans at the Department of Education’s National Student Loan Data System (NSLDS), by going to www.nslds.ed.gov or calling 800-4-FED-AID, TDD: 800-730-8913. When first using the online system, create a user name and password, supply an e-mail address, and provide other identity information. The NSLDS will provide your approximate loan balance, the type loans you have, who is servicing those loans, and other loan details. You can also determine what type of loan you have by checking your loan agreement papers. If you do not have copies, request them from your loan holder. If the loan is federal, the name of the federal loan program will be written at the top of the loan document and also on the loan application and billing statements. Your credit report will also have information about your loans. Direct Stafford Loans are the most common student loan. Since 2010, nearly all new federal student loans are Direct Loans, made directly from the federal government to you, with the school’s assistance. Federal Family Education Loan (FFEL) Stafford Loans are similar to Direct Stafford Loans, but were given out by banks or other financial institutions, administered by state and nonprofit guaranty agencies, and ultimately backed by the United States. Before 2010, many student loans were made under the FFEL program (also known as guaranteed loans), and many borrowers are still making payments on these loans or are subject to collection on old FFEL loan debts. PLUS Loans are loans for parents to help finance their children’s education and also for graduate and professional students. Since 2010, PLUS loans have been issued under the Direct Loan program, but were mostly FFEL loans before that. Consolidation Loans allow you to combine one or more federal loans into a new loan that has different, hopefully better, terms—now issued only through the Direct Consolidation Loan program though some borrowers continue to repay old FFEL Consolidation Loans. Perkins Loans were made directly from the school you attended. If you stop paying the school, the loan may eventually be turned over to the U.S. Department of Education for collection. Perkins Loans have a fixed interest rate of 5%. Private Student Loans are also offered to students. These loans have no government involvement but are offered by banks or other private institutions. If your loan is not listed in the NSLDS, it is probably not a federal loan, unless it is a very old federal loan. Other ways to identify a private student loan include: 1. If the loan was made since 2010 and has the name of a bank on it, it is a private loan. 2. If the interest rate is 10% or higher, it is most likely a private loan. 3. If there is a co-signer on a loan, it is probably a private loan. 4. If, when you took out the loan, you received a disclosure statement that looks somewhat like the statement you get when you take out a car loan, then it is probably a private loan. Most of the discussion in this chapter applies to federal loans only. A separate section at the end of the chapter discusses private student loans. Rights to Cancel Your Federal Student Loan If there were serious problems with the school, if you are disabled (or have passed away), even if you are in default on the loan, you may be able to apply to have your federal loan discharged—that is cancelled—by submitting paperwork to your loan servicer, debt collector, or directly to the Department of Education. This is an administrative process. Ask whoever is holding your loan for the appropriate discharge request form. The forms are also available at https://studentaid.ed.gov. Be prepared to meet resistance and delay, insist on your rights, and consider seeking assistance from an attorney. You may also have rights to cancel the debt by filing bankruptcy. A successful administrative discharge may not only completely wipe out the current loan, but may in some cases allow you to get back money you paid on the loan and any money that was taken from you through tax refund intercepts, wage garnishment, or other collection methods. In some cases, the government is also required to delete negative references on your credit report. Closed School Discharge. If your school closed while you were enrolled or within 120 days of your leaving the school, your loans can be discharged. In a few cases, the 120-day period may be extended. New rules scheduled to go into effect in July 2020 will extend this period to 180 days for borrowers who first take out loans on or after July 2020. Unpaid Refund Discharge. You are eligible to discharge all or a portion of a loan if you left school and the school failed to pay you a refund you were owed. Borrower Defense to Repayment Discharge. You may seek to discharge all or a portion of a loan if your school lied to you or otherwise misled you in convincing you to enroll, stay enrolled, or take out loans, or in some cases engaged in other misconduct violating state law. The rules for this discharge program have changed several times in recent years and differ depending on when your loans were disbursed. For many