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Bankruptcy

A GUIDE TO BANKRUPTCY

Bankruptcy

Undisputed Legal

A misconception exists that bankruptcy is caused by inescapable debt as a last resort when an individual cannot meet debt obligations and has taken on too much credit. However, bankruptcy can also be filed after suffering a major unexpected financial blow. Bankruptcy does not magically waive all debt, and the debtor is still required to pay. However, the method of payment depends on the type of bankruptcy filed. 

The United States governs bankruptcy via federal law, commonly called the Bankruptcy Code, deriving authority from the US Constitution to enact uniform law. Some laws relevant to bankruptcy are found in other parts of the United States Code; however, with bankruptcy crimes being found in Title 18 of the United States Code (Crimes), tax implications of bankruptcy are found in Title 26 of the United States Code (Internal Revenue Code). The creation and jurisdiction of bankruptcy courts are found in Title 28 of the United States Code (Judiciary and Judicial procedure).

[1.0] INTRODUCTION

Bankruptcy cases are filed in United States Bankruptcy Court (units[1] of the United States District Courts), and federal law governs procedure in bankruptcy cases. However, state laws are often applied to determine how bankruptcy affects the property rights of debtors. For example, laws governing the validity of liens or rules protecting certain property from creditors (known as exemptions) may derive from state law or federal law. Because state law plays a major role in many bankruptcy cases, it is often unwise to generalize some bankruptcy issues across state lines.

What happens when bankruptcy is filed

An automatic stay puts a block on the debt of the individual filing for bankruptcy, which essentially protects them from creditors and collections agencies from pursuing them for what they owe. This means that there is no garnishing of wages and no confiscation of secured assets during the stay.

A debtor is required to file a petition in bankruptcy court to initiate proceedings.  Filing bankruptcy can help a person by discarding debt or making a plan to repay debts.

[2.0] HOW TO FILE FOR BANKRUPTCY

Before filing for bankruptcy, it is necessary to attend a council meeting with a credit counseling organization approved by the Department of Justice’s U.S. Trustee Program. The meeting helps gauge the individual’s financial situation and can educate them as to alternatives to bankruptcy. Furthermore, this can help in the creation of a budget plan. According to the Federal Trade Commission, the counseling session is free for individuals who cannot actually pay for the same, although the standard cost is USD 50.  Obtaining a credit report at this juncture provides insight into the state of the individual’s finances. 

Moreover, every person who files for bankruptcy has to take a credit-counseling course in the 6 months or 180 before their bankruptcy petition is filed with the court in both Chapter 7 and Chapter 13 cases. The course has to be taken through a credit counseling agency approved by the Department of Justice. For discharge of debts, a debtor education course must be taken. Finally, before filing, a creditor’s meeting is required to take place between the individual filing bankruptcy, the bankruptcy trustee, and any attendant creditors. The meeting provides an opportunity for the attendees to question the debtor regarding their decision to file bankruptcy and really comprehend their financial situation. This meeting is termed the 341 meetings. 

The filing fee for the federal racks up a bill of USD 338 for a Chapter 7 bankruptcy., collected at the time of filing the bankruptcy petition with the court. Payment can either be upfront or if the debtor is unable to pay at the time or installments after the case is filed. Up to four monthly payments can be provided. However, if the debtor cannot pay in installments, they can apply for a fee waiver as long as their household income is under 150% of the federal poverty line. However, the denial of the application would require the debtor to pay the sum in installments. 

[2.1] LISTING DEBTS OWED

An inventory of creditors is required to be supplied to the court by the debtor. This is necessary to form a priority list for the repayment of the debts. Debts may be grouped into [A.] secured debts and [B.] unsecured debts. 

In secured debts, the creditor has an actual security interest in property put up as collateral. These include loans like mortgages or car loans, where the collateral is the home or the car. Unsecured debts do not have any property or collateral. They are consequently seen as less pressing by the bankruptcy court since failure to pay an unsecured debt does not have the failsafe collateral to fall back on. 

The bankruptcy court will then issue a discharge, which effectively relieves the individual from liability to pay debts and freezing any collection activity or legal activity by the creditors since the discharge prevents them from enacting further claims. The court is required to send the creditors and the  U.S. Trustee Program at the Department of Justice a notice communicating discharge, since any creditor who attempts to collect a debt after the notice can be penalized. 

