Do’s and Don’ts of Debt
As an attorney who deals with debt, I do debt negotiation and bankruptcies. Sometimes clients contact me early in the crisis and sometimes after they are being sued. Here are some of the things I wish I could tell all of them from the beginning:
– Never ignore a bill even if you are certain you don’t owe it. Never pay less than the full amount because you think there is an error. If there is a problem communicate with the creditor. If there is an error, get it corrected and if the creditor refuses and you are sure they are mistaken, get legal help. Otherwise, even if you are right and you don’t owe the bill, the creditor will likely sue you and your credibility will be low since the court will wonder why you didn’t make any effort to correct the error and unless you have good evidence to persuade the court of their mistake, you will be found liable and they can pursue remedies like garnishment and taking property from you.
– Never ignore any type of court document. If you don’t read the documents and participate in the legal process you will lose regardless of any defense you might have. What happens when debtors don’t answer is that creditors wind up with a default judgment that they can use to garnish wages and seize property. If they don’t know where the debtor banks or what property could be seized, they will ask questions as part of the legal process. If they don’t get an answer, they will ask the Judge to require a response and the judge will order the debtor to answer. If no answer is made, the creditor will move for contempt of court. If a debtor doesn’t answer, then they are found in contempt and a bench warrant issues. That means if a police officer happens to pull over the debtor for something like an expired plate, they will find the warrant and arrest the debtor. The debtor is not being jailed because they owe money; they are in jail because they ignored a court order. Typically, if a debtor is at the point they are being sued, they really need to get a consult with an attorney to determine if they have the option to negotiate or whether they should file a bankruptcy.
– If you know you owe money and have moved, run a credit report. It is quite possible collections are under way, but the debtor is not aware of them because they moved. That does not provide enough advance warning or options if collections have moved to the litigation stage by the time the creditor finds the debtor. In some cases, there has been litigation that the debtor was not aware of and they have already been found liable for a debt (even if a debtor was never properly served, it is problematic to prove that). No matter how bad the debt situation is, it’s better to know the extent of the debt, so that the debtor is making reasonable decisions instead of being blind-sided with a garnishment when they least expect it.
– If you can’t afford to pay a bill, either negotiate the amount and type of payment, go see an attorney who can negotiate for you, or file a bankruptcy. You, or an attorney, can negotiate the amount of debt (you don’t have to accept interest and fees, you can offer less if you are offering a lump sum) or payment plan (if you can’t do a lump sum the creditor may not agree to reduce interest and fees but might agree to a payment plan). If you have too much debt and you don’t have a lump sum to negotiate with and you can’t manage a payment plan that covers your debts, you may need to do a bankruptcy.
– Do not borrow or cash in your retirement, take money from the equity of your home or borrow from family and friends, until you talk with an attorney. It is common for a person to cash out their equity, retirement and borrow heavily from family and friends and still need to do a bankruptcy. Chapter 7 bankruptcy protects a fair amount of equity in your home and it protects retirement money most of the time. Also, if you can’t afford to pay creditors, who would you rather be listing as your creditors?
– Don’t make deals with creditors unless you are certain you can afford them and they are in your best interest. When a creditor is pressuring you, you are in danger of making an agreement that is not in your best interest and is not affordable. Giving access to your bank account for automatic debt payments is an example of an agreement that can be highly hazardous. If you are offered a good agreement (they are getting rid of interest and penalties and reducing the overall debt), get it in writing as to a) the debt will gone once the amount is paid; b) exact terms, such as when payment is due, c) how much they are reporting to the IRS (example: you owe $1,000 and they agree you can pay $500.00. If they are sending notice to the IRS they have forgiven $500.00 that is considered income to you that you will pay tax for. If they agree that the debt is actually $500.00, there is no tax consequence since they do not send a notice.) It is critical you have this document in your files since you may need it if the creditor acts in bad faith or forgets and sells your debt to a collection agency.
– Beware of debt management companies who claim they can negotiate with your creditors and deal with them for you. Most of these agencies get most of their funding from creditors and are not acting in your best interest. Many of them require a significant up-front payment before they do any work and they often will require a lump sum before they make any deals. Even when they have both, they often come up with plans with such a highly monthly payment that the debtor can only make payments for a few months. There are a few agencies that are legitimate. Do searches on the web for any agency you are considering to see how many people like or dislike their work. If you are in serious debt, you should schedule a consult with a bankruptcy attorney first because otherwise, you might spend a fair amount of money without resolving your debt when you should have just filed a bankruptcy.
