- What disclosures must a collection agency provide to a debtor?
- What actions must a collection agency avoid?
- Are there any alternatives to filing bankruptcy?
- Are student loans discharged in a bankruptcy proceeding?
- What effect does a bankruptcy filing have on the collection of alimony and child support?
- Does a bankruptcy discharge eliminate all debts?
- How much property does the debtor have to give up in a bankruptcy proceeding?
- Will a debtor lose his or her home by filing bankruptcy?
- How long are bankruptcy and other credit information included on the debtor’s credit report?
- What happens if the debtor’s salary increases after filing a Chapter 13 wage-earner plan?
- The Bankruptcy Code uses such confusing terminology. What is meant by such terms as preference and fraudulent conveyance?
- How can a debtor determine whether a debt is secured?
- Learn More: Bankruptcy Law
Typically, a collection agency begins its efforts with an introductory letter. This letter usually contains the required legal disclosures, which include:
- The amount of the debt,
- The name of the original creditor,
- The period of time in which the debtor may dispute the validity of the debt (thirty days), and
- The obligation of the collection agency to send the debtor verification of the debt if its validity is disputed.
In the original correspondence, the collection agency must also inform the debtor that it is attempting to collect a debt and that any information it gathers from the debtor or other sources will be used for that purpose. If this information is not included in the initial contact letter, the collection agency must provide it within five days.
Most lawyers recommend that debtors request verification of the debt because, in that case, a collection agency may not resume collection efforts until the information is confirmed with the original creditor. The collection agency may not, whether by threatening to destroy the debtor’s credit rating or by threatening to sue if payment is not received immediately, make a statement in the initial correspondence that overshadows the debtor’s right to dispute the debt for thirty days.
Under the Fair Debt Collection Practices Act, a collection agency may not act in the following ways:
Third-party communications. The collection agency cannot contact third parties other than the debtor’s attorney or a credit bureau for any reason other than to locate the debtor. Collection agents who contact third parties must state their names, and may only add that they are confirming or correcting information about the debtor. They cannot give the collection agency’s name unless asked directly. They cannot state that they are calling about a debt. Collection agents may not contact a third party repeatedly unless they believe an earlier response was wrong or incomplete and that the third party has revised information. Further, collection agents cannot communicate with third parties by postcard or by correspondence that uses words or symbols that betray their collection motive.
Attorney-represented debtor. A collection agency cannot contact the debtor directly if counsel represents him or her unless the debtor gives the collection agency specific permission to do so.
Debtor communications. Collection agents may not contact debtors before 8:00 a.m. or after 9:00 p.m., or at another inconvenient time or place. Collection agents also may not contact a debtor at work if he or she knows that the employer bans receipt of collection calls while on the job.
Harassment or abuse. Agents cannot threaten or use violence against the debtor or another person. They cannot use obscene or profane language. They cannot publish a debtor’s name on a blacklist or other public posting. Agents cannot call repeatedly or contact the debtor without identifying themselves as bill collectors.
False or misleading statements. Agents may not lie about the debt, their identity, the amount owed, or the consequences for the debtor. They cannot send documents that resemble legal filings or court papers. Agents cannot offer incentives to disclose information.
Unfair practices. Agents may not engage in unfair or shocking methods to collect, including adding interest or fees to the debt, soliciting post-dated checks by threatening criminal prosecution, calling the debtor collect, or threatening to seize property to which the agency has no right.
Debtors who have faced obstacles to paying off their debts when due have no doubt received more than their fair share of demanding letters and phone calls, and the thought of getting rid of their debts, and thus the constant demands, through bankruptcy can be quite appealing. Before making a decision to pursue that route, which can have long-term effects on credit rating and the ability to make large purchases, like a home, debtors should consider other, less drastic alternatives.
If the debtor’s financial problems are only temporary, he or she may want to ask creditors to accept lower payments or that payments are scheduled over a longer period of time. Creditors may be receptive to these ideas if the debtor has been a prompt payer in the past, or if the specter of bankruptcy is raised, since creditors know that once a bankruptcy proceeding is initiated they will probably collect only a portion of what is owed. In addition, creditors may wish to avoid the difficulties of a court proceeding to collect on the debt, which can be time-consuming and expensive.