Chapter 7 bankruptcy can see discharge issued within six months (typically four) after the bankruptcy petition, contrasting with Chapter 13 bankruptcy, wherein discharge is filed after the payment plan. 

[3.0] TYPES OF BANKRUPTCY

[3.1] CHAPTER 7

Chapter 7 of the Bankruptcy Code is the most common form of bankruptcy in the United States, primarily centers around liquidation. It espoused liquidation, initiating the process by appointing a trustee to collect the assets that are non-exempt of the debtor. This trustee is appointed by the bankruptcy court and is required to sell the assets to accrue the funds to pay the creditors in order of preference. Businesses and individuals in the United States can file for bankruptcy in federal court under Chapter 7.

A company often files for bankruptcy if it is troubled or if advised by the creditors. This means that the business essentially is out of existence when the petition is filed. However, it can still subsist if the court-appointed trustee decides to continue operations. A swathe or even a company division can be sold to retain enough funds to pay creditors, beginning with the secured creditors. The company’s assets already exist as collateral for the credit advanced to the liquidating company. 

Individuals are allowed to keep exempt properties, though they need to adhere to certain specifications to be protected from the exemption.  Some considered subordinate debts are discharged because they are unsecured, and other forms of debt take priority. These are called junior tranche debts since they may be leftover after senior debt paying for the creditors. Due to the high risk associated with the junior tranche, this debt carries a lower credit rating. It pays a higher interest rate than the senior tranche to compensate its holders for the additional risk.

An amendment was made to the bankruptcy law in 2005 with the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, created to limit consumer debtors from filing bankruptcy in general. 

Chapter 7 debtors do not always have to liquidate their property (unless it’s collateral) because it’s usually exempt or just not worth it. Often, cumbersome property means that the trustee may “abandon” the property, allowing the individual to retain the same even in cases of non-exemption. 

Liquidation can occur only after the creditors who are owed a meeting. The trustee calls for the meeting, and if the vote goes for liquidation, the property is either surrendered or paid for in an equivalent cash value to pay back the debt.

The means test helps in determining whether Chapter 7 or 13 bankruptcy must be filed. The means test compared the average income of the individual filing for bankruptcy over the previous six months alongside the median income for a household of equivalent size in the state. If the individual’s earnings fall below the median, they are eligible for chapter 7 bankruptcy.

However, even if the income is higher than the median, one can still be eligible under chapter 7. This would be done after deducting certain allowable expenses. This will not hold if the individual has enough remaining disposable income to repay their debts.

[3.2] CHAPTER 11

Chapter 11 bankruptcy is the most complex form of bankruptcy and is mostly filed by businesses that require time to restructure their debts. Dubbed reorganization bankruptcy, Chapter 11 involves reorganizing a  debtor’s business affairs, debts, and assets. For that reason, it is known as “reorganization” bankruptcy, allowing the debtor a fresh start dependent on their satisfaction of their liabilities under the plan of reorganization. Higher-income individuals who want to retain their property can also file for a chapter 11 bankruptcy. If they fall outside a chapter 13 bankruptcy chapter, 11 case petition must be filed with the bankruptcy court serving the area where the debtor has a domicile residence. This petition may be voluntary or involuntary, dependent on whether the debtor or the creditor files it.   Dependent on the same, the required forms must be filled. A voluntary petition would require the attachment of Form 1 of the Official Forms prescribed by the Judicial Conference of the United States.

It is necessary to also file [A.] schedules of assets and liabilities; [B.] a schedule of current income and expenditures;  [C.]  a schedule of executory contracts and unexpired leases; and [D.]  a statement of financial affairs. Additional documents need to be filed with the court depending on whether the debtor is a person rather than a company or married. For individuals or people who are married, there are further requirements, including [A.]: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; [B.] evidence of payment from employers, if any, received 60 days before filing;  [C.]a statement of monthly net income and any anticipated increase in income or expenses after filing; and [D.]a record of any interest the debtor has in the federal or state qualified education or tuition accounts. However, married people don’t have to file a joint petition and file for bankruptcy individually. 

A business in the midst of filing Chapter 11 may continue to operate. In most cases, the debtor called a “debtor in possession,” runs the business as usual. However, in cases involving fraud, dishonesty, or gross incompetence, a court-appointed trustee steps in to run the company throughout the entire bankruptcy proceedings. 

