Rule #1: Prioritize Debts Whose Non-Payment Immediately Harms Your Family

Non-payment of certain debts have sudden and dire consequences for your family. Either pay these debts first or talk to an attorney.

High priority debts are those which can impact where you live and your livelihood. Som examples of high priority debts include:

● Court Judgments. You have been sued on a debt and a court has ruled for the creditor. The creditor has rights to seize part of your wages, bank accounts, and even your home or other property.

● Criminal justice debt. In some cases, non-payment of debt arising from a criminal proceeding (such as fines, fees, and costs) can lead to immediate loss of your driver’s license, loss of income or assets, or even incarceration.

● Auto loans. Nonpayment of car loans or leases can result in a creditor repossessing your car after you miss only a few payments.

● Rent. Rent payments for your residence (or for the lot on which your manufactured home sits). Swift eviction can result if you do not keep up these payments.

● Utility bills. Non-payment of utility bills can lead to termination of gas, electric, water, and other utility service.

● Child support debts will not go away and can result in very serious problems, including prison, for non-payment.

Other debts become a high priority debts as those detailed above, and then must be addressed immediately. Most notable are:

● Home mortgage delinquencies. Miss a month or two and you are unlikely to face foreclosure, but if you get behind by enough months, you face loss of your home. In some states this can happen without a court hearing. There are ways to delay and fight foreclosure.

● Real estate taxes. If you do not have an escrow account with your mortgage lender you are responsible for paying your own property taxes. While non-payment of property taxes will not result in the immediate loss of your home, at some point your home will be subject to a tax sale.

● Federal student loans are not in default until you are nine months behind on payments, but then you risk seizure of your tax refund and your Social Security or other federal benefits, wage garnishment without a court order, and denial of new student loans and grants.

● Taxes owed to the IRS. Be aware the IRS can seize your bank account, part of your paycheck and federal benefits, and even your home.

Lower Priority Debts. Debts that are low priority should not be paid ahead of high priority debts. Some low priority debts include:

● Medical debt, such as payments due hospitals, doctors, other medical professionals, dentists, and ambulance companies. It is not likely to carry high interest. They cannot seize your home or garnish wages or take other benefits without a judgment.

● Credit card debt. You will not be subject to seizure of bank accounts, income, or property unless they obtain a judgment after suing you. Debt collection contacts can easily be stopped.

● Debt owed friends and relatives.

● Private student loans. These loans typically do not involve collateral, and special remedies available to the government to collect federal student loans do not apply to private student loans.

Rule #2: Do not allow a creditor to tell you how to prioritize paying debts.

Understand that debt collectors will call and write letters pressuring you to pay their debt first. However, if you neglect a high priority debt just because a low priority debt collector persistently calls you, it could have the effect of further imperiling your livelihood and your property. Decide for yourself with the advice of an attorney which debts are the highest priority.

Similar to the issue of debt collector contacts, do not let your credit report decide which are prioritized. Your credit report does not directly impact your income or your property. It effects your ability to obtain credit in the future.

If you feel obligated to pay a debt, that is different from determining which debts can have an effect of taking away your property.

Rule #3: Consider the long term, not just the short term.

If you cannot pay everything, try to delaying can sometimes allow you to bridge the gap to your next payment. We note that you must be careful and again, use the advice of counsel on any impact that delay could have.

These are difficult decisions. Once the choice is made, stop making payments on that debt in favor of other pressing items. It is not a good idea to continue paying a debt on property that you will eventually lose anyway. You can save the money to pay for alternative housing or transportation.

Rule #4: Do not be suckered in by scams and con-artists making false promises.

Many credit repair companies, debt management companies, banks, creditors, and scam artists target those in financial difficulty for some of the worst abuses. Scams to avoid, include:

● Debt elimination scams promise for a fee to eliminate your debts completely—these are all bogus.

● Debt settlement agencies charge high fees and rarely help you settle your debts with your creditors.

● Foreclosure rescue scams offer to save your house but end up stealing it.

● Reverse mortgages that do not meet federal “HECM” standards can get you into big trouble.

● Credit repair charge to clean up your credit record, but you can do it better yourself for free.

● Small loans such as payday, auto title, and installment loans have extraordinarily high interest rates. Walk away from any loan with a disclosed annual percentage rate (APR) more than 200%. Also watch out for loans that add charges for insurance. Auto title loans also put your car at risk.

Rule # 5: Determine if a bankruptcy is right for you.

Understanding when and if to file bankrupcty can be one more tool in your belt. Many people are reluctant to file bankruptcy because they feel a stigma attached to it. There is no stigma - fortune 500 companies file for bankruptcy often.

Bankruptcy is effective dealing with court judgments, stopping wage garnishment, bank seizures and enforcement of judgment liens. It protects household goods collateral. If bankruptcy discharges a debt whose non-payment led to suspension of your driver’s license, you get your license back.

Bankruptcy Costs. It is best to hire an attorney help you file bankruptcy. Sometimes you can find a legal services or other attorney who will not charge you. The bankruptcy court charges a filing fee of more than $300, but you can spread this fee out over several months and in some cases it can be waived.

Common Misconceptions. Despite what you might think, typically you lose little or no property in bankruptcy. Bankruptcy may not hurt and may even help your standing with creditors. Your reputation in the community is unlikely to suffer. Housing authorities, licensing departments, and other government agencies cannot discriminate against you for having filed for bankruptcy.

When to File Bankruptcy. Bankruptcy is not really a “last resort” for those in financial trouble. Legal rights can be lost by delaying a bankruptcy. Get early advice about bankruptcy if you are concerned about saving your home or your car or protecting your bank account or wages from seizure.

Rule # 6: Call a lawyer. Do not try to manage everything alone.

Lawyers and particularly lawyers that practice consumer protection, understand the law better than you do. While your attempts to protect yourself may be exemplary, obtaining an advice from a professional who understands the law is your best option. Always.

-Always be professional. There is no reason to yell, swear or engage in conduct that would not be acceptable in a courtroom. The reason I say that is because debt collectors often record phone calls. Sometimes those phone calls are played in trial.

- Do not be pressured by a debt collector. Make your own choices about which debts to pay first based on what is best for you. The most common reasons most people cannot pay their bills are job loss, illness, divorce, or other unexpected events. And, creditors and collectors know this. The debt collector’s job is to try to convince you to pay their debt first. Your job, however, is to make the right choices for you and your family.

- Do not let a debt collector tell you what they can do. Just because they threaten you does not mean the threat is true or that they are being honest. Consulting with an attorney is the best way to find out your rights and protections. A debt collector is not necessarily going to tell you information that is helpful to you and prevents their ability to collect the debt.

- Do not give the debt collector your personal information. There is no need to give the debt collector your social security number or other private information on a call. Sometime they will claim it is necessary to verify who you are or pull up an account. However, if that information falls into the hands of a scam artist, the risk to you is too great.

