When the collection agency comes to your doorstep or spams your mailbox or phone line with calls and collection notices, it’s always a bad time. The whole collection process costs you money, and can greatly detract from your personal well-being and self-esteem. Creditors have many legal rights, which lawfully allows them to pursue you to the fullest extent they can in the hopes it motivates you to make at least some payment on your debts. Legally speaking, creditors also have the right to call your personal cell phone numerous times, provided that you included your cell phone number on the application when signing up for your card.
Negotiating With Debt Collectors
When a creditor cannot further recover any of the funds they loaned out, they will most likely contact a third party collection agency or debt collector to do the work for them for a small portion of the total debt as the fee. Creditors will give these agencies some leniency with how they collect on debts you owe to make debt ratification easier and more efficient.Usually an agency will present you with different choices for settling your debt, such as cash settlements or term settlements.
After enough time passes and you are completely unable to pay your debts a creditor or a collection agency will deem your debt un-collectable and will promptly begin negotiating some terms of repayment with you, called a settlement. When negotiating your settlement, you should make sure that whatever terms your come to will erase your debt once and for-all. When you finally negotiate your settlement, you can have your debt wiped at a great discount compared to the original amount you owed. You can also go for a term settlement, which is just like a final settlement except the final amount is paid off in installments over a period of several months as opposed to one lump sum.
Each and every consumer is legally and ethically obligated to pay off any debt they owe. Therefore, you should not take settlement negotiation as an opportunity to carelessly spend, expecting to have the greater portion of it magically done away with when you settle. There are consequences to your actions, and even if you settle on all your debts it’s still a bad mark on your credit report.
The Fair Debt Collection Practices Act
Unfortunately for the consumer, debt collectors are not always negotiable and will sometimes harass and intimidate consumers into making payments on debt. There are state and federal laws to prevent these acts from happening, but if they do occur the consumer does not have to put up with such unacceptable tactics. Like all parties before the law, you have rights as well.
The Fair Debt Collection Practices Act (FDCPA) is in place to prevent people from being subject to tactics by professional debt collectors that are deceitful unjust, or even downright antagonizing. This act pertains only to lenders who do not collect on their own loans, but all lenders of all types are disallowed from using tactics set out in the act. Some examples from the act are:
- When making contact with the debtor, collectors are allowed to contact people other than the debtor
- After successfully contacting the debtor, collectors must mail a letter to the debtor informing them of the debt’s existence, the amount owed, the creditor the debt is owed to and the validity of the debt unless disputed, usually inside of 30 days after receiving the notice.
- Abuse, oppression, or harassment are disallowed from use by collection agencies. They are also disallowed from making the debt public knowledge.
- Consumers must be made aware of the debt in a truthful and sincere manner. Collectors are barred from deceiving consumers by falsely exaggerating the consequences of unpaid debt, misinforming the consumer about the terms of the debt, or otherwise being untruthful when revealing their identity to the consumer.
Any actions which contradict the stipulations of the FDCPA may lead to the initiation of legal action by the consumer.
The Bankruptcy Option
As hard as collection agencies may try to collect on unpaid debt, sometimes consumers are frankly unable to pay their debt whatsoever.There exists two ways that someone in debt can achieve a clean slate, and those are chapter 7 and chapter 13 bankruptcy. According to the US Courts, in 2007 alone, 822,590 American families were forced to file for bankruptcy.
Chapter 7 bankruptcy is where the debtor is forced to relinquish any valuable property until the value of seized property satiates the amount creditors report. Some assets are protected and cannot be seized by creditors during bankruptcy. Often times your home is one such asset which cannot be seized, in addition to certain types of accounts such as pensions, retirements, 401(k) and 403(b)’s, stocks, annuities, or other employee benefits. Within chapter 7 rules, once you have declared bankruptcy you are declared completely free of responsibility to pay most debts you owed previous to your declaration. Some debts such as taxes, alimony, student loans, and child support remain your responsibility to pay, however. Once you have declared bankruptcy you cannot once again for another 8 years.
Chapter 13 bankruptcy is slightly different, wherein the debtor does not have to surrender their valuable assets. Instead, a judge will instigate a payment plan that must be fulfilled by a certain time. The courts may also lower total amounts owed to further assist you with repaying your debts.
Regardless of which type you choose, bankruptcy will leave a scar on your credit report, with chapter 13 taking only 7 years to wipe away and chapter 7 requiring a full 10. This is because in chapter 7, you are freed from all debts whereas chapter 13 requires you still pay at least part of them, hence the lower time on your credit report.
Bankruptcy is a decision that should be carefully considered as it stays with you forever. Often times you are questioned as to whether you have filed for bankruptcy in the past. To lie about this is to commit fraud, but fear not to tell the truth as any employer who asks this is not allowed to discriminate based on your past bankruptcy.
Bankruptcy Testing
Frustrated by too many bankruptcy filings, the credit card companies successfully lobbied to pass The Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. It is no longer so easy for consumer to claim bankruptcy anymore without first being subject to “means testing” which the act gave rise to. Depending on the results of their test, a bankruptcy claimant can now only qualify for chapter 7 or 13, whereas before they could simply pick which type they wanted.
There are two steps in means testing:
- median income test
- means test
The first test is used to determine your income versus the median state income, as set out by the US Census Bureau. If your total income for your household is less than or equal to the median state income, you qualify for chapter 7 bankruptcy and the chance to have your debt erased. If your household income is greater than the median state income, however, then you must apply for further means testing to see whether you qualify for chapter 7 bankruptcy, or if you will only be able to use chapter 13.
The means test is a means of determining how much residual income a debtor has left after daily expenses have been factored in. If the residual income is great enough, then the debtor does not qualify for chapter 7 and must instead pay for their debts out of their remaining funds.
When calculating your residual income, here are some of the expenses used when subtracting from your overall income:
- Day-to-day expenses such as food
- Mortgage or rent payments
- Vehicle or alternative transportation costs
- Any and all other vital expenses, such as alimony, child support, insurance, taxes, etc.
The US Department of Justice’s website contains charts which denote the National Standards for Allowable Living Expenses. These charts will help you to determine what expenses are allowed and disallowed from factoring into the means test.
If you find that your residual income after expenses are above the national standard threshold, you no longer qualify for chapter 7 whatsoever and must apply for chapter 13 instead. In all agreements under chapter 13 bankruptcy, the minimum duration of the payment plan must be five years or more, except if the plan specifically stipulates certain amounts that are to be paid in a shorter amount of time.
The Bankruptcy Act’s Effectiveness
As another point set out in the bankruptcy act, it is now required that debtors undergo compulsive credit counseling or fiscal fidelity courses before they fully qualify to have their debt erased through bankruptcy. The courses must begin no less than 180 days prior to applying for bankruptcy, and the company conducting the courses must be federally approved by the US Trustee’s office. A list of approved courses can be found at the US Trustee Program website. Many people consider this stipulation to be frivolous and unreliable, as the credit counseling industry is rife with misinformation, non-regulation, and profiteering.
Despite the tightening of the laws regarding bankruptcy, consumers have not been deterred from filing bankruptcy as the act intended. When the act was passed in 2005, the mean amount each chapter 7 bankruptcy wrote off increased three-fold to $61,000 by 2008. The overall number of bankruptcy filings greatly increased since the passing of the act. When compared against the same period in the prior fiscal year, personal bankruptcies were up 25% from June 2007 to 2008. The facts presented above give a glimpse of the true testament to the desperate situations many consumers find their finances in.
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