– Be very wary of cash advances, use of credit cards and selling and transferring property. If you are considering relying on these options to pay debt, the danger is that you may create more financial problems and may also jeopardize your chance to file a timely bankruptcy. Again, weighing your options with a bankruptcy attorney might save you a lot of trouble. (For example, if you borrow several cash advances and use your credit cards for non-essential purposes, that is considered a fraud in the bankruptcy system and you will either have to pay that money back or wait to file.
Read all Court Correspondence: Once someone sues you (you have been served by a process server or you find legal documents on your front step), it is critical that you read the pleadings (documents sent to the Court by the Creditor and Orders from the Court) as well as letters from attorneys. If you don’t, you will likely be cited for contempt, which would allow them to jail you. How can you be jailed for a debt? You aren’t being jailed for a debt. You’re being jailed because the Creditor’s attorney asked you to answer questions (called Discovery) that you failed to answer. Some people don’t answer because they tossed the papers without reading them. Others don’t answer because they don’t want to provide information such as their bank, account numbers, etc. However, if you don’t answer the Creditor will file a Motion to Compel, which the Court will grant. If you still don’t answer, they will then file a Contempt Motion. Contempt motions are the way that attorneys and judges have of making people take the justice system seriously. If there weren’t serious penalties for ignoring court documents, the system would quickly fall apart. So if you don’t answer the Contempt Motion, the Court will rule in favor of the Creditor, and a bench warrant will be issued. This means that you will be picked up by the cops and will usually spend the night in jail. Creditor’s counsel will be glad to agree to resolve the contempt so that you can be released if you agree to pay them what they want, otherwise you have to wait for a hearing before the judge. At that hearing, the judge will determine if you are in contempt (you are) and what to do with you; that can include more jail time or monetary sanctions.
How do you deal with this problem? Fight the lawsuit by answering it, or at least answer the discovery or file a bankruptcy to deal with the debt. If there is really nothing they can take anyway or garnish then answering the discovery may not give them much. If they can garnish wages or take your property, you will likely need to file for bankruptcy protection so that the creditors cannot harm you through garnishment, repossession of your car or other items bought on installments, or foreclosure of your home. It is better to file before they are actively garnishing, etc. because it will be less expensive and there is less danger that your attorney can’t recover your money or property. For example, some garnished money can be retrieved and some cannot.
Keep all dealings with Creditors in writing and keep careful notes: Please don’t think that Creditors are a good risk for verbal deals. If you made a deal on the phone to pay $50.00 per month on your Visa, the person who made that deal is now gone and their successor doesn’t know anything about it. So, they refer the case to collections or sell the debt to a new agency. All deals have to be in writing so you have recourse if they come after you for more payment. Also, it’s hard to make any progress on a debt issue unless you know whom you spoke with, when, what was discussed and precisely what you are supposed to pay and the date of payment. (I’ve seen cases where the person paid the agreed upon monthly amount but the Creditor alleges they paid the amount late and sued them for the entire original amount, plus late fees, penalties, interest and attorneys fees).
Never, Ever Take Advice from People in Bars, Well-meaning Relatives, Form Sellers, etc. I have heard some extremely pitiful stories from clients of advice they took that got them in serious trouble because the advice giver really didn’t understand the law. Example: Sell your car, take the proceeds, buy a new car and put it in your Mom’s name then file a Chapter 7 (given by an Ex-Husband!). Guess what! That’s a fraudulent conveyance and a great way to set yourself up for a felony in bankruptcy court as well as have your case thrown out. The current Bankruptcy Reform Act was written by banks and credit card companies and is not debtor-friendly. There are lots of requirements and rules to trip over. The last thing you need is someone with no bankruptcy law experience getting you in more trouble. And that includes those geniuses that sell forms at ridiculous prices. They are forbidden to give legal advice but usually sneak in a few completely wrong bits of advice. So in addition to overcharging you for forms you could have gotten at court or at a court website cheaper or free, they’ve also screwed up your case. Bankruptcy law is tricky enough that you need someone with actual legal knowledge to advise you as to your particular situation. You’re better off paying some attorney for a consult (most do charge for a consult, some do not) than to get advice that will get you jailed or thrown out of bankruptcy court.
