Monday, August 23, 2010

From the Archives - Don't Be Afraid of Debt Collectors - They Can't Really Do Very Much

How a Debt Collector Can Attempt To Collect A Debt In Texas

In Texas, there is no wage garnishment. That means that a creditor can not deduct money from your paycheck (unless your employer is out of state - and then they can go directly to that state to garnish). In fact, the mere threat of garnishing wages in Texas is itself an illegal debt collection practice, and may create a potential lawsuit in favor of the debtor against the creditor.

Because wage garnishment is not an option, creditors in Texas are left with only a few options:

Call incessantly

This is their favorite tactic, and it is very effective. It is surprising how negatively this tactic influences people. It really drives people batty. The best way to deal with this, if you are a debtor, is simply to disconnect your phone line, and use only your cell phone (and change your cell phone number if necessary). If creditors call you at work, you may inform them that it is your work phone number and they may not call you at that number anymore. If they continue to contact you at your work number, you should send them a letter via certified mail, return receipt requested, advising them of your work phone number and asking them not to call you there. If they continue to call you at your work number, that is a debt collection violation, and you may be able to file a lawsuit against the debt collector.

Generally speaking, it is not productive to talk to debt collectors. They are adept at upsetting people. The insults and abusive language that my clients have heard from debt collectors is truly mind-boggling. If you want to get upset, just read the chapter on debt collectors in The Two Income Trap by Elizabeth Warren, or the similar chapter in Financial Peace by Dave Ramsey or watch the documentary film Maxed Out. The best approach with debt collectors is never to speak to them.

Send you letters

Debt collectors can send letters advising you of how much you owe and advising you to pay. This is generally not terribly upsetting to people and is not used very much by creditors because:

(i). It is not very effective because it is not very upsetting to the debtors,

(ii). All the communications are in writing and thus any illegal debt collection practice is easy to prove, and

(iii). The cost of stamps add up.

Calling family members or neighbors

Believe it or not, this tactic is arguably legal, so long as they do not disclose what they are calling about. Usually, they will say, “Do you know you neighbor Joe Smith? I have a message for him. Will you ask him to call me?” or “Would you be willing to provide a reference for your daughter Jill Smith? Would you have her call us at this number?” This technique is rarely used. I am not sure why it is not more heavily used. It is effective in upsetting people. My guess is that creditors are afraid of lawsuits for common law unreasonable debt collection, even though its technically not specifically prohibited under the Federal Debt Collection Practices Act or the Texas Debt Collection Practices Act.

Offset against your checking account (if you owe money on a credit card to the same bank that holds your checking account)

It may seem surprising but the issue of whether banks can offset went all the way to the US Supreme Court, and it is now very clear that banks may legally offset from your checking account (i.e. take your money) to repay themselves debts that you owe them. So, don't keep your money at a bank where you have a credit card or any other kind of debt.

Lawsuit

This technique is rarely undertaken because it is quite expensive. The filing fees, attorneys fees, process serving fees, and other expense can add up very quickly. And creditors know that in Texas, where there is no wage garnishment, they are unlikely to collect anyway. Many debtors become very freighted when they are sued for a debt. Generally speaking, this fear is unwarranted. All the creditor is asking the court to do is sign a piece of paper saying that the debtor owes money to the creditor. There is nothing new about the debtor owing the creditor money. There are plenty of monthly statements, demand letters, and other pieces of paper that say the debtor owes money. However, there is one thing special about a piece of paper signed by a judge. Papers signed by a judge called an “Order or Judgment,” can be used by the creditor to get the local Constable to seize any of debtors non-exempt property. So, if the debtor has a boat or an extra car or an extra piece of real estate other than his homestead, or anything that is non exempt, the creditor may be able to get the constable to seize it, auction it, and give the proceeds to the creditor.

The most common type of Non-exempt property seized by creditors is financial accounts (i.e. checking accounts, savings accounts, brokerage accounts, or any other account at a financial institution). Thus, once a Judgment or Order has been signed against a debtor, most debtors choose to live on a cash basis (i.e. not to have a checking account, savings account, brokerage accounts, or account at a financial institution) for fear that they will wake up one day to find their money has been taken from their account.