- Investigate the collector. Do they really own debt that you must pay? Did they really obtain an assignment of a loan that you took out? Just because they are aware of a debt you took out with a different creditor does not mean it is their debt to collect.

- Send a "stop contact" or "cease" letter to the creditor. The simplest strategy to stop collection harassment is to write the collector a “stop contact” letter, also called a “cease” letter. Then the collector can only acknowledge the letter and notify you about legal steps the collector may take. Make sure the letter is sent certified mail return receipt requested so that you have proof of it being sent. Below is a sample letter:

[Your name]

[Your return address]

[Date]

[Debt collector name]

[Debt collector address]

Re: [Account number for the debt, if you have it]

Dear [Debt collector name],

I am responding to your contact about an alleged debt you are attempting to collect. You contacted me by [phone/mail], on [date]. You identified the alleged debt as [any information they gave you about the debt].

Please stop all communication with me and with this address about this alleged debt.

Thank you for your cooperation.

Sincerely,

[Your name]

Important: Even if debt collector stops contacting you because of the letter, you will still owe the debt.

Keep a copy of the letter and send the original by mail, return receipt requested. If a debt collector still continues to contact you, send another letter and once again keep a copy.

- Be wary of making small payments on old debts. Creditors can only collect debts for a certain amount of time. After that, they are barred from collection. If you make a payment, that restarts the clock on when they can collect.

- Keep records of all contacts. Hold onto all creditor letters, keep all phone records. If you have an app on your phone that records calls automatically, hold onto the call recordings. If the collector engages in harassing or illegal conduct, it is difficult to dispute whether they engaged in the conduct if there are recordings, records.

Knowing how a credit report works and how it affects a family is critical in allowing families to make the right choices in dealing with their debts and other obligations. This chapter explains how information gets into your credit report, what information is in your report, who sees it, and how it affects your life.

Your credit report is a record of how you have borrowed and repaid debts. Almost every adult American has a credit file with each of the three major national credit bureaus: Experian, Equifax, and TransUnion.

Each account includes a code that explains whether the account is current, thirty days past-due, sixty days past-due, or ninety days past-due, or if the account involves a repossession, charge off, turned over to a collection agency, or other collection activity. The report will also list under “inquiries” the names of creditors, employers, or insurers who have requested a copy of your credit report during the past year or two. It also includes creditors who have looked at your account to decide whether to send you an offer of new credit, but other creditors do not see this last item.

Many creditors will not even review all of this individual information in your account, but will only look at your credit score, which is a number that summarizes all the individual items in your credit report. There is no one scoring system that all credit bureaus and creditors use, but about 90% of the credit scores used by creditors are issued by FICO. A FICO credit score ranges from 350 to 900. FICO considers the following as detracting from your credit score:

● History of missed payments (about 35% of the score).

● High debt in comparison to your credit limits (about 30% of the score).

● Small number of years of credit history (about 15% of the score).

● Opening too many new accounts (about 10% of the score).

● All credit of the same type (about 10% of the score).

Consumers are rightfully concerned about their credit score, but you should not respond to debt collector pressures by paying overdue low priority debts ahead of high priority ones just because of these concerns. An overdue bill may damage your credit score but very often the damage has already happened by the time a debt collector is threatening you.

For credit card debt and other debt payable on a monthly basis, the creditor will report the status of the debt to credit bureaus every month. The biggest impact on your credit score will be when the debt is reported as 30 or 60 days overdue. When your account is referred to a collection agency, and the collection agency reports the debt to a credit bureau, your credit score will take a big hit. Continued non-payment after that will not change your score nearly as much. By the time you are being contacted by a debt collector, it is too late to do much about your credit score—rushing to pay the debt won’t really help your score.

As a result, worry about your credit score should not be a reason to pay a late bill. Responding to the collector’s pressure may not help your credit score, but it will put at risk payments on higher priority debts, whose non-payment will have far more serious consequences. Also, if you pay off a debt that was already reported by a collector, the collection item will show in your report as “paid,” but your credit report will still show that the debt was in collection. If you want that information removed, you must get the collector’s written agreement to delete it and not all collectors will agree to do so.

Typically, hospitals, doctors, and other medical providers will not report your debt to a credit reporting agency. It is only if and when a medical debt is turned over to a collection agency that many—but not all—collection agencies will report the overdue debt to a credit bureau. In addition, the three major credit bureaus have agreed not to include any report on medical debt if that debt has been outstanding for less than six months. Reporting of a medical debt over six months will hurt your credit score. But after that first report, continued non-payment to the collection agency will not affect your score much.

Most negative information stays on your credit report for seven years, and then the credit bureau must remove it from your report. Bankruptcies stay on your report for ten years from the date of filing.

While your credit report will affect you in a surprising number of situations, it will not affect many other aspects of your life. You can expect that your report will be viewed by the following:

● Creditors when you apply for credit. A low score can mean you will be denied credit or pay a higher interest rate.

● Employers in most states to evaluate you for hiring, promotions, and other employment purposes.

● Government agencies trying to collect child support and when considering your eligibility for public assistance.

● Insurance companies using special credit scores for homeowners and auto insurance.

● Landlords when deciding whether to rent an apartment to you.

● Utilities are more commonly reviewing your credit score to determine whether to charge you a security deposit—not as to whether to provide you service.

Your credit report should not be a problem in the following situations:

● Your application for federal student loans and grants. Except for parents, graduate students, and professional school students applying for PLUS loans or anyone applying for a private student loan.

● Your credit report will not damage your friends or relations, and need not even affect your spouse. For example, a creditor is not allowed to look at your credit record if your spouse, child, or parent applies for credit and they are not relying on your income or assets.

● Your reputation in the community. No one can obtain your credit record for curiosity, gossip, or to determine your reputation. Your credit record is just between you and creditors—your neighbors and friends should never see it.

● Divorce, child custody, immigration, and other legal proceedings. Your credit report shouldn’t be used in proceedings such as applications for citizenship or to register to vote.

When you have unpaid bills damaging your credit score, the last thing you want is inaccurate information in your credit file making matters worse. It is amazingly common to find incorrect information in your credit file, and you can take steps to correct this information.

After reviewing the report you received from each of the three major credit bureaus, send a written dispute to each credit bureau that has reported incorrect information. The credit bureau by law must investigate the entry and correct the mistakes. You can also dispute the error with the creditor that supplied the incorrect information to the credit bureau, but you should always make sure you dispute it also with the credit bureau in order to preserve your legal rights. Even if the credit bureau told you they are making the correction, after a period of time obtain another credit report to see if the correction was actually made or whether it has popped up again.

If your debt is in fact delinquent, you can try to improve your credit report by entering into an agreement with the creditor to pay all or some of the debt, up front or in installments. But you should get the creditor’s written agreement to inform the credit bureau to delete any reference to the debt ever being delinquent—otherwise the fact that you were previously delinquent will stay on your report. Another option is for the creditor to agree not to affirm the debt after you dispute it with the credit bureau. The bureau must remove the information if the creditor who supplied it does not affirm it is correct.