Consumer credit counselors can also help creditors work out a repayment plan. Some of these advisors work for non-profit agencies, so they charge no fees. Many credit-counseling services charge a fee for their guidance, however, and it may not appeal to an already over-stressed debtor to add another debt to the stockpile.
If the debtor’s financial troubles are long-term or if the creditors will not agree to an alternative payment plan informally, bankruptcy may be the best way for the debtor to get out from under an insurmountable debt load. Although it is not without its adverse consequences, bankruptcy can be the right option to enable debtors to make a fresh start.
Educational loans are generally not discharged by a Chapter 7 or Chapter 13 bankruptcy. They may be dischargeable, however, if the court finds that paying off the student loan will impose an undue hardship on the debtor, and his or her dependents. In order to qualify for a hardship discharge, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed and will not be able to make payments in the future.
The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts have applied different standards, but they often apply a three-part test to determine eligibility: (1) income — if the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself, and his or her dependents; (2) duration — the financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period; and (3) good faith — the debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.
A Chapter 7 filing should have no effect on such collections.
Although filing bankruptcy stops, or stays, all efforts to collect debts, the Bankruptcy Code excludes actions to collect child support or spousal maintenance from the stay unless the creditor attempts to collect from the property of the estate. In a Chapter 7 proceeding, property of the estate includes all possessions, money, and interests the debtor owns at the time he or she files. Money earned after the bankruptcy is filed, however, is not property of the estate. Since most child and spousal support is paid out of the debtor’s current income, the bankruptcy should have little impact.
A debtor under Chapter 13 must pay all domestic support obligations that fall due after the petition is filed. Failure to do so could result in dismissal of the case.
Neither a Chapter 7 nor a Chapter 13 discharge affects future child or spousal support obligations. In other words, even at the conclusion of the bankruptcy proceeding, these on-going obligations remain.
The rules pursuant to which debts are discharged, or eliminated, are different depending on which type of bankruptcy is filed. A Chapter 13 discharge nullifies most debts. Exceptions to Chapter 13 discharge include claims for spousal and child support; some educational loans; drunk-driving liabilities; criminal fines and restitution obligations; civil liability for damages from malicious injury to another; debts not included in the bankruptcy in time for the creditor to properly respond; certain tax liability; debt from fraud, larceny or embezzlement; and certain long-term obligations, such as home mortgages, that extend beyond the term of the plan.
In a Chapter 7 proceeding, the following debts are not discharged:
- Debts or creditors not appropriately listed on the schedules, unless some narrow exceptions apply
- Most student loans, unless repayment would cause the debtor and his or her dependents undue hardship
- Recent federal, state and local taxes
- Child support and spousal maintenance (alimony)
- Government-imposed restitution, fines or penalties
- Court fees
- Debts resulting from driving while intoxicated
- Debts not dischargeable in a previous bankruptcy because of the debtor’s fraud
- In addition, a debt from one of the following categories is discharged unless the affected creditor requests that the court formally determine the debt falls into one of these categories after notice and hearing, and the court so finds: Debts from fraud, including certain debts for luxury goods or services incurred within 60 days before filing and certain cash advances taken within 60 days after filing
- Debts from willful and malicious acts
- Debts from embezzlement, larceny or breach of fiduciary duty
Items that the debtor usually has to give up include:
- Expensive musical instruments, unless the debtor is a professional musician
- Collections of stamps, coins, and other valuable items
- Family heirlooms
- Cash, bank accounts, stocks, bonds, and other investments
- A second car or truck
- A second or vacation home
Certain types of property are exempt, however, which means that the debtor can keep them. Exempt property can include:
- Motor vehicles, up to a certain value
- Reasonably necessary clothing
- Reasonably necessary household goods and furnishings
- Household appliances
- Jewelry, up to a certain value
- A portion of the equity in the debtor’s home
- Tools of the debtor’s trade or profession, up to a certain value
- A portion of unpaid but earned wages
- Public benefits, including public assistance (welfare), Social Security, and unemployment compensation, accumulated in a bank account
- Damages awarded for personal injury
One of the debtor’s major concerns in a consumer bankruptcy is the thought of losing the family home. Although that is possible in some cases, loss of the debtor’s home need not always happen in a bankruptcy filing.