borrowers your eligibility for this discharge also ends after a certain number of years after leaving school, so it is important to act quickly if seeking this discharge. For more information on the particular standards applicable to your loans and how to apply for discharge, consult www.studentloanborrowerassistance.org, https://studentaid.ed.gov. False Certification Discharge. A false certification discharge application form is available if any of the following happened to you (or to the student, if you’re a Parent PLUS borrower): ● At the time of enrollment, state law disqualified you from getting a job in the occupation for which you were being trained (for example, you were enrolled in a truck driving program even though you had a physical disability that prevented you from obtaining a truck-driving license). ● You did not have a valid high school diploma or GED when you went to the school, and your school did not ensure that you met the applicable alternative financial aid eligibility criteria (such as through an ability-to-benefit test). ● The school forged your name on the loan papers or check endorsements, and you never went to school for the times covered by the forgery. Disability Discharge. You can discharge your loan if the Department of Veterans Affairs, the Social Security Administration, or your physician certifies that you have a total and permanent disability. Parents with PLUS Loans may apply for discharge based on their own disabilities, not those of their child. If two parents have a PLUS Loan and only one becomes disabled, the other must still repay the loan. The first step to apply is to notify Nelnet (a company hired by the Department of Education), by calling 888-303-7818 (8 a.m. to 8 p.m. EST, 7 days a week), e-mailing DisabilityInformation@Nelnet.net, or applying at www.disabilitydischarge.com. You can designate a representative to apply on your behalf, but you first must fill out the representative designation form available at www.disabilitydischarge.com. Additional details about applying are available there as well. Death Discharge. Your family or estate will not have to pay back your student loans if you die. Your estate should submit an original or certified copy of the death certificate to the loan holder. The death of both parents with a PLUS Loan (assuming both took out the loan) is also grounds for the “death discharge,” but not the death of only one of two obligated parents. A parent can also apply for discharge of a PLUS Loan if the student for whom the parent received the loan dies. Other Grounds for Loan Cancellation or Forgiveness. The Public Service Loan Forgiveness program allows Direct Loan borrowers employed in certain occupations to discharge any remaining loans after making 120 qualifying payments (the equivalent of ten years of payments). Borrowers must be in specific repayment plans for their payments to qualify them for forgiveness in this program. Certain teachers who have taught for five consecutive years are also eligible for at least partial loan forgiveness. Perkins Loans also may be partially or completely cancelled for borrowers who work in certain fields. Be sure to review the details about all of these programs at https://studentaid.ed.gov. Bankruptcy. It is very difficult, but not impossible, to discharge a student loan in bankruptcy. You must prove that repaying the loan would cause an “undue hardship” for you and your dependents. Courts generally interpret this to mean that you must have serious financial problems which are likely to persist for reasons beyond your control. It is usually better to ask the bankruptcy court to make this determination at the time of the bankruptcy filing, but if you fail to do so, the bankruptcy court can make that determination later when collection attempts on the student loan are renewed. How to Reduce or Delay Your Payments If loan discharge, cancellation, or forgiveness is not currently available to you, the government also offers options to lower your monthly payments, so you don’t default. Even if you do default, you can often get out of default and qualify for one of these lower payment plans (see Getting Out of Default later in this chapter). The typical federal student loan repayment plan, called the Standard Repayment Plan, generally gives you up to ten years to repay your student loan (up to thirty years for consolidation loans). For many borrowers struggling to afford their student loans, income-driven repayment plans are the best option. These plans base monthly payments on your current income, with payments sometimes as low as $0/month, and offer forgiveness of any outstanding balance after 20–25 years of qualifying payments. Other repayment plans may lower your payments (at least initially). These plans do not reduce your total obligation, but they let you pay it off more slowly. This means that additional interest will be added to the loan, and you could end up paying more interest in exchange for more affordable monthly payments. Income Driven Repayment Plans. In recent years, the government has created