Rebuilding Your Credit

Do Not Rush Into New Credit Just to Build Your Credit Score. It is tempting to rebuild credit by getting new credit and making timely payments. You should not start trying to get new credit during times of financial difficulty simply to improve your credit report. This is likely to take your attention away from paying high priority debts first. Definitely do not obtain credit from a creditor advertising “easy credit” or “no credit history required.” Many of these offers are rip-offs from lenders preying on consumers who fear that they cannot get traditional forms of credit. One of the most important steps you can take to cope with a bad credit history is to avoid getting deeper in debt during the bad times.

Once you get back on track, each year your older debt problems will have less of an impact on your ability to obtain credit. Seven years will come around sooner than you might think, and then there will be no record of those past problems at all. If your financial problems are behind you, your credit record problems will not go away immediately. Be patient. Your credit profile will improve over time.

Establish New Credit Accounts (with Caution). You can improve your credit by getting new credit and paying it back on time. But be careful. Avoid causing yourself more problems by getting unaffordable high-rate credit. One way to avoid this trap is to wait until you are offered a credit card with reasonable terms. You may get credit card offers even though you have a negative credit history, but these offers may be for expensive subprime cards that offer little credit and charge high fees.

If you are in default on a debt, the creditor can sue you to collect the money owed. Sometimes a creditor will be hesitant to sue because of costs associated with litigation.

The following may indicate that a collector will not sue:

● If your home or car is collateral on a loan, the creditor is more likely to foreclose or repossess than sue. A lawsuit is slow, expensive, and may not even succeed in recovering money from the defendant. Home mortgage and auto lenders instead will seize their collateral and sell it.

● Many collectors rarely sue on debts under $1,000 and some don’t sue unless a debt is much higher than that.

● If you dispute the debt and threaten to raise a reasonable defense. The collector not only has to factor in the value of your claim, but also the time and expense to resolve the case.

Can You Win the Lawsuit?

It depends. In some cases, you may be able to successfully defend against a suit. You will lose any lawsuit if you do not respond to the lawsuit properly. If you do respond properly within time deadlines, and raise reasonable defenses, you have a good chance of winning or of the creditor dropping the lawsuit. The stronger your defenses, the better your chances.

Collectors also pay little attention when they file lawsuits to collect on consumer debt. Their paperwork is often sloppy or incomplete. Pointing out these errors can throw the lawsuit out. Whether brought by the debt buyer or original creditor, trying a case may cost the collector more than they could ever recover and just by contesting the case you can lead them to dropping the lawsuit.

How to Respond to a Collector’s Lawsuit

CONSULT WITH AN ATTORNEY. The best way to find out whether you can defeat the suit is to speak to an attorney to find out your legal rights. Respond promptly. Do not ignore the suit. There are deadlines in place that require you to answer within a certain period of time or the debt collector will automatically win.

Common Defenses to Raise

The facts of each case are different, and each state has its own laws. Here are some common defenses:

The Lawsuit Was Brought in the Wrong Court. If you are not sued in the county where you live or where you signed the contract with the creditor, the action is illegal because it was brought in the wrong court.

The Collector Has Not Proved It Owns the Debt. The collector has the burden to prove not only that you owe the money, but that you owe the money to this collector. If it cannot do so, you should win the case.

Many collection cases are not brought by the company to which you first owed the debt (such as a credit card issuer), but by someone who has allegedly bought the debt, called “a debt buyer.” Ask that the debt buyer prove that your debt has been properly transferred to it. Amazingly, debt buyers often do not have that proof. It may produce a document indicating it bought thousands of accounts and state that the list of those accounts, including yours, is on a computer tape. This is meaningless until the debt buyer produces the computer tape and shows that your account is one of the accounts on that computer tape.

The Collector Has Not Presented Your Credit Contract in Court. Collectors often sue you based upon a contract you entered into with the creditor and then ask the court to make you pay not just the amount owed, but also interest, late charges, and attorney fees—all as provided for in the contract. To recover on the contract like this, the collector must produce the contract. Make sure the collector produces in court the actual contract you agreed to, and not some standard form agreement with no evidence that it was the one you entered into with the creditor. If the collector cannot do so, it may lose the right to collect attorney fees, late charges, and interest, and may even lose the right to recover on the debt.

If the collector cannot produce the actual contract, it may sue for money on some other theory. For example, it may say that it sent a statement of how much you owed and you did not object. An attorney will be helpful in advising you whether that theory is valid, but this theory should not allow the collector to recover attorney fees and interest based upon a contract, because no contract has been proved.

The Debt Is Too Old to Be Collected. Some debts are so old that they cannot be collected in court (in legalese, this referred to as “that the statute of limitations has run”). If you do not raise this with the court, the collector will win, even if the debt is too old. There is no one simple rule as to when a debt is too old to collect in court. The time period varies by state and even by the type of lawsuit being brought. The time period might be as short as three or four years, but it can be five or more years. On a very old debt, it is risky to make a partial payment or say in writing that you owe the debt, because this can start the time period running all over again.

Someone Else Incurred the Debt or You Are Only an Authorized User. You are only liable for your debts and not for someone else’s (unless you are a co-signer or otherwise guaranteed payment.) This means that you are not liable if someone forged your name or used your credit card without your authority (under federal law, you may be liable only up to $50). You are not liable if you are only an authorized user on a credit card. You are not liable for the debts of a family member who passed away (although the debts may be deducted from any inheritance you receive). You may not even be liable for your spouse’s debts, depending on state law.

You Have Already Paid, Settled, or Discharged the Debt in Bankruptcy. Virtually all debts are eliminated by a bankruptcy and this is a defense to the lawsuit, as is that you have already paid the debt, paid more than the collector claims, or if you already settled the debt with the collector or the original creditor. Present whatever evidence you can to support your claim.

Common Counterclaims to Raise

A defense is a reason you do not owe the money being sought. A counterclaim is a reason why the person suing owes you money. If your counterclaims are large enough, they wipe out everything you owe and even allow you to recover money from the collector. These claims often are available even if your claim relates not to the collector’s conduct, but that of the seller or original creditor.

Sale of the goods or services. Many debts arise from the purchase of goods or services. Anything unfair, deceptive, or defective in the sale may lead to a counterclaim (other than when purchased with a credit card). The same is true if warranties are not honored or if goods or services are not delivered. Counterclaims may exist even if the car or other goods are sold “as is.”

Credit terms. Anything that you find to be outrageous, unfair, or deceptive about the credit terms may form the basis of a valid claim. High-pressure tactics should also be challenged. In addition several laws, including the federal Truth in Lending Act, state installment sales laws, and other state credit legislation, create requirements as to what the creditor must tell you about a loan. These laws are technical in nature and you may need the assistance of a lawyer.

Special Rights If You Are Active Duty Military

If you are sued while you are on active duty with the military, or within the first ninety days after you get off active duty, you can ask the court for a postponement or “stay” of the case. The lawsuit will not be dropped, but the case will not move ahead while the stay is in effect. Once the stay ends, you have to defend the case.