If the debtor in a Chapter 7 liquidation bankruptcy is behind on his or her mortgage payments, the home could be lost. The mortgage lender in such cases usually asks the bankruptcy court to lift the automatic stay so that it can institute foreclosure proceedings in which case the home will be sold and the proceeds used to pay off the debt. Whether a debtor who is not behind on mortgage payments will lose his or her house depends on how much equity the debtor has in the property and the amount of the state homestead exemption. If the amount of debt owed on the home is less than the home’s market value, the debtor could lose the house unless the homestead exemption entitles the debtor to most of the equity.
In a Chapter 13 proceeding, however, even if the debtor is behind on mortgage payments, if the wage-earner plan includes paying back any missed mortgage payments and the mortgage is otherwise current, the debtor should not lose his or her home. If the debtor is current on his or her house payments, the home will not be lost if the debtor continues to make payments when due.
If the debtor is a renter rather than a homeowner, the law is complex and the advice of an attorney important. Under most circumstances if the landlord wins the right to evict the debtor-tenant before the bankruptcy is filed, the automatic stay will not stop the eviction proceedings. An eviction may also survive the automatic stay if the tenant is endangering the property or using illegal substances on the premises. However, these provisions may apply differently to those with public-housing leases.
Usually a residential lease can be assumed in bankruptcy and the debtor-tenant can continue to live there and pay rent according to the lease terms, but certain deadlines may have to be met for the lease not to be considered rejected.
A consumer credit report may include Chapter 7 and Chapter 13 bankruptcy information for ten years from the time the case is filed. One major consumer credit reporting agency is said to remove Chapter 13 information after only seven years, but it is not legally required to do so.
Most other credit information can be included in a consumer credit report for seven years. Civil suits, civil judgments, and arrest records, however, can be reported for at least seven years, and longer if the information is relevant for a longer time period. For example, if the civil judgment against the debtor is valid for ten years, it can be reported for credit-rating purposes for the same time period.
These time limits on reporting credit information do not apply to reports for credit transactions that involve or are reasonably expected to involve a principal amount of $150,000 or more, the underwriting of life insurance involving or reasonably expected to involve a face amount of $150,000 or more, or the employment of a person at salary that is or is reasonably expected to be at least $75,000 annually.
Because both the Fair Credit Reporting Act, which controls what a credit-reporting agency may include in a consumer’s credit report, and the Bankruptcy Code are federal law, the same rules apply in all states. There may be some differences, however, in relation to the more-than-seven-year information, since most of the relevant time periods or statutes of limitations are found in the individual states’ laws.
The Bankruptcy Code requires that the debtor contribute his or her projected disposable income toward the plan payments for the duration of the plan. Although the law imposes this requirement only when the trustee or a creditor demands it, in reality the trustee always requires it, at least at the beginning of the plan. Whether changes in salary will change the payment plan depends on a complete consideration of all of the circumstances.
If the debtor’s income changes after the case has been filed but before the court has confirmed the plan, making it binding on the creditors (which can take as much as six months), the trustee will closely scrutinize the debtor’s disposable income to make sure that the payments and the income are consistent and will incorporate any necessary changes into the plan. If the debtor’s income changes during the duration of the repayment plan, changes in income may not necessitate any changes in payments. However, the trustee may ask that payments be adjusted if the debtor’s income increases significantly. The trustee does not closely monitor the debtor’s income, and it may actually be outside the scope of a trustee’s duties to do so.
The trustee will consider not only the salary increase, but also whether there has been a corresponding increase in disposable income, on which the payments are based. Disposable income is the amount of the debtor’s salary that is left after deducting all reasonable living expenses. If the debtor’s salary increases but so do his or her expenses, there may be no increase in disposable income and therefore no change in the payment plan. If there is a significant increase in disposable income, the trustee may ask for an increase in payment amounts.
The Bankruptcy Code uses such confusing terminology. What is meant by such terms as preference and fraudulent conveyance?
Preferences and fraudulent conveyances are two ways in which a debtor facing the prospect of bankruptcy may attempt to show favoritism to a particular creditor or close family member or associate, or even set aside some property for himself or herself to avoid losing it to the bankruptcy estate.