[3.3] CHAPTER 13

With chapter 13, a debt plan must be followed. Some debts, called priority debts, need to be paid in full, including alimony, child support, tax obligations, and wages owed to employees. This depends on how much is owed and the income level of the individual declaring bankruptcy. However, it provides detailed instructions on how much should be paid and when it has to be paid.  

Chapter 13 is often called a wage earner’s reorganization since debtors must submit and follow through with the plan within three to five years.  The plan must be consistent and substantial payback to the creditors be assured, even if it takes up the entirety of the debtors’ disposable income. The payback must be at least equal to what creditors would receive under other forms of bankruptcy. An exhaustive list of creditors must consequently be compiled with inventory regarding the amount owed to each property owned, with a record of the individual’s income sources and monthly expenses. Furthermore, credit counseling should have been completed.

Upon determining the plan’s financial situation and conduct, the debtor is required to pay the monthly amount to an appointed, impartial bankruptcy trustee, who is responsible for distributing money to the creditors equitably. However, debtors have no direct contact with creditors under Chapter 13 protection.

There is an eligibility criterion to avail of Chapter 13 bankruptcy. If the individuals have [A.] unsecured debt under USD 419 274 or [B.] secured debt of under USD 1,257,850, they are eligible for Chapter 13 bankruptcy. However, increases to the same are likely and come in three-year intervals.

[4.0] IMPACT OF BANKRUPTCY 

The main impact of bankruptcy can be seen on one’s credit score.  There is a steep plummet in one’s credit score after any bankruptcy filing. With more accounts involved, the graver the impact on the score. This can make it more difficult to obtain a credit card, car loan, or mortgage, impacting the individual’s insurance rates or rent acquisition.  In general, a chapter 7 bankruptcy will remain on your credit report for 10 years, and chapter 13 stays on for seven.

Most debts in bankruptcy are discharged. However, some debts are more difficult to get rid of than others, including tax debts, alimony, and divorce-related debts. Furthermore, student loans can be discharged only after a federal test for hard-ship has been passed. 

A bankruptcy alternative is negotiating with creditors to work out a payment plan or another arrangement to pay off debts. Even though bankruptcy is not as dire as it is made out to be, alternatives can be worth exploring before declaring bankruptcy.  This is a good way to avoid a negative credit score marring the report. Negotiations with creditors is often a route to pursue, wherein creditors are more comfortable with a reduced period over a longer period of time rather than waiting for a bankruptcy settlement.  Since there is prioritization in repayment, creditors run the risk of getting nothing and, consequently, are more likely to accept a side-payment plant.

For outstanding loans and engagements like a mortgage, interacting with loan servicers is important to understand the options available. Some lenders are accommodating enough to postpone payments for a period of time, enacting forbearance, but others can help devise a loan repayment or modification program. This would allow for smaller payments over a period or a change in Sloan’s loan’s interest rate to make it easier to repay. 

Sometimes, negotiations may even be done with the Internal Revenue Service, wherein an offer in compromise can also be included. Payment plans are also in function in the IRS, which would allow eligible taxpayers to pay taxes over a period of time.

[4.1] HOW TO RECOVER AFTER BANKRUPTCY

As mentioned above, bankruptcy will remain on a credit report for either seven years (in the case of Chapter 13) or 10 years (Chapter 7). The first step to recovering after bankruptcy is simple: the credit report should show a $0 balance for any accounts that have been discharged through bankruptcy. This can also prevent continual reportage of negative account information by creditors even after discharged from bankruptcy. Engaging with credit repair companies is not advisable if the bankruptcy report is accurate; however, there is nothing these companies can legally do for an individual. 

A tool to reinstate good credit for individuals is a secured credit card, where a deposit is made with the issuing bank to develop into a credit line. Responsible usage of that card can establish a better credit history, and regular payments on time can even allow for a regular, non-secured credit card.

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Sources

1.2005—Pub. L. 109–8, title VIII, § 801(b), title X, § 1007(d), Apr.

2. (Article 1, Section 8, Clause 4) authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.”

3.U.S. Trustee Program. (2020, October 16). Retrieved December 04, 2020, from https://www.justice.gov/ust

4.2005—Pub. L. 109–8, title I, § 102(k), title VII

5.122A-2 Form.

6.United States Courts. “Chapter 11 – Bankruptcy Basics.” Accessed December 4, 2020.