To request a stay, send a letter to the court explaining how your military duties prevent you from appearing in court, when you will be able to appear, and include a statement from your commanding officer that your current military duties prevent you from appearing in court and that military leave is not authorized for you. Once the court gets this letter, it must order a stay for at least ninety days. If you need more time, ask for it in the original letter, or send a second letter that includes the same information as the initial request. If the court refuses to give you a longer stay, it has to appoint a lawyer to represent you. A JAG Corps attorney may be able to help you ask for a stay.

Courts also have authority to stay enforcement of judgments, including orders for attachment and garnishment, against servicemembers. A court may stay collection of a judgment if it finds that military service impairs the servicemember’s ability to comply with an order to pay the debt.

Going to Court

Attend All Court Proceedings and Respond to All Papers You Receive. Attend all hearings that are scheduled in your case. If you don’t show up, a default judgment will be entered against you even if you filed an answer or appearance earlier. If you cannot attend, send someone else to ask for a delay (usually called a “continuance”) and explain the reasons why you could not attend the hearing that day (such as illness, family emergency, preexisting and unavoidable work conflict, or unusual transportation problems). In small claims court, you usually only have to go to court once to resolve the case.

Whenever possible, let the collector or the collector’s attorney know in advance if you have a good reason for not attending the hearing. Often, they will agree to a delay in the case. If a delay is agreed to, you should put it in writing in the form of a letter confirming the agreement.

Summary Judgment. In more formal courts, either side can ask for a judgment before the trial even begins if there are no important facts in dispute. This is usually called a “motion for summary judgment.” If you receive a copy of a motion for summary judgment, you must respond to it or the collector may automatically win the case. Describe all facts that you dispute that relate to whether this collector has the right to obtain a court order against you for the debt. Most courts require the disputed facts to be stated in affidavits signed under oath by people who have first-hand knowledge of the facts. When you file a response, always send a copy to the collector’s lawyer.

Preparing for a Court Hearing. At the hearing both sides tell their story to a judge or magistrate. In many small claims courts, the hearing is informal. Usually, the collector first explains why it is suing. Make sure the collector gives the judge a copy of the credit contract as well as the accounting records showing any missed payments. If the collector is not the original creditor to whom you owed the money, make sure the collector shows sufficient paperwork that it in fact is the current owner of the debt.

You then present your response. Be as prepared as much as possible, preferably with the advice of an attorney. Here are some tips to help you prepare:

● Bring all relevant documents. This is usually your only chance to present documents, and courts pay a lot of attention to written documents. Try to have extra copies available, because the court and the collector will keep copies of the documents you present.

● Bring witnesses if there are any. Witness testimony may be important, especially if the witnesses are not friends or relatives. For example, if the dispute is about an item which does not work properly, a mechanic or another witness can testify from their own experience in using that item.

● Do not rely on written statements of your witnesses because the court usually will not allow them into evidence. Have the witnesses attend the trial.

● Consider going to court beforehand to get a feel for where the courtroom is, how the court works, how people dress, when to stand, how to tell when your case is called, where you sit during the hearing, whether a microphone is used and how to use it, the judge’s personality, whether an interpreter is available, etc.

● Take a companion to the actual hearing if possible to offer emotional support, to give you feedback and other help, keep track of your documents, and offer a second opinion if you must respond on the spot to a settlement offer.

● Prepare a written chronological report of events in advance, as well as a checklist of points to make and documents to give to the court, and bring these with you. Judges may be impatient if you are disorganized. Mention all of your defenses and counterclaims.

● Assume that the judge has not read any of the documents already presented to the court and does not know the facts of the case. Start at the beginning and tell your story in a clear and organized fashion in the order it happened.

● Do not be afraid to be forceful, but do not make personal attacks on individuals, including lawyers, witnesses, or the judge. A display of anger will usually hurt you more than it helps.

Be Wary of Deals You May Be Asked to Make in the Court’s Hallway

The collector’s attorney will not want to try the case and often will collar you in the courtroom hallway and try to work out a deal. The collector’s attorney is only looking out for the collector’s interest and not yours. No matter what the collector’s attorney tells you, he is not there to help you and may be taking unfair advantage of you or even misrepresenting things to you.

In return for giving up your right to go to court and force the collector to try the case, expect a substantial reduction in the amount you owe. The more defenses you have, the greater the reduction. Also think about other settlement terms. You might ask the collector to help you clean up your credit record, by agreeing in writing that it will no longer report that you owe the money and that the collector will tell the original creditor to do the same.

If you reach an informal agreement with the collector, still go to court to file an appearance and answer. The safest course is to file a copy of the written agreement with the court clerk to be entered into the court record. No deal should include a judgment being entered against you unless you have no defense and the settlement is for only a fraction of the debt owed. A judgment being entered against you is a very dangerous thing—this can lead to your bank account being frozen and the amount owed whisked out of your account in no time.

If you are not represented by an attorney, you may need help to determine if a settlement is fair and reasonable. Never agree to anything you do not understand or which you think is unfair. Whenever possible, wait until you see the terms of the settlement in writing before you agree.

Undoing a Default Judgment

Not filing a written answer or appearance within the specified time, or by failing to attend the hearing, or by missing other deadlines may lose you the opportunity to raise your defenses. This is usually called a “default.” Try never to lose by default.

If a default has been entered against you, you may be able to still get another chance to be heard by asking the court to “set aside” the default. A default can be set aside only for specific reasons and most often only within a short time after the judgment has been entered into the court records.

To set aside the default, act immediately, presenting reasons why you did not respond to the court case, such as that you never knew about the case or that there were unavoidable circumstances that made you unable to answer within the required time. In some courts, you will also have to tell the court briefly about your defenses or counterclaims so that the court will know that you have a chance to get a different result if the default is lifted. Usually, a request to “remove,” “lift,” or “set aside” a default has to be made to the court in writing. A copy of your request should be mailed to the collector’s lawyer.

It is difficult to set aside a default. You can avoid the problem by instead responding on time to all deadlines.

Below are “quick money” strategies that you should avoid at all costs. An entire industry of unscrupulous businesses exists to pressure you into making costly mistakes. These businesses know that people in financial distress often make desperate or poorly informed choices. They also know that people who feel that their options are limited are likely to be willing to overpay for credit and other services.

Unfortunately, even reputable companies operate businesses that take advantage of consumers in financial trouble. You cannot assume that because a company is well known or because it advertises on TV that it will give you a fair deal. Also be suspicious of companies that use names which are designed to create confusion about their identity, such as using the name “United States.” Some companies use names very similar to legitimate organizations just to confuse you.

There are two cardinal rules to follow:

● If it seems too good to be true, it probably is.

● If you are in financial trouble, be wary of anyone seeking you out and offering you a way out of your problems. Most legitimate options wait for you to contact them.