A preference occurs when a debtor treats one creditor more favorably than the debtor treats the other creditors. If a debtor has only $500, for instance, and owes that same amount to both First County Bank and First State Bank, but the debtor pays all $500 to First County Bank, that bank has received a preference. Bankruptcy law disfavors preferences if they are made for the benefit of a particular creditor and for a debt owed prior to filing bankruptcy, if the debtor is insolvent at the time of the payment, and if payment is made within 90 days before filing (or one year, if made to an insider like a family member or an officer of a corporate debtor). Creditors receiving preferences may be required to return the amount paid to the debtor’s estate, so that it can be added to all the other assets and appropriately divided among all creditors.
A fraudulent conveyance is another vehicle by which a debtor may attempt to defraud creditors. An example of a fraudulent transfer of property in the bankruptcy context might be the debtor’s free conveyance of real estate to a relative for the purpose of keeping the property in the family, protecting it from being sold to satisfy debts in an upcoming bankruptcy. The Bankruptcy Code is complicated in this regard, but the main fraudulent transfer provision allows the trustee to make void any transfer of the debtor’s assets within two years prior to the bankruptcy filing with the “intent to hinder, delay, or defraud any entity to which the debtor was … indebted …”; if no reasonable exchange of equivalent value occurred; and when the debtor was insolvent. Some exception is made for reasonable charitable contributions.
The best and perhaps the easiest way to find out whether a debt is a secured debt is to review the documents signed at the time the debt was incurred. If the debt is secured, the documents will say so and will describe the creditor’s security interest, which is usually in the property that is the subject of the financing.
Sometimes, however, the type of debt itself will suggest whether it is secured. The following types of debts are often secured debts, which means that if the debtor does not make payments on the debt when due, the creditor can take back the property that secures the debt, sell it, and apply the proceeds to pay off the debt. (If the sale price is not enough to cover the full amount owed, the debtor may still be liable for the remainder.)
Home mortgages. Companies financing home purchases almost always require a mortgage on the house. If the borrower defaults on the mortgage payments, the lender can force a foreclosure, in which case the house is sold and the proceeds are used to pay of the debt.
Motor-vehicle loans. When a person purchases a car on credit, the lender puts a lien on the car, which allows it to repossess the car if the borrower defaults (i.e., fails to make payments on time).
Store purchases. Although many consumers are unaware of this, when they charge something that they purchase at the local department store, the store may retain a security interest in the item purchased based on the agreement that the consumer signed when he or she first opened the account. As a result, if the purchaser fails to pay according to the credit-card agreement, the store can take back the merchandise.
Finance-company loans. When a borrower obtains a loan from a finance company and is asked to list things that he or she owns, it is possible that the finance company will obtain a security interest in the items listed.
Commercial bankruptcy is a remedy available to businesses that are unable to pay their debts. Options include liquidation, in which many of the business assets are sold, the proceeds are divided among the creditors, and the business ceases to exist; and reorganization or restructuring, in which the business continues to operate according to a plan that allows for at least partial payment to creditors.
Consumer bankruptcy is a method through which individuals may be able to get out from under insurmountable debt and make fresh starts, albeit with negative impact on their credit ratings. As in commercial bankruptcy, there are two options: liquidate assets to pay off creditors, or file a wage-earner plan that allows the debtor to retain more assets while working to pay off his or her debts.
Discharge is the bankruptcy term for wiping out many of the debtor’s remaining debts at the conclusion of the bankruptcy proceeding. A discharge is available to only certain debtors, however, and only certain debts are dischargeable.
Bankruptcy law is primarily federal law and varies little from state to state. The United States Constitution grants to Congress the power to establish uniform bankruptcy laws throughout the United States, which ensures uniformity in how bankruptcy proceedings are conducted, encourages interstate commerce and promotes national economic security. The individual states do, however, retain jurisdiction over certain debtor-creditor issues that are not addressed by or do not conflict with federal bankruptcy law, such as which property remains exempt from creditors’ claims.
Bankruptcy law provides two basic forms of relief: (1) liquidation and (2) rehabilitation, also known as reorganization. Most bankruptcies filed in the United States involve liquidation, which is governed by Chapter 7 of the Bankruptcy Code. In a Chapter 7 liquidation case, a bankruptcy trustee collects the debtor’s nonexempt property and converts it into cash. The trustee distributes the resulting fund among the creditors in a particular order of priority described in the Code. Not all creditors will receive the full amount owed through this process and some may receive nothing. When liquidation and distribution are complete, the bankruptcy court may discharge any remaining debts of an individual debtor. If the debtor is a corporation, it ceases to exist after liquidation and distribution, and there is therefore no real reason for further discharge because the creditors cannot seek payment from an entity that no longer exists.