7.11 U.S.C. §§ 301, 303.

8.Fed. R. Bankr. P. 1007(b)

9.11 U.S.C. § 521.

10.11 U.S.C. § 302(a)

11.Federal Register. “Revision of Certain Dollar Amounts in the Bankruptcy Code Prescribed Under Section 104(a) of the Code.” Accessed December 4th, 2020.

WILL BANKRUPTCY REMOVE MY CHILD SUPPORT OBLIGATIONS?

Bankruptcy’s effect on child support is very similar to its effect on alimony. Past-due child support is not dischargeable in bankruptcy. If one spouse owes child support but has not paid because of hard times, the past-due amount still must be paid. A bankruptcy court can discharge many debts, but the court cannot remove a child support debt (or an alimony debt). Severe financial problems (as evidenced by the bankruptcy) could be a basis for reducing future child support payments, but not for reducing past-due costs. 

For information on serving legal papers, click here or call (800) 774-6922. Representatives are available Monday-Friday 8 am – 8 pm EST.  If you found this article helpful, please consider donating.  Thank you for following our blog, A space dedicated to bringing you news on breaking legal developments, interesting articles for law professionals, and educational material for all. We hope that you enjoy your time on our blog and revisit us!  We also invite you to check out our Frequently Asked Questions About Process Servers by clicking here.

What You Need To Know About Divorce and The Effect Of Bankruptcy

A property settlement might be dischargeable in bankruptcy, or it might not be dischargeable, depending on the case’s facts. A discharge in bankruptcy means that all of a debt or a portion of a debt no longer has to be paid because a federal court has declared the debtor to be bankrupt. 

Before 1994, many former spouses of persons who declared bankruptcy after the divorce found themselves out of luck when seeking to collect what was due. For example, a wife may have agreed to a divorce based on a promise from her husband that three years after the divorce, he would pay her a certain amount of money as part of the property settlement. If the husband declared bankruptcy after the divorce was finalized, the wife might never collect the amount that was due. 

Congress saw the potential unfairness of this, particularly when the debtor is technically bankrupt (owing more money than the debtor has assets). However, the debtor nonetheless still has the capacity to pay any debts. The new law, which took effect in 1994, allows the bankruptcy court to weigh the parties’ hardships. If it appears that the bankrupt debtor has enough property and income to pay the debt to the ex-spouse, the debtor will have to do so. If the debtor truly does not have enough money for the debtor’s basic support and his or her dependents, then all or a portion of the debt may be discharged in bankruptcy. 

Although in appropriate circumstances, a bankruptcy court has the power to discharge a debt owed in a property settlement, the court cannot discharge past-due payments for alimony or child support. A debtor’s bankruptcy may be a basis for reducing future alimony and child support, but not for reducing or eliminating past-due alimony and child support. 

For information on serving legal papers, click here or call (800) 774-6922. Representatives are available Monday-Friday 8 am – 8 pm EST.  If you found this article helpful, please consider donating.  Thank you for following our blog, A space dedicated to bringing you news on breaking legal developments, interesting articles for law professionals, and educational material for all. We hope that you enjoy your time on our blog and revisit us!  We also invite you to check out our Frequently Asked Questions About Process Servers by clicking here.

5 Things to Know About Personal Bankruptcy and Divorce

divorce

By: Justipedia

In many cases, personal bankruptcy and divorce go hand in hand. Money is one of the top reasons couples fight; therefore, money is one of the top factors in a divorce. Sometimes, couples cannot resolve their money issues, and one or both spouses decide that the marriage is irretrievably broken. In this event, one or both spouses may file for a divorce to have the marriage dissolved. Unfortunately, if the spouses have accumulated a significant amount of joint marital debt (or they live in a state where marital debt is divided equally, regardless of whose name the debts are in), filing for divorce may only make the money problems much worse.

 

In addition to dealing with overwhelming debt problems, the couple will now face paying attorney fees and costs for the divorce action. However, if the couple can work together to file a bankruptcy case before filing for divorce, the bankruptcy case may resolve some of the debt problems. If so, the couple may be able to save time and money, simplifying the divorce proceedings by removing the issue of joint marital debts.