Other Important Things to Know About Lawsuits on Debt

Once a Judgment or Order has been signed it is good for ten years, and the creditor may renew it for additional ten year periods.

The creditor can obtain an Abstract from the Clerk of the Court that signed the Order or Judgment (an Abstract is just a one or two page summary of the basic terms of the Order or Judgment) and file that Abstract in the county public records to create a lien against any extra (i.e. non-homestead) real estate that the debtor owns in that county.

But there is no need for despair, even after a Judgment or Order has been signed, it can still be discharged in bankruptcy.

The statute of limitations of lawsuits regarding debt is four years. That means a creditor only has four years to sue you from the time that you stop making your payments. If a creditor sues you after four years have already elapsed, you can file a response in the lawsuit alleging that the statute of limitations has run because four years have elapsed and you can get the case dismissed. Note that creditors are always free to call you and ask you to pay even after four years. And if you agree to do so, they can keep pursuing you and can keep the money.

Debtors who have been sued for debts often ask whether they should file an Answer or Response of any sort in the lawsuit. If you have a legitimate dispute about the debt, or the amount of the debt, or the calculation of the debt, then it is fine to file an Answer in Response. However, generally speaking, this only delays the inevitable. In most cases the debt is valid, and the creditor will eventually be able to get a judge to sign an Order or Judgment saying so.

You must respond to any formal discovery (such as Interrogatories, Requests for Discovery, Requests for Admissions, Requests For Disclosures, etc.) sent to you by the creditor after you have been sued, and this obligation continues even after you have had an Order or Judgment entered against you. You can be held in contempt by the Judge and even arrested for failing to answer discovery requests. But you can never be jailed in the United States just for failing to pay a credit card or other debt.

From the Archives - Qualifying For a Chapter 7

Qualifying for a Chapter 7 in Texas

When we evaluate a Texas bankruptcy case to determine whether it qualifies for a Chapter 7, we first look at three major questions:

1. How much unsecured debt (credit card, medical, signature loans, personal lines of credit, etc.) does the debtor have?
It costs over $2,000 to file bankruptcy when you include all of the attorneys fees, filing fees, required classes, credit reports, and so forth. So, unless a debtor can discharge $10,000 or more, we generally don't recommend filing bankruptcy.

2. Does the debtor have any non exempt property?
Exempt property is property that is exempt from levy by creditors. In other words, exempt property is property that can not be touched by creditors. Non- exempt property is anything you own that is NOT exempt. Thus, “non-exempt property” is the property that creditors CAN TAKE. If a debtor has a large amount of non exempt property, which will be taken if he files bankruptcy, then it is usually not advisable to file bankruptcy.

The determination of what is exempt and not exempt is complex. There is a list of exemptions in the Texas Property Code. And there is another list of exemptions in the Federal Bankruptcy Code. Outside of a bankruptcy context, in the ordinary course of life, Texans can only exempt the types of property listed in the Texas Property Code exemption list. However, a Texas resident who files bankruptcy gets to choose the Texas list or the Federal list. Generally speaking, the Texas list is more generous, but it contains no exemption for cash and no “wild card exemption” that can be applied to anything. The federal list is generally less generous than the Texas list, but contains approximately $10,000 per person of “wild card exemption” which can be applied to any kind of property.

3. What is your income level?
In order to file bankruptcy, a debtor must pass the Means Test. Generally speaking, your income can be at most 5-10% or so above the median income for your county and your household size. To give you an idea of what that means, the current Travis County median income for a household size of 1 is about $38,545, for a household size of 2 it is $54,908, for 3 it is $57,053, and for 4 it is $66,400. Keep in mind that if you are married and you and your spouse both work, then both of your incomes must be counted against this household median income level. As with everything to do with bankruptcy, the calculation of the Means Test is complex (certain deductions apply, and certain kinds of income such as Social Security are not counted). It is absolutely essential that you consult with an attorney before making any decisions.

The determination of whether someone qualifies for a Chapter 7 is a complex one and the above three factors are only the first level of analysis that we do.