a range of income-driven repayment (IDR) plans. These plans calculate your monthly payment after considering your income. By lowering monthly payments—in some cases to zero—these plans help you avoid default, which prevents tax refund intercepts, wage garnishment, seizure of benefits, and high collection costs. For these IDR plans, your loan servicer or lender will check with you every year to determine your income. If you fail to respond you will be dropped from the payment plan and your monthly payment will usually increase by a lot! In some instances, your balance continues to grow even though you make monthly payments, as interest will continue to be added to your loans. However, the government may pay a portion of the interest, depending on your loan type and repayment plan. Also, if you stay on an income-driven repayment plan for twenty or twenty-five years (depending on the plan), any remaining debt is forgiven, though some borrowers may owe taxes because of the forgiven debt. Brief descriptions of these plans follow below. Detailed information about each of these repayment plans and a calculator to compute your payment amounts is available at www.ibrinfo.org or https://studentloans.gov. Pay special attention to which loan types qualify for which of these repayment plans. FFEL and Parent PLUS borrowers can only access some of these plans. Pay As You Earn (PAYE) Repayment Plan. This is often the best option for borrowers who qualify, particularly if you would otherwise have high student loan payments relative to your income. PAYE is only for those who had no student loan obligations as of October 1, 2007, and then received a Direct Loan disbursement on or after October 1, 2011. You pay 10% of your “discretionary income”—the amount by which your adjusted gross income exceeds 150% of the poverty line for your state and family size. In 2018, 150% of poverty was $1,517/month for a one-person household, $2,057/month for a two-person household, and $3,137/month for a four-person household. (The numbers vary in Hawaii, Alaska, or with different family sizes.) For example, if your monthly income is $120 above 150% of the poverty line, you only pay $12 a month. If you are married, your spouse’s income is included in this calculation only if you file a joint tax return. Your monthly payments can’t go higher than your payments on the Standard Repayment Plan. After twenty years of payments on PAYE, your remaining student loans are forgiven. Revised Pay As You Earn (REPAYE) Repayment Plan. REPAYE incorporates many of the benefits of PAYE and makes them available to borrowers no matter when they took out their loans. Under REPAYE, you pay 10% of your discretionary income toward your student loans. However, if you are married, then your spouse’s income is included in this calculation even if you file separate tax returns. (The only exception is for spouses who are separated and borrowers who cannot reasonably access their spouse’s income information.) Under the REPAYE plan, there is no cap on your monthly payment so that higher income borrowers could end up with payments higher than on the Standard Repayment Plan. If you only have loans from undergraduate studies, the remaining loan is forgiven after twenty years of payments. Forgiveness for loans from graduate or professional school is not available until after twenty-five years of payments. Income-Based Repayment (IBR) Plans. There are different IBR plans based on how recent your student loans are. If, on July 1, 2014, you had a zero balance on any loans and then took out a Direct Loan after July 1, 2014, your rights are almost exactly the same as under a PAYE plan. Because PAYE offers more flexibility in switching plans, you may choose to use PAYE (or REPAYE) instead of IBR. However, PAYE and REPAYE are not available for FFEL loans, but those loans are eligible for IBR. For older loans, IBR is not quite as generous as IBR is for newer loans. Your payments are 15% of the difference between your income and 150% of the poverty line, and forgiveness occurs after twenty-five years. In either case, as with PAYE, your spouse’s income is only included in the payment calculation if you file joint tax returns. Income-Contingent Repayment (ICR) Plan. ICR usually requires higher payments than PAYE and REPAYE. But it is essentially the only income-driven repayment option for Parent PLUS borrowers. If you have an FFEL Parent PLUS Loan, you can consolidate it into a Direct Consolidation Loan to become eligible for ICR. The calculators at https://studentloans.gov estimate what your monthly payment will be on ICR. Extended Repayment Plan. This option allows you to extend repayment over a longer period (usually no more than twenty-five years), thus lowering your monthly payment. These plans are generally available only if you have loans totaling more than $30,000. Graduated Repayment Plan. Payments start out low and increase every two years. In most cases, however, the loan still must be paid over a ten-year period. Income-Sensitive Repayment Plan. If you have an FFEL and do not