However, this may not always be the case. Couples may not be able to put aside their differences to file a joint bankruptcy case, or one spouse may be unwilling to file a bankruptcy case. In some of these situations, it may still be advantageous for a spouse to file bankruptcy either right before, during, or right after a divorce proceeding. In many cases, only an experienced bankruptcy attorney working in conjunction with an experienced family law attorney can properly advise you of the best option for your specific situation. However, here we’ll look at some of the key facts you should know if both divorce and bankruptcy are imminent in your case.

Facts About Filing a Personal Bankruptcy While Seeking a Divorce

As discussed above, whether you should file a personal bankruptcy before, during, or after your divorce proceeding depends on your specific situation. However, below are five facts about bankruptcy and divorce that you may want to consider when consulting with your bankruptcy attorney and your divorce lawyer.

  1. The Bankruptcy Automatic Stay
    If you file for bankruptcy during your divorce proceeding, the automatic stay provided by the Bankruptcy Code will put a temporary hold on the division of property and debts in your divorce proceeding. While you are a debtor in bankruptcy, you cannot transfer any assets, including those in a divorce action. You may also be unable to pay any joint marital debt if the debt is unsecured. Your divorce attorney must understand how a bankruptcy filing affects a divorce proceeding. Because most divorce attorneys are not as familiar with bankruptcy law as bankruptcy attorneys are, your divorce attorney should discuss the bankruptcy filing with your bankruptcy attorney before filing to work out the details in your best interest.
  2. Unsecured Marital Debt in Bankruptcy
    If you file for bankruptcy, you will receive a bankruptcy discharge to all unsecured marital debt. This means that you will no longer be legally liable for the repayment of the marital debt, and the creditor can never try to collect that debt from you. However, the creditor may pursue your ex-spouse to pay the full marital debt since it cannot be collected from you. A problem arises if the family court ordered you to pay some or all of the marital debt. If you do not pay this debt, your ex-spouse can file a motion with the family court to hold you in contempt of the family court order. It would help if you discussed this possibility with your bankruptcy attorney before filing. (Learn more about the bankruptcy process in 8 Things You Should Know About Bankruptcy.)
  3. Filing a Joint Bankruptcy Petition
    Some couples choose to file a joint bankruptcy petition before filing for divorce. In this case, the couple can discharge debts through the bankruptcy case so that both parties can get rid of the marital and individual debts to obtain a fresh start. This may also make the divorce less complicated and costly. Couples do not need to live in the same household to file a joint bankruptcy petition.
  4. Discharging Spousal and Child Support
    The filing of a bankruptcy case will not discharge your obligations to pay domestic support obligations (i.e., child support or alimony). These amounts are non-dischargeable and will remain due after your bankruptcy case has been closed.
  5. Domestic Support Obligation Arrearages
    Even though you cannot discharge your child support or alimony through your bankruptcy case, if you are behind in your payments, filing bankruptcy may still help you avoid jail for failure to pay your support payments. If you file a Chapter 13 bankruptcy case, you may include the past due to child support or alimony payments in your bankruptcy plan. The arrearage j will be paid through your bankruptcy plan, but you must make your regular payments outside of bankruptcy and keep those payments current at all times.

Timing of Bankruptcy and Divorce Filings

As discussed above, the timing of your bankruptcy and divorce filings is critical. For some people, filing bankruptcy before a divorce case may be in their best interest, while it may be better for others to file bankruptcy after their divorce is final. If you are contemplating a divorce and bankruptcy, it is best to consult with two experienced attorneys who know how to use a bankruptcy case to help you resolve your debt problems as you are dissolving your marriage.

Takeaway: Timing is crucial for divorce and bankruptcy proceedings, as is knowing what to expect when the cases are closed.

For information on serving divorce papers, contact a Divorce Process Service, call (800) 774-6922. Representatives are available Monday-Friday 8 am – 8 pm EST.  If you found this article helpful, please consider donating.  Thank you for following our blog, A space dedicated to bringing you news on breaking legal developments, interesting articles for law professionals, and educational material for all. We hope that you enjoy your time on our blog and revisit us!  We also invite you to check out our Frequently Asked Questions About Process Servers.

5 Things to Do Before Filing for Bankruptcy

By: Mitchell Allen

Takeaway: When bankruptcy’s looming, sometimes the best thing you can do is buy yourself some time.

This article is an excerpt from “A Survival Guide to Debt” by Mitchell Allen.