From the archives - Why Chapter 13's Rarely Make Sense

Why Chapter 13's rarely make sense in Texas

In many states, Chapter 13 Bankruptcy is more common than Chapter 7 Bankruptcy. However, in my bankruptcy practice in Texas, I rarely recommend Chapter 13. In this blog post, I will attempt to explain why.

It is almost always preferable to file a Chapter 7, if you qualify (see my other post on
Qualifying for a Chapter 7), because in a Chapter 7 your debts are discharged within a few months. By contrast, in a Chapter 13 bankruptcy, you must make monthly payments for five years to the Chapter 13 trustee (and the trustee distributes those payments pro-rata to your creditors) and only after 5 years do you get a discharge on whatever amount of debt is still owing at that time.

In Texas, there is no wage garnishment (i.e. no deductions from your paycheck by creditors) and the list of exemptions (i.e. the list of stuff that is exempt from levy by creditors- and thus may be kept by you) is very generous. So, the option of not filing any form of bankruptcy and doing nothing to respond to creditors attempts to collect from you is not such a bad option. This “do nothing option” is sometimes referred to as “informal bankruptcy.”

There are only two situations in which I commonly recommend that a debtor file a Chapter 13 bankruptcy:

1. Where the debtor is behind on his house and wants to force the mortgage lender to allow him to catch up on his late payments over time.

2. The situation in which the debtor makes too much money to qualify for a Chapter 7 but is not comfortable with the informal bankruptcy option, usually because he or she is a person of delicate temperament and is very bothered by the telephone calls from creditors. (NOTE: see my other post on
How Creditors Can Attempt To Collect In Texas.)

From the Archives - Reaffirmation Agreements - Do They Make Sense?

Is "Ride-Through" still an option for Chapter 7 Debtors?

Prior to the bankruptcy law change in 2005, there was a circuit split (i.e. the courts were divided) as to whether debtors had the right to retain their vehicle and continue making regular monthly payments without signing a reaffirmation agreement in places that allowed "retain and pay." The debtor's personal obligation on the note was discharged, and the automatic stay prevented repossession of the collateral. If the debtor defaulted after the bankruptcy, he would not be on the hook for any deficiency after repossession.

Now that BAPCPA has made clear the elimination of the option of "retain and pay," creditors have the ability to repossess a vehicle even if the payments are current, simply by virtue of the debtor filing a bankruptcy and not reaffirming the debt.

But, do creditors actually take advantage of this option?

The short answer seems to be "no."

According to the American Bankruptcy Institute's Reaffirmation Agreements in Consumer Bankruptcy Cases by Daniel Austin and Donald Lassman, "the likelihood of a creditor repossessing the collateral of a debtor who is current simply because a bankruptcy has been filed is very remote" (see pg. 31).

Creditors are almost always better off continuing to accept payments from a bankrupt debtor who refuses to reaffirm, as opposed to repossessing the collateral. Repossessed vehicles only net a small percentage of the loan balance after considering attorney fees, repo fees, storage fees, auction fees, and low market value of a vehicle at auction. So, creditors have very little incentive to expend the time and money necessary to compel reaffirmation. And even if the lender is successful in getting the debtor to reaffirm, there is no guarantee they will be able to collect from a judgment-proof debtor who later stops paying.

Nationwide, only 23% of cases ever have reaffirmation agreements filed in them. In Texas, the percentage is higher. At 37%, Texas ranks in the top four states, along with Mississippi, Alabama, and Maine (see Austin and Lassman pg. 61 & 62). It is hard to believe that so many Texas debtors make a fully informed decision to reaffirm. Reaffirmation agreements disproportionately benefit the creditor. The only up-sides to the debtor are (a) an ability to have timely payments reported on the debtor's credit report, (b) maintaining a positive relationship with the creditor, and (c) eliminating the very small chance of repossession. Thus, the benefit of discharging your personal obligation to pay an entire auto loan usually greatly outweighs the limited benefits of reaffirmation.