The following list warns you to avoid twenty practices that may increase your financial problems, not solve them. This is not a complete list of scams. New scams constantly emerge, and old ones change form. The main message is that services aimed at people with bad credit or other financial problems are often rip-offs. If the services seem too good to be true, they probably are.

Debt Elimination Scams

These are internet offers to totally eliminate your debt. They are bogus, will just cost you money, and will prevent you from taking the proper steps to deal with your debts. See Chapter 12 for more on debt elimination.

Debt Settlement Offers

A whole industry advertises the ability to settle your debts for less than what you owe. They claim that you put away money each month in a special account and at some point they will settle the debt for the money in the account. This rarely happens—they rarely settle your debts, always take a lot of your money in fees, and get you into trouble with your creditors. Since your payments are going into a special account and do not go to the creditor, you will be subject to debt collection, negative reports to credit bureaus, and even collection lawsuits. More on problems with debt settlement is found in Chapter 12.

Foreclosure Rescue Scams and Sale and Lease Back of Your Home

Some scam operators read published foreclosure notices, and then seek out the homeowner with a plan to “rescue” the home. Other companies advertise “We Buy Houses”—stay away from them as well. Often these scammers buy your home at a low price (or for nothing at all) and lease it back to you, with promises that you can get the home in the future. You may not even know that in the mound of paperwork that you have sold them your home. You will be overpaying them for rent, and may never get your home back.

Rip-Off Reverse Mortgages

As explained in Chapter 6, reverse mortgages are complex loans that have benefits and costs. Evaluating whether to take out a reverse mortgage is a difficult decision and requires consultation with a knowledgeable nonprofit counselor. Both your home and a sizeable amount of money are at stake. For this reason, the federal government creates standards for legitimate reverse mortgages, called HECM mortgages. Be extremely suspect of any reverse mortgage offer that is not a HECM mortgage, because you risk losing not only a lot of money, but even your home.

Credit Repair

Credit repair agencies, sometimes called “credit services” or “credit clinics,” offer to clean up your credit record. They charge a hefty fee and usually cannot deliver what they promise. You generally can do a better job cleaning up your own credit record at no cost. These agencies may even make matters worse for you or cause you legal problems.

Payday Lenders

Payday loans go by a variety of names, including “deferred presentment,” “payday advances,” “deferred deposits,” or “check loans,” and operate out of check cashers, over the internet, and elsewhere. They all work in the same way. You write a check or sign an authorization for the lender to take money out of your account electronically. The amount on the check equals the amount borrowed plus a fee. The check is due to be cashed or the electronic debit due to be initiated on your next payday or receipt of a government check.

Too often you will find that when it comes time to repay the loan, you do not have sufficient cash in your bank account or you need the funds there for more pressing purposes. You then have no choice but to roll over the loan into a new loan with a new fee. The effective annual rate of the loan is often as high as 400% or 700% or even higher. As you roll this loan over each time, the balance quickly grows, making it more and more difficult to repay. You become caught in a spiral of rolling over the loan each month, accumulating ever more fees and interest at astonishingly high interest rates.

Auto Title Lending

Auto title lending, often called “auto pawn,” “auto title,” or “auto equity” loans, are legal in some but not other states. You borrow money at very high interest rates (for example, 240% or 500%) and put up your car title as collateral for the loan. If you are unable to repay the loan when it becomes due or pay another fee to refinance the loan, your car will be repossessed and sold. Automobile title lending is not as simple and hassle-free as the title lenders advertise it to be. You can borrow money elsewhere at lower interest rates without endangering your car.

High-Cost Installment Loans

There is a growing industry offering high cost loans of anywhere from $300 to $3,000 or more that you pay off in monthly installments over anywhere from six months to five years. These loans come in all kinds of shapes and sizes. Some are by licensed lenders in your state and charge interest rates in the 30% to 60% range. On top of that they may sell you overpriced credit insurance. The real risk with these loans is that very often these loans are rolled over into new loans when you have trouble paying them off with their high interest charges, meaning that your indebtedness grows to much more than you originally owed, and keeps growing each time you roll over the loan. Not to mention that your car or home might even be taken as collateral.

Other installment loans are sold over the internet and seek to avoid state regulation. Then the sky is the limit as to interest rates, which can be as high as several hundred percent. Make sure to look at the Annual Percentage Rate (APR). Avoid any loan with a high APR number—certainly any rate above 36%. Some high cost loans today are claiming to have a zero percent APR, but then charge high fees based on your outstanding balance. This is a sure sign of a predatory lender to be avoided at all costs.

Refinancing and Consolidation Loans

Any offer to consolidate your loans or refinance existing loans must be carefully considered. Too often the end result is that you are worse off than before. Your old low interest or no interest loans are turned into high interest loans. Prepayment penalties to pay off your old loans early are added to the new loan. Closing costs and other up-front charges and fees are also added to the new loan. Be especially wary of anyone who sought you out for the new loan or anyone that is not an established lender in your community.

If you have federal student loans, it is generally not a good idea to consolidate them into a private student loan. Federal student loans come with all kinds of rights, including rights to cancel the loan, defer any payment for a year or more, and payment plans that match your income. These rights are generally unavailable if you consolidate into a private loan. On the other hand, there are good reasons to consolidate federal student loans into a federal student consolidation loan. For more, see Chapter 13.

Student Loan Debt Relief Scams

For-profit private companies charge high fees to assist you in dealing with your student loans, when what you should do is contact your servicer to obtain relief at no charge. These companies prey on students to recover large fees for unnecessary work. See Chapter 13 for your rights to cancel, delay, or reduce student loan payments you can obtain directly by working with your servicer or the Department of Education.

Rent to Own

Appliances, furniture, electronic equipment, and even used cars are offered on a rent-to-own basis where you do not own the item until you consistently have made years of weekly or monthly payments, and where the effective interest rate on the purchase can be 300% or even 500%.

Auto Brokers

When you are having trouble keeping up with your auto loan or lease payments, these brokers offer to lease or sublease your car for you for a fee. The practice is illegal in many states. Moreover, the broker may try to keep payments it receives from the person using your car and may not even obtain permission from your creditor or lessor for the arrangement.

Subprime Credit Cards

Some credit cards marketed to those with low credit scores charge so many initial fees that 25% of the credit limit is already taken up by fees, and very high interest rates are then applied to the fees as well as any purchases. As a result, the effective interest rate on your credit card charges is much higher than you think it is or than is indicated by the disclosed interest rate.

Bouncing Checks and Postdated Checks

It is tempting to write a check or authorize an electronic debit when you have insufficient funds in your account to cover it. At best, you may hope to make a deposit before the check is cashed. At worst, you may be deliberately using the check payment as a way to make the creditor leave you alone for a few days.

Avoid this temptation. Bouncing checks is never the answer. You will be charged a hefty fee, often by both the bank and by the creditor each time the check is presented for payment. And creditors may present the same check for payment a number of times. You could also face criminal prosecution for fraud. Although you may be able to defend yourself successfully if you are prosecuted, it is better not to have to deal with this problem at all.