Watch out for Consumer Counseling Services: Guess who pays a large portion of the operating expenses for most consumer counseling services? Why yes, it is credit card companies. It should not be a surprise to you that they recommend you not file a bankruptcy and that you should pay large amounts of money to them to resolve your debt. There is another problem. They will not work on your case until you pay them their entire fee. If you’ve paid part of it, they do not start calling creditors. And you need to take a hard look at their debt payment plan. Can you really pay them their fees plus the debt payment they recommend? Is there any room for necessities plus unforeseen expenses like your kid getting sick or hurt? If not, save your money for an attorney and resolve the debt permanently rather than spend a few nerve-wracking months paying large amounts of money and still fail.
Retirement Money, Equity and Debt: Before you take out a second on your house to pay debt or liquidate your retirement you need to carefully run some calculations. At least some of your equity and most retirement accounts are protected in bankruptcy. It would be a shame to lose these accounts and still wind up with a bankruptcy because you still have too much debt or your financial crisis isn’t over. If you’re not sure, consult with an attorney.
If you think you might want to file Bankruptcy, DO NOT: 1) transfer, sell or otherwise convey any property to preserve it. (This is called a fraudulent conveyance, and has criminal sanctions and will likely get your case dismissed). 2) Do not use your credit cards unless you absolutely have to for necessities and you can make some sort of payment on those cards; particularly avoid cash advances and using their checks. (Considered a fraud if done 90 days before bankruptcy on the basis that you must have known you might need to file and that you couldn’t pay). 3) Do not try to repay anyone more than $600.00 because you’re afraid you might have to file (Called Preferred Creditor and forbidden since you cannot treat some creditors better than others).
Do’s and Don’ts with Attorneys: You really do need to tell them the whole story despite advice you will get that you shouldn’t tell them things you wouldn’t want the court to know or that you find embarrassing. Otherwise, you might be sitting in a hearing when it comes out and your attorney will have very little opportunity to dig you out of the problem. Or they might give you advice that isn’t helpful since they don’t understand your situation. At least give them a shot at resolving the issues. Don’t call them at the last minute either. If you think you have a serious problem, get some advice before you’re asking them to deal with a train wreck occurring tomorrow. It will cost you a lot less, it is more likely they can fit you in and they will have time to be prepared. Another reason to do a consult is that beyond what I’ve covered in this article, there is a considerable amount of information specific to individuals that might apply to you as well as specific concerns you might have that a good attorney can address.
Legal Fees: If you are concerned about the cost of the fee and whether your attorney is any good, I would suggest that you call around to see what the varying fees are in your area (most of the time, it is a flat fee which is a one-time fee rather than an hourly or a contingency fee). If they charge very little they will spend about that much time knowing you or your case. And you should ask if they’re doing ‘unbundling’ of legal services. This means that for what you pay them, they only do part of the case. The fee agreement should tell you but you want to be sure they are going to do the paperwork, file the paperwork, deal with the creditors for you and go to the hearing with you. If they plan to skip any of these steps, the fee is cheap but not worth it since you need to have the bankruptcy succeed. If they charge a lot compared to other attorneys you are being overcharged or you have a tricky case (you will probably know if you do but that includes lots of assets, income or other red flags) or possibly that they are God’s Gift to the Law. You do not need God’s Gift to the Law unless you have a tricky case or you greatly admire the legal profession.
How to Pay for Legal Counsel: Most debtors recognize the benefit of having an attorney to file bankruptcy but think they can’t afford it. The way most debtors pay for legal counsel is to stop paying the debts they can bankrupt and use the money for the retainer. For those filing a Chapter 7, another option is to have a friend or relative assist you on the basis that once your debts are discharged, you’ll be able to pay them back. Although most debts are discharged in a Chapter 7, you can pay any debts you choose to pay after the bankruptcy is over.
Good Attorneys vs. Bad Attorneys: The bad ones will treat you with contempt, spend very little time with you and do not seem to know what is going on with your case. They will not answer your calls or deal with creditors. They may not show up for the hearing either (Check the fee agreement!) The good ones will be straight with you as to whether you have problems in your case, what you need to do to have a successful case and they are usually nags. Also, take a good luck at your attorneys’ support staff. Are these people nervous and unhappy? If so, run away. If they seem courteous, reasonably calm and moderately cheerful it is probably a good law office.
One final note: If you need additional information, check my website at juliekreutzerlaw.com and read through other attorneys’ websites. I would avoid the websites that are generic since they usually don’t provide much content.