want to or cannot consolidate into a Direct Loan, you best option is one of the income-driven repayment plans (discussed below) or possibly an income sensitive plan. Income-sensitive repayment allows for reduced monthly payments due to your financial circumstances. Payment is calculated based on your total gross income, rather than your discretionary income. There is no loan forgiveness under this plan even after several years of repayment. Alternative Repayment Plan. If no other plan is affordable, Direct Loan borrowers who have “exceptional circumstances” can submit documentation to apply for a repayment plan that is affordable. High medical expenses or private student loan payments could be among the expenses you provide to your loan servicer. There is no loan forgiveness under this plan. Deferments. If you cannot manage your monthly payment using one of the repayment options listed above, you may choose to seek a deferment instead. A loan deferment lets you temporarily delay repaying your loan, usually for up to a year, though sometimes longer. You can often renew the deferment if it ends, but if not, you must resume making payments. Deferments are not available if you are already in default, typically defined as missing nine payments. To benefit from deferment, you must first get out of default, as described later in this chapter. Benefits from deferment depend on whether your loan is subsidized by the government. Subsidized loans are given out based on financial need. As of July 2012, graduate and professional students were no longer eligible for new subsidized loans. For subsidized loans, the government makes interest payments for you during the deferment period. Your loan balance will be no higher after the deferment period than before. When you defer an unsubsidized loan or a PLUS Loan, you will later have to pay back the interest that accrued during the deferment period. If you can afford it, you should consider paying the interest while you are in a deferment period. You have a legal right to a loan deferment under specified conditions. For most loans that you got after July 1, 1993, the available deferments include: ● Unemployment deferments (for up to three years); ● Economic hardship deferments (granted one year at a time for up to three years); ● In-school deferments for at least half-time study; ● Graduate fellowship deferments; ● Cancer treatment deferments; ● Rehabilitation training program deferments; ● Military service deferments (there is no time limit, but eligibility ends 180 days after demobilization or the end of active duty service); and ● Post-active duty deferments for borrowers who are enrolled in school when they are called to active duty and plan to re-enroll after their service is completed. FFEL and Perkins Loans have somewhat different deferment rules than those for Direct Loans. Forbearances. If you cannot qualify for a deferment, you can still request loan “forbearance,” meaning you do not have to pay for a while, and no adverse action will be taken against you during the forbearance period. Even for a subsidized loan, the government does not pay interest for you. You will eventually have to repay the full loan amount and all accrued interest. In some cases, you should be able to get a forbearance even if you’re already in default. This will not get you out of default without further action. In some circumstances, you have a legal right to a forbearance. For example, you have a right to forbear an FFEL or Direct Loan if your total student loan payments exceed 20% of your income even if you are many months delinquent. There are limits to how many times you can automatically get this and most other forbearances. If you don’t have a right to a forbearance, loan holders still may grant you one, especially for health or other personal problems that affect your ability to make your monthly payments. What to Expect If You Are in Default on Your Student Loan The government has a number of aggressive collection tactics it can take if you are in default on a federal student loan, which usually means you have not made payments for at least nine months. The next section describes methods to avoid those tactics completely by getting your loan out of default status. Denial of New Student Loans and Grants. If you’re in default, the government can deny you new federal student loans and grants. Your Credit Report. Most student loan defaults appear on your credit report for seven years. Perkins Loans may be reported until repaid in full, and then for seven years from the date of default. Aggressive Collection Agency Contacts. Most student loan debt collection is by private agencies hired by the government or other loan holders. Private debt collectors are likely to be aggressive and to not inform you of options that would help you out, such as loan cancellation rights or affordable repayment plans. In general, you have the same rights to deal with student loan debt collectors as with any other debt collector—as detailed in Chapter 2. Complain about problems with student loan debt collectors