When in doubt, look up your account balance before writing a check or authorizing an electronic debit. Your balance may seem higher than it really is because other checks you have written have not yet been deducted from your account. If you have a joint account, coordinate your check writing carefully with any other person who has power to write checks and make withdrawals.

You might also be tempted to write a “postdated check,” that is a check dated later than the date on which you write it. You do this assuming it will not be cashed until the date written on the check, when you hope to have sufficient funds in the account. Despite what you may think, the check can be cashed immediately and the bank need not wait until the date written on the check.

Instead, delay payment until you are sure you have sufficient funds in the account. That way you are not surprised that the check is cashed early. If things change in the interim, it is not too late to direct your funds to something else more important. And you avoid the cost of bouncing a check.

Using Overdrafts As Credit

Many banks and other financial institutions permit you to deliberately overdraw your account. The bank will honor a check, debit card payment, or ATM withdrawal even if you do not have sufficient money in the account. This is often an incredibly expensive way to pay your obligations.

Banks charge high fees for each overdraft, up to $35 per transaction. Some banks also charge a fee of up to $5 every day or $30 every few days until you repay the overdraft. Banks pay themselves back the amount of the overdraft and fees out of your next deposit, before you can use the money for other essential bills like your mortgage or utility payment. A $100 overdraft with a $30 fee has an interest rate of 780% if the overdraft lasts two weeks.

For ATM or one-time debt card transactions, the bank can only honor the payment and charge you a high fee if you affirmatively consent or “opt in” to this arrangement. Do not do so and revoke your consent if the bank already has gotten you to opt in.

Selling or Giving Away a Creditor’s Collateral

You may have a car or other property that serves as collateral for a loan from one of your creditors. It is a bad idea to give away or sell a creditor’s collateral without the creditor’s permission. This is called “conversion” of collateral.

You may of course sell collateral if the sale price you receive is enough to pay off the existing loan. If the collateral is a car, typically you will need to pay off your loan and have the lender release the lien in order to give good title to the buyer. If you are selling the car to an individual, you may need to work with the lender to determine the amount of the payoff and the release of the lien in order to transfer title.

If you have already lost, given away, or sold collateral, you may be prosecuted for a criminal offense. A defense to a criminal prosecution is that your conduct was not intentional, that you did not understand that the property was collateral or that you did not know the consequences to the creditor of disposing of the property. In addition, most such prosecutions and lawsuits can be ended by payment of the value of the collateral either in installments or in a lump sum if you have it. Jail time is rarely or never imposed. Still, this is not a risk worth taking.

Get-Rich-Quick Schemes

Many products and jobs are advertised with the promise that you will make a lot of money quickly. These are almost always scams.

For example, real estate investment seminars are sold with the promise that you can make a bundle by buying and selling investment property. The reality is that the only one making a bundle is the person selling you the seminar. When seminars of this type are offered for free, the person running the seminar will usually aggressively try to sell you something very expensive.

A similar problem involves jobs which are offered with the promise of making quick financial returns. A common example is an advertisement with a bold heading such as “Make up to $1,000 a week immediately—working at home.” The vast majority of these offers require payment of substantial “set up” or “one-time start-up” fees to a person or company that promises you a money-making plan in return. The company keeps these fees and you end up with no real way of making money.

Don’t Pay Medical Debt Ahead of Other Debt or Borrow to Pay Medical Debt

Most families encountering financial difficulty have overdue medical debt. You should treat medical debt as a low priority debt to be paid only after you pay more pressing types of debt, such as your mortgage, car loan, or criminal citations. Almost any other type of debt will be more pressing—medical debt should typically be a lower priority.

Similarly, never pay medical debt by incurring other debt. The worst thing you can do is take out a second mortgage to pay off medical debt. Also don’t put medical debt on your credit card, even a “medical” credit card, unless you can pay the card and all your other obligations that month.

Unlike credit card debt, medical debt will often carry low or no interest payments and late charges. While the medical debt may eventually end up on your credit report, it will not show up for at least six months. Delinquent credit card debt affects your credit score immediately. You are also less likely to be sued on medical debt than credit card debt. Some medical debts can go unpaid for long periods of time without any significant adverse consequences.

Nonprofit hospitals have written policies to reduce or even eliminate certain medical charges if you are eligible for financial assistance. Many states have laws that reduce or even eliminate medical debt for eligible families. Whether or not you qualify for such financial assistance, health care providers are often more willing to reduce the amount of a delinquent debt where you can show financial hardship. Once you put medical debt on your credit card, you lose all of these opportunities.

Some doctor or dentist offices may encourage you to sign up for a special credit card to pay your medical bills, but these cards are usually not a good choice for paying medical bills. The credit cards often have high interest rates or unfavorable terms. You lose the option of negotiating with your health care provider over the bill. Using this type of card turns your medical debt into credit card debt.

Medical debt’s status as a low priority debt does not mean that one should ignore medical debt. You have special rights concerning medical debt, and it is important to know these rights to be able to reduce the amount of your medical debt and its adverse consequences.

Debt Collectors and Medical Debt

Hospitals and other health care providers are quick to turn over medical debt to debt collection agencies—some will do so after a month or two, while others may wait six or more months. The job of these debt collectors is to try to get you to pay medical debt even if this is not in your best interest.They will push you to put medical debt on your credit card—don’t fall for that. They will try to get you to pay these bills ahead of more important bills, such as your rent or home mortgage. They will threaten to ruin your credit rating, but they may not even report the collection effort to a credit reporting agency. If they do report the debt, the reporting agency will not even include the debt in its reporting unless it is over six months old. Just as importantly, paying your medical bill instead of your mortgage or car loan will end up damaging your credit report a lot more than not paying your medical bill.Debt collectors also will call you and constantly press for payment. But this is easy to stop, particularly for medical debt. Few hospitals and health care providers will be collecting on their own debt, but will instead hire third-party collection agencies. Under federal law these agencies must stop contacting you if you simply send them a letter telling them to stop, above.Another approach to avoid debt collection harassment is to contact the hospital or health care provider early about your inability to pay, before the matter is turned over to a collection agency. Explain that you are unable to pay at present and that you will not pay the collection agency either. Since the health care provider must pay the agency, the provider may be better off waiting for you to pay the provider directly when your financial situation improves. Preventing your debt from going to a collector will also help your credit standing because typically only collection agencies and not medical providers report your debt to a credit bureau.

Limits on Credit Reporting of Medical Debt

Health care providers will probably not report your debt to a credit bureau. Instead, when your debt is eventually handed over to a collection agency, that collection agency may (or may not) report the debt to a credit bureau.

In addition, in almost all cases, your credit rating is determined by one of the three major national credit bureaus. All three of these agencies have agreed not to include any medical debt in your credit report if the debt is less than 180 days delinquent when reported to them. This means that medical debt will not affect your credit rating unless a provider’s collection agency makes a new report to a credit bureau after the debt is over 180 days old. For more on credit reporting, see Chapter 3, above.