From attorney to attorney, there seems to be a large disparity in percentage of reaffirmation agreements filed for clients. Some bankruptcy attorneys file many more reaffirmation agreements on their clients' behalf than other attorneys. This is further evidence that something is amiss. Clearly, a large number of debtors are reaffirming debts that they do not really have to reaffirm. If you do not reaffirm, and the lender fails to repo while your bankruptcy case is still open, it is arguably too late for them to repossess on the basis of your bankruptcy. In other words, you can argue that they have waived the default you committed by filing bankruptcy, and thus can not lawfully repo the vehicle unless you create a new default by missing a payment or failing to maintain insurance, etc.

Granted, a small calculated risk must be accepted by the debtor when he chooses not to reaffirm. However small the chance may be, there is a possibility that the debtor's vehicle will be repossessed even if he is current on the payments. Debtors should be cautious in choosing an attorney who will look out for their best interest when dealing with reaffirmation. Debtors should be wary of anyone who is too eager to have them reaffirm.

Making a sound financial decision should take priority over a personal attachment to a car, or a debtor's strong desire to have their payments reported to the credit bureaus. In practice, the "ride-through" option has not been completely eliminated, and should be fully explained by the debtor's attorney before a reaffirmation agreement is hastily signed.

From the Archives - How Your Startup Business Can Minimize Legal Expenses

Unless you have a lot of personal assets that you want to protect that are not in exempt buckets like IRA's, home equity etc., you probably don't need to incorporate and hire a lawyer before you rent office space, get a phone line, print business cards, and go into business. Just do it.

Unless you are going into a regulated industry such as food service, child care or the like, don't worry about getting a lawyer right away and just make sure there's a real business opportunity and that you can close deals. If you can't close deals and generate revenue, you don't need to mess with the legal stuff anyway. Once you've sold something, you'll have revenue, energy and a reason to get the legal stuff right. Don't let the legal worries become a distraction.

When you do start working on the legal stuff, don't try to jump through every legal hoop at once. If your full time job becomes filling out forms, your business will fail. Do only the bare minimum, worry only about the things that will really hurt you. Here's a tip: unless you have a lot of assets sitting in the bank or are making a lot of taxable income, very few things will really expose you to much risk in the first year because you are probably judgment proof.

Wait to hire employees as long as possible. Hiring employees makes the legal side much more complicated. Note: contractors can come in and do project work for you any time.

Once you are ready to get a lawyer, make sure you find the right one. Find a lawyer who will answer basic questions for free. You shouldn't have to pay $100 to get a simple, 30 second question answered. You want a lawyer who doesn't start the clock unless he has to draft docs or review docs or do research, and who is willing to give you a reasonable hourly rate (not more than $300/hour) and bill his time conservatively until you get on your feet.

If you have some free cycles, ask your lawyer to point you in the right direction and let you do things yourself to keep costs down. For example, you can probably figure out how to incorporate yourself.  You might also want to use a generic Non-Disclosure Agreement and do it yourself.

From the Archives - Should You Use a Do-It-Yourself Will Kit?

The form kits for wills, living wills, etc. are very simple. If your situation is simple that may work (e.g. you are single, have no kids, don't have a lot of assets, don't have any special needs or disabilities, etc.) But if your situation is even slightly complex, it's important to have a will or living will crafted to fit your situation.

Keep in mind that when you consult with a lawyer, what you are paying for is not the form used, but the personalized advice and counseling that goes along with it. I'll give you an example of something a good lawyer might point out during an estate planning meeting:

If you have minor children or may have children any time soon, you should include a testamentary trust to hold any assets they inherit if you and your spouse both die. This avoids having to do a dependent probate (i.e. get approval from the Probate Court for each step in the probate process) which is time consuming and expensive. It also allows you to control things like:
  • Who serves as trustee for your children
  • How much is paid per month to the family who raises them
  • The age at which your children get free reign over all of their inheritance
  • The purposes for which the principal balance of their inheritance may be pulled out early (college tuition or medical needs, for example)
This is just one example and, as you can see, this sort of legal and estate planning advice goes beyond what you'd find in a do-it-yourself will kit.

From the Archives

Now that I have switched over to my new blog, I'm going to run a few of the most popular posts from my old blog.  I don't know how to port the old posts over, so I'll just pick a few of the ones that people have told me were most helpful. 
 
Thanks,
Joe

Another little trick by banks to take more money from consumers