to the Department of Education at https://feedback.studentaid.ed.gov/ and the Consumer Financial Protection Bureau at https://consumerfinance.gov/complaint/. Collection Fees. When you are in default, a large portion of anything you pay to a collection agency on the loan is applied to high collection fees and not to pay off your loan—fees can be as high as 25% of your payment (less in some cases). Fees on Perkins Loans can be as high as 40%. Tax Refund Offsets. When in default, the government can intercept your tax refund, including your earned income tax credit. The only sure-fire way to avoid this is not to have a tax refund due by lowering your withholding or any estimated tax payments you make. If your joint tax refund is seized, your spouse can recover some of the amount by filing IRS Form 8379, a simple form available at www.irs.gov. You have the right to be notified before your tax refund is taken. You can contest the taking by checking appropriate boxes on the form (for example, the school closed or the school failed to give you a refund), by returning it immediately and by asking for a hearing. Send the form back return receipt requested as proof that you sent it. Do this every year that you get a notice. If you receive notice only after your tax refund is offset, you can contest the offset after the fact. Wage Garnishment. When in default on a federal student loan, the government can garnish part of your wages without first obtaining a court judgment. The first $217.50/week of “disposable pay” (basically your take-home pay) is protected from garnishment. If your disposable pay is less than $256/week, the government can take the amount that exceeds $217.50/wk. If you make more than $256/week, it can take 15% of the pay. There are a number of ways to stop student loan garnishments: 1. Request a hearing and explain why you think you need not repay the loan. 2. Ask for a repayment agreement, especially before the wage garnishment begins. 3. Explain you lost your old job against your wishes and have not been continuously employed in a new job for a full year. 4. If you enter a rehabilitation plan (discussed later in this chapter), the garnishments stop after your fifth on-time rehabilitation payment. Federal Benefit Offsets. The government can seize part of certain of your government benefits, including Social Security, Social Security Disability, certain railroad retirement benefits, and Black Lung Part B benefits. Some benefits are exempt from seizure, including Supplemental Security Income (SSI), Veterans benefits, and Black Lung Part C. To find out which benefits can be seized or are protected, go to https://www.fiscal.treasury.gov/. For benefits the government can seize, the government cannot touch the first $750 a month. If your monthly benefits are under $832 a month, it can seize the amount that is left after $750 is protected. If your benefits are over $832 a month, it can seize 15% of your benefits. You should also receive a notice warning you that your benefits are going to be taken, with information about your right to request a hearing with the agency that is collecting the money. Request a hearing if you think you have defenses to repayment or if you are facing financial hardships. Lawsuits. There is no time limit for the government to sue you to collect on federal student loan debt. If you are sued, you may have defenses and you can resolve the lawsuit by getting out of default (as discussed below) and resuming payments, or by applying for loan cancellation or discharge. License Revocations. Some states allow professional and vocational boards to refuse to certify, certify with restrictions, suspend, or revoke your professional or vocational license, or even fine you if you default on a state-guaranteed student loan. Some states may allow for suspension or revocation of your driver’s license, too. Some states also apply these policies if you are in default on federal student loans. Getting Out of Default As described in the prior two subsections, after you default on your federal student loan by missing nine months of payments, you may be subjected to harsh collection tactics and lose access to some of the most generous repayment plans and deferments. It is greatly to your advantage to get out of default. One way is to cancel the loan as described earlier in the chapter. Three other ways are described below, but these do not happen automatically—you must press for your rights and initiate the request. Reach a Settlement to Pay Off Your Loan Balance. You can get out of default by negotiating a settlement with your loan holder or the Department of Education to pay a lesser amount to pay off the loan. It can be difficult to negotiate a “good” deal, and you probably will need a large, lump-sum amount to offer. Get any settlement in a writing that confirms that you no longer owe anything, then pay on time, and request a satisfaction letter as proof of your payment in case someone attempts to collect further from you. Consult with a tax professional about any tax liability from your settlement.