Can a Hospital Turn You Away If You Owe It Money?

If medical debt goes unpaid for a period of time, a hospital or other health care provider may decide to stop providing you services. In some areas, you may have few other options for medical care, but in other locations you should be able to find other health care providers to take care of your family. That you owe money to one hospital or one health care provider should not prevent you from obtaining services from other hospitals or providers. This will particularly be the case with public hospitals and community health centers.

Even if you owe a hospital for past-due bills, the hospital cannot turn you away from its emergency room. This is your right under a federal statute called the Emergency Medical Treatment and Active Labor Act (EMTALA).

If you request financial assistance from a nonprofit hospital, the hospital cannot deny you care in any part of the hospital because of an old bill until it determines whether you are eligible for financial assistance. You usually have about eight months (240 days) from when you first received the old bill to request such financial assistance.

If you are a Medicaid recipient and you owe a doctor or other health care provider for co-payments or deductibles, Medicaid prohibits health care providers from denying you future services.

Correcting Your Medical Bills

One way to reduce a medical debt is to review it carefully for errors and unauthorized charges. Also review any explanation of benefits (EOB) form you receive from your insurance company to see if it is consistent with the medical bill. If you see errors, contact the health care provider or your insurance company to have the erroneous charges taken off your bill.

Check also for charges based upon unauthorized balanced billing. The EOB may disallow a portion of the health care provider’s bill, pursuant to its agreement with the provider. Balance billing is when the health care provider bills you for the disallowed portion of the bill. Balance billing is prohibited in certain states.

If you have Medicare or Medicaid, providers are usually not allowed to bill you for rates higher than what these programs are willing to pay. They can only bill you for copays and deductibles. If you have both Medicare and Medicaid coverage and are enrolled in a Qualified Medicare beneficiary program, providers are usually not even allowed to bill you for the Medicare co-pays and deductibles.

If you receive a bill that you believe should be covered by insurance, Medicaid, or Medicare, contact your insurer to find out why the service was not covered. You may need to contact your health care provider also. If the insurance company made an error, they might be able to fix it when you call.

If your insurance company, Medicaid, or Medicare will not pay for a service that you needed, you have a right to appeal. Call your insurer and tell the insurer that you want to appeal their decision. Do this as soon as you can before the deadline for requesting an appeal. Contact your state insurance commissioner or state attorney general’s office if you need assistance.

Requesting Financial Assistance

Federal law requires nonprofit hospitals to establish policies for offering patients financial assistance, such as free or discounted medical services for eligible patients. The policies and how to apply for financial assistance must be in writing and available from both the hospital and on the hospital’s website.

Hospitals often charge an uninsured patient high “retail” prices for services, but charge significantly less for the same service to a health insurer, Medicare, or Medicaid. If you are eligible for financial assistance from a nonprofit hospital, the hospital should not charge you the “retail” price but instead should charge a price similar to what it charges insurance companies, Medicare, and Medicaid. The hospital even has to go back and reduce bills you received even before you established eligibility for financial assistance. The “retail” price is sometimes called the “chargemaster” price, and hospitals are currently required to post these chargemaster prices on their websites.

Federal law does not otherwise specify standards for financial assistance, but about half the states have medical debtor protection laws that specify who, based on family income, is eligible for financial assistance and what type of assistance a hospital must offer. For example, the hospital may have to offer an interest-free installment plan, reduced cost medical care, or even free medical care. The hospital’s financial assistance plan will set out exactly the type of financial assistance that it provides to those who are eligible.

In at least some states you can also apply for Medicaid and if you are found eligible, Medicaid will cover retroactively medical bills incurred over the last three months. This retroactive coverage is not available in every state.

Other hospitals or health care providers may agree to reduce bills based on your financial hardship even if not required to do so by federal or state law. Explain your financial situation and that you will pay when you are financially able. You can ask for a payment plan, but do not agree to a payment plan if you cannot afford the payments.

Chapter 8 discusses ways before you incur a medical bill to obtain medical and dental care at reduced prices, such as applying for Medicaid or obtaining low cost dental care from a dental school. But even after you have incurred medical bills, there are charities and other programs that may help pay for some of your medical bills.

When to Pay on Your Credit Cards and When to Use Them

Credit card debt is relatively low priority debt. If you do not pay it, you do not face immediate loss of your car, home, wages, bank account, or other property. If you do not have enough money to pay all your bills, you should generally not make significant payments on your card debt ahead of your mortgage, car loan, utilities, food, medicine, and the like. Keeping this priority in mind, this chapter provides advice on paying down your credit card debt.

Just because credit card debt is low priority does not mean that you should pay off other debts with your cards. As described in the chapter on medical debt, you should not pay off medical debt with a credit card if you will have trouble paying these credit card charges, no matter how much a debt collector is hounding you to do so. You have better choices concerning your medical debt than you do concerning your credit card. For example, with the help of our firm, there may be a way to negotiate your medical debt and reduce the overall amount.

On the other hand, it may be a smart choice to put necessities on your card (or use your card for a cash advance) if that is the only way to free up cash to make your mortgage, rent, car, or utility payments. Similarly, paying a criminal citation with a credit card (if available) is better than losing your driver’s license or even being incarcerated for non-payment.

How a Delinquent Credit Card Account Affects You

In making judgments about paying and using your credit card, you should understand what does and does not happen if you fail to pay your credit card. You are only required to make the required minimum payments on your credit card, but if you do so it will take many years to pay off your debt and you will likely pay thousands of dollars in finance charges. Nevertheless, if you consistently make the minimum payment, you will be avoiding late charges and your credit report will show your payments are on-time and current. The card issuer cannot raise your interest rate on charges you have already incurred if you keep current on your minimum payments. It is unlikely that you will lose the ability to use your card—assuming you have not maxed out the card.

If you stop making even the minimum payments, then your overdue credit card payments will almost certainly show up on your credit report, first as overdue, then 30 days overdue, then 60, then 90, etc. Your credit score will likely take its biggest hit when the card is 30 and then 60 days overdue. After the card is 60 days overdue, the card issuer can then increase the interest rate on your card even for existing charges that you have already made.

At 180 days, the card issuer is likely to “write-off” or “charge off” your debt. This does not mean it will stop trying to collect on the debt or that you do not owe on the debt. It just means the card issuer will treat the card account differently for their internal accounting purposes. Most card issuers at 180 days will stop sending you statements and also stop assessing new interest or new late charges. They will cancel the card if that has not happened already and turn the account over for collection if that has not already happened.

Being contacted by a debt collector is never fun, but you can stop the collector from contacting you. The debt collector may also threaten to ruin your credit score, but by the time the account is turned over to the collector, your score has already been lowered a lot. Not paying the collector will have little additional effect on your score, no matter how much the collector threatens to ruin your credit rating. Also, if you pay off a debt that was already reported by a collector, that collection item will show as “paid” but will not be removed from your credit report—if you want it removed, you must get the collector’s written agreement to delete it and not all collectors will agree to do so. A written agreemen is something to pursue with an attorney to make sure it is drafted properly.