When you’re sick, and you go to the doctor’s office, the first thing he or she asks (when the doctor finally gets to you) is usually something like, “So, what seems to be the problem?” That’s when you get to describe your symptoms so that the doctor can start figuring out what medicines to prescribe and what other treatments to recommend.

Debt trouble is a lot like being sick. The problem is, many people can’t or won’t admit to themselves that they have this particular illness until they’re already in the financial equivalent of critical condition. What could have been handled in the early stages with a few simple preventative measures now requires an emergency-room visit, followed by admission to the financial ICU.

Eventually, of course, one way or another, debt trouble will reach the point where it can no longer be ignored if you’ve finally concluded that you’re in real trouble … congratulations!

I really mean that. As anyone who has ever been through a recovery process knows, the first step to solving a problem is admitting to yourself that you have a problem. The one advantage of debt trouble is that it won’t allow you to ignore or deny it forever. Your creditors will, without fail, remind you repeatedly that there is a situation developing that must be addressed, and eventually, action will be taken – either by you or by them. Here we’ll look at how to go from being a passive, avoidant victim of debt to being a proactive, confident debt survivor. Here are five things to do right away.

Stop the Bleeding

Going back to our medical analogy: When you go to the emergency room, the physicians there use a triage process that involves assessing your situation and those of the other patients to decide what is the most critical need to address first. If you have a fever and the guy next to you has blood squirting from an artery, they’re going to take care of him first. And, if you have multiple symptoms ranging in severity, they’re going to treat the most life-threatening symptoms first and leave the others alone until you’re stable enough that they can get to them.

Right now, it would help if you had financial triage. And if you’re bleeding to death financially, the first thing you need to do is apply a tourniquet so that you can buy enough time to address the underlying issues that got you in trouble in the first place. We’ll start with the most severe conditions and work our way down from there.

Delay Foreclosure

For most of us, losing our home to the bank is probably the thing we fear most, and with good reason. Our house is usually the single largest and most valuable asset we have. Not only does it provide financial benefits, but it also affords shelter, both physical and emotional. If you’ve reached the point where your mortgagor is threatening or has initiated foreclosure proceedings, that’s the first thing you must address.

Communication is your most useful tool as you work your way out of debt. Now is the time to begin using it. Call your mortgage lender and tell them about your circumstances. Have you lost a job or had your hours drastically reduced? Has a serious illness cut into your income or generated medical bills that have caused you to fall behind? Has a divorce and its attendant court-ordered alimony or child support payments impaired your ability to stay current? Tell your lender.

Believe me; the lender does not want to foreclose on your home; foreclosure is expensive and time-consuming. If you are honest and forthcoming in your explanation, your lender will almost always work with you on a reasonable plan to help you get current.

The important thing to remember is that your lender wants to hear from you. Their favorite form of communication is a full payment received on time, but if that is impossible for you, by all means, communicate in some fashion. A call from you explaining your circumstances and asking for additional time to work things out is vastly preferable, from your lender’s perspective, then no communication at all.

An important word of caution: Don’t allow your panic over possible foreclosure to push you toward responding to one of the many scams that promise to halt foreclosure. These fraudulent schemes use phrases like, “We can save your home” “Stop foreclosure now!” “We guarantee to save your home,” and other claims. Some will even offer a money-back guarantee. The problem is, by the time you realize they aren’t going to do what they promised, your money – and, sometimes, what is left of your equity – has vanished, along with the guarantee.

Stall Repossession

Following closely behind our homes in importance are our automobiles. Usually, car payments are second only to house payments in our chart of monthly expenses. That’s not surprising because, for most Americans, the car provides transportation to and from our places of employment and also gets our kids or us to school, to church, to friends’ houses, etc. I can’t imagine what my life would be like if I didn’t have my vehicle constantly available to take me where I need to go. I’m sure your life is much the same.

If your debt troubles have become severe enough that your lender is taking steps to repossess your car, there are some things you can do to give yourself a little more time as you form a plan for getting out of debt. Here again, communication is at the top of the list.

While a vehicle’s repossession is easier for a lender than foreclosure on a mortgage, it is still a costly process that the lender would much rather avoid if it thinks there is a reasonable alternative. Call your lender and explain your situation. If you can send them even a partial payment, let them know that. If you’ve fallen on hard times, give them specific information, especially if you think you’ll be in a better position in the future. As I will emphasize again later if you agree to send a payment or even to something as simple as calling back in three days to give them an update, follow through. Consistent, honest communication from you may not keep your car safe from the tow truck indefinitely. Still, it can certainly buy you a bit of time as you begin working on your personal financial recovery plan. And right now, a little time and breathing space is your greatest need.