In a rehabilitation or reorganization, the option courts often prefer, creditors may have a better opportunity to recoup what they are owed. Chapter 11 or Chapter 13 of the Bankruptcy Code governs this type of bankruptcy. Chapter 11 usually applies to individual debtors with excessive or complex debts, or to large commercial entities like corporations. Chapter 13 usually applies to individual consumers with smaller debts. (Farmers and municipalities may seek reorganization through the Code’s special chapters, Chapters 12 and 9, respectively.) Reorganization provides a greater opportunity to retain assets if the debtor agrees to pay off debts according to a plan approved by the bankruptcy court. If the debtor fails to do so, however, the court may order liquidation.
Debtors must meet a means test to determine if they are financially eligible for straight Chapter 7 liquidation. In brief, the law sets out a formula to determine whether a debtor has a realistic ability to repay a reasonable monthly amount out of his or her adjusted current monthly income to unsecured creditors. If it is reasonable for the debtor to repay some of this debt, he or she may not avail himself of Chapter 7 and must go into Chapter 13. It is seen as an abuse of liquidation bankruptcy to allow someone who can reasonably repay some of his or her debt to possibly write that debt off in Chapter 7.
In most instances, the bankruptcy case is filed by the debtor, which is considered a voluntary bankruptcy. Once the debtor files the bankruptcy petition, he or she is immediately entitled to relief from creditors through the bankruptcy procedure known as the automatic stay. The automatic stay freezes all debt-collection activity and forces the creditors to allow the bankruptcy proceeding to determine how payment will be made.
Under Chapters 7 and 11, creditors, too, have the option of filing for relief against the debtor by forcing the debtor into bankruptcy, known as an involuntary bankruptcy. Involuntary bankruptcies are allowed only when there are a minimum number of creditors and a minimum amount of debt. The debtor has the right to file a response, after which the court determines whether the creditors are entitled to relief. If the court dismisses the involuntary bankruptcy filing, finding that it has no merit, the creditors may have to pay the debtor’s attorneys fees, damages for any losses the debtor experienced because of the bankruptcy, and even punitive damages to punish the creditors for the frivolous or abusive filing of a petition.
Lawyers who practice bankruptcy law can help both debtors and creditors overcome obstacles to the repayment of debt. Legal services often extend beyond bankruptcy to include debt repayment and collection options that can circumvent the need for a bankruptcy filing. The following are just some of the areas in which bankruptcy lawyers can assist their clients.
Collections and repossession are remedies sought by creditors against debtors who have defaulted on their obligations. Collections include any technique to get the debtor to make up the remaining debt, including use of a collection agency or the courts. Creditors may also have outstanding debts legally recognized, and then enforced against a debtor’s property involuntarily with garnishments, liens or levies. Repossession of collateral is another technique used when property is pledged to secure a debt.
Creditors’ rights include a full range of options available to creditors to collect unpaid debts. These rights include collection actions, repossession, foreclosure, garnishment, replevin, attachment, obtaining court judgments, liens, and forcing debtors into involuntary bankruptcy.
Foreclosures are the actions taken when a mortgagor fails to make the required mortgage payments on time and the lender, or mortgagee, forces the sale of the property — often the debtor’s home — to pay off the debt. A foreclosure can be either judicial, which requires court involvement, or pursuant to a clause in the mortgage that allows for such a sale.
Garnishment is a creditor’s remedy aimed not directly at the debtor but rather at a third party who owes money to the debtor or holds some of the debtor’s property. Through the garnishment process the third party is notified that the creditor intends to apply the third party’s property to satisfy the debtor’s debt. Typical garnishees, as the third parties are called, include debtors’ employers and banks in which debtors have accounts.
Workouts are nonbankruptcy agreements between debtors and creditors in which the creditors agree to take less money than the full amount owed or accept payments over a longer period of time than originally anticipated. Workouts have the advantage of being voluntary, less complicated and less negatively perceived than bankruptcy.
If you are facing a financial crisis, a knowledgeable bankruptcy lawyer can help you to weigh whether a bankruptcy or some other legal remedy is your wisest course of action. Likewise, if someone in financial trouble owes you money, an experienced attorney can help you decide your next step in collecting the debt.
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