Deal with Creditor Calls and Mail

Creditor calls are no joke, especially if they’re contacting you during working hours. Fortunately, recent laws governing debt collection have greatly improved debtors’ ability to protect themselves from harassing or threatening calls from creditors.

If you’re fortunate enough to be gainfully employed, the last thing you need is the distraction of creditor calls and the potential embarrassment and/or disfavor with your employer they can cause. If you lose your job because of creditor calls, that’s only going to make matters worse.

So, request that creditors cease contacting you at work. This sounds ridiculously simple – and it is – but many people don’t realize that they have the right to tell creditors to quit calling during working hours. The next time a creditor calls you at your place of employment, say something like: “I must ask you to stop calling me at this number during working hours. I am not trying to avoid this debt, but you are potentially jeopardizing my employment. Please do not call me at this number from the hours of [give your working hours] again.”

Be courteous but firm, recognizing that the law clearly states that the creditor may not contact the consumer at work if the creditor knows that the consumer’s employer prohibits it. If the calls continue, document the fact in writing; it may give you grounds for filing a formal complaint with the Federal Trade Commission. Trust me: your creditors do not want to fall afoul of this or any other regulatory body.

As a matter of fact, the law states that creditors may not communicate with consumers “at any time or place which is unusual or known to be inconvenient to the consumer” (www.ftc.gov). Times within the hours of 8 a.m. to 9 p.m. are presumed to be convenient unless you can prove otherwise. However, it would help if you exercise caution in pushing too hard on this point; creditors who feel they have no other recourse to communicate with a debtor may file a lawsuit that provides specific means for communication between the parties.

Write a Cease-and-Desist Letter

Another way to get creditors to stop contacting you is to send them a letter. Again, this sounds like an obvious course of action. Still, many people are so intimidated by their situation that they never think of simply sending a written demand to cease contact.

Here again, the laws governing debt collection provide that creditors who receive a properly worded cease-and-desist letter must stop contacting you except for the specific instances allowed by the law:

  • To inform you that they have ceased efforts to collect the debt.
  • To inform you that they may invoke “specified remedies” (which sometimes means a lawsuit)
  • To inform you that they intend to invoke “specified remedies.”

What this means to you is that you should probably tread carefully in the area of sending a cease-and-desist letter. Why? Because for some creditors, receiving a letter from you forbidding them to contact you any more – even though it is your legal right to send such a letter – may cause the creditor to conclude that it’s in their best interest to use their legal right to bring a suit for collection of the debt. As you can probably figure out, this is a situation you want to avoid if at all possible.

While I’m on the topic of mail, let me urge you, if you’re one of the many debtors who have tried to avoid looking at those demand letters you’ve been getting, to start opening and reading your mail. No matter what course of action you eventually decide to pursue on your way to regaining financial health, you have to know where you are before you can figure out where you need to go.

Communicate

One of the most important tools you have at your disposal in this task is communication – not only with your creditors but also with family members and other involved parties. Right now, though, I want to emphasize the importance of maintaining lines of communication with your creditors.

This is especially important if you decide to work directly with your creditors to satisfy the debt. Creditors are much more willing to benefit from the doubt to consumers who are honest, forthcoming, and respectful in their communications, whether by phone or by mail.

Collection agents spend the majority of their time trying in vain to establish contact with debtors. By returning their calls and answering their written communications, you immediately place yourself on a different – and better – list than debtors who are non-
communicative or who otherwise give the appearance of trying to avoid making good on their obligations.

Now, that doesn’t mean you should agree to all their demands. A collector’s job is to convince you to send money; if you could have done that, you wouldn’t be behind in the first place, right? However, you can do things and say that will encourage your creditor to be more patient with you as you work on a repayment plan. Chief among these is an honest acknowledgment of your responsibility for the debt, maintaining a respectful tone, and following through on anything you agree to do, including subsequent communications. I know that the last thing you may want to do is send a follow-up letter to a creditor or take a phone call from a collector, but sometimes, a bit of time spent in communication with the creditor can pave the way to an easier path out of debt. It can also sometimes help to keep you out of a lawsuit.

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