If you are sued and the judge rules for the creditor, then the debt becomes much more serious. You do not have to pay the debt all at once. But it is possible part of your wages will be garnished, your bank account seized, or even some of your property sold.

Even if you lose the lawsuit, you may not have to pay the debt all at once. If your income and bank accounts are protected by law, you may not even have to pay anything on the debt. For more information on what may or may not happen when you lose a collection lawsuit, see Chapter 21, below.

Special Cards Create Special Problems

The above description of the implications of a delinquent credit card applies to most credit cards. But a few special types of cards create additional concerns when you are delinquent.

Some cards are specially marketed to people who have low credit scores or no credit history. Beware of these cards! They come loaded with high fees that can eat up to 25% of the credit line. In some case, you may even need to pay a fee to apply for the card. These cards usually do more harm than good for your credit score.

Some credit cards are marketed as helping you reestablish credit, and are secured by a certain amount of funds in your bank account. You cannot withdraw that amount from the account and your card’s credit limit matches that amount. If you do not pay the card, the card issuer just seizes that amount from your bank account. These cards can be helpful in establishing credit, but only if you’re careful not to max out and to make the minimum payment every month.

Avoid Debt Settlement and Debt Elimination Companies

You may hear about companies that claim they can help you reduce your debts or eliminate them. These companies are a total rip-off. Never use them. Some say they can send you documents or sell you tips that will eliminate all your credit card debt. They offer a “bond for discharge of debt,” “a declaration of voidance,” or a “redemption certificate.” Or they tell you that “monetized” debt need not be paid. Other times, they claim to be “sovereign citizens” or offer to set up sham arbitration proceedings to eliminate the debt. These are totally bogus offers. They will cost you money, and just make matters worse.

Another scam is often called debt settlement. The company claims that it can negotiate with your creditors so you can pay off your debts for less. They may even advertise examples of how they have saved people thousands of dollars. Some debt settlement companies claim that they have a special certification by the Better Business Bureau or other organizations. But this is all meaningless. Debt settlement is actually illegal in some states and a bad idea everywhere.

Typically, debt settlement companies instruct you to put money away in a special account each month. When there is enough in the account, they claim they will use it to settle your credit card debts. Some want to be paid upfront and others say they only get paid if they settle your debts. But they always manage to charge you monthly fees even if they never settle your debts. Or they may settle one or two small debts and claim their fee. But this still leaves you with your bigger debts—which often grow even larger while you wait for the company to do something. These companies have no special connection to card issuers and some credit card companies even refuse to talk to debt settlement firms.

While you are putting money in the special account, nothing is going toward to your card companies; interest and late charges are mounting; the total amount you owe is growing; the non-payment is being reported to credit bureaus; and you are likely being harassed by debt collectors or even sued on the debt. Even if the company eventually settles some debts, your total amount of debt will be bigger than when you started, especially after all the fees you must pay to the company.

Credit Counseling and Debt Management Plans

Credit counselors offer budgeting advice. Sometimes they also offer debt management plans. The difference between a debt management plan and debt settlement is that a debt management plan requires you to pay all of your debt. While you usually get a discount on the interest rate and late fees, you are still paying the full bill. It may take years to pay off your credit card debt under a debt management plan—are you prepared to continue to make payments to the credit counselor for that long a period? In addition, most credit counselors require you to stop using any of your credit cards that have not already been cancelled. Some counselors will allow you to keep one card only for emergencies.

You must also still pay a monthly fee to the credit counselor, but this should be far less than what debt settlement companies charge. Legitimate credit counselors only charge small fees and are nonprofit organizations. They do not make grand promises; they offer budgeting assistance; and they provide consumer financial education. If you cannot afford their fee, a legitimate credit counseling agency will help you for free. Sometimes they recommend a debt management plan, but only if you can afford it. Shop around; do not go with the first company you see and certainly do not go with the first company that reaches out to you or that you see in advertising. You might even go to an agency in person to see what it looks like.

Nevertheless, even legitimate credit counselors work closely with credit card companies and may even receive funding from those companies. They may not be quick to recommend a bankruptcy option even when that makes sense for you, and are unlikely to consider the fact that you should pay your rent, mortgage, and car payments ahead of credit card debt. Typically, they offer you no help on these other types of debt, although sometimes a credit counselor will be affiliated with a housing counselor.

Being a nonprofit organization is not enough to make a credit counselor trustworthy. Avoid any credit counseling agency that charges high fees or promises you it has special methods to reduce your debt that no one else has. Even when advertised as nonprofits, these agencies are not legitimate credit counselors and are trying to make as much money off you as possible. They will not help you in the long run. Another tip-off for a shady credit counselor is if it only offers to work out a payment plan with your credit card company and does not offer budgeting or financial education services.

Even a legitimate credit counseling agency is not for you if you are having trouble paying your rent or mortgage, car payments, utilities, student loans, or other higher priority debt. Most credit counselors only help with credit card debt and require you to make payments that only go to the card companies. You shouldn’t devote money to credit card debt when you have more important obligations to deal with.

On the other hand, if all you are worried about is credit card debt, a legitimate credit counselor may make sense. They should help you work out a realistic budget that meets your living expenses and higher priority debt before they recommend a debt management plan. If you cannot pay your basic expenses and high priority debt, do not sign up for a debt management plan.

The Bankruptcy Option

Bankruptcy is an option that can legitimately eliminate all your credit card debt. A chapter 7 bankruptcy can wipe out all of the typical credit card debt (unless you go on a shopping spree just before filing bankruptcy). A chapter 13 bankruptcy can reduce how much you pay and spread payments over three years or more—it is more typically used if you want to protect against the loss of your home or car.

While many people file for chapter 7 bankruptcy to get rid of crushing credit card debt, do not rush into bankruptcy with just a minor credit card obligation. There are limits to how often you can file bankruptcy and this option is best saved for when you are having trouble paying many of your debts and not just a relatively small credit card debt, and when the total amount of your debt is substantial.

Bankruptcy is also not free. If you are very low income and file under chapter 7, you may be able to waive the bankruptcy filing fee. Otherwise, as of 2018, you will pay $335 to file a chapter 7 bankruptcy or $310 to file a chapter 13 bankruptcy. You can pay these fees in installments. It is also highly recommended that you file with the help of an attorney who may also charge a fee.

Bankruptcy will, however, give you a fresh start without the credit card debts hanging over you. Your credit report will show that your credit cards are not delinquent, because the bankruptcy has cancelled them out and many creditors may find you more creditworthy for having passed through bankruptcy rather than being buried under debt. On the other hand, the fact that you filed bankruptcy will be on your credit report for ten years, while the credit card delinquency stays on your credit report only for seven years.

A good rule of thumb might be that it is too soon to file for bankruptcy when you just have a relatively small amount of delinquent credit card debt, but that it may make sense to file once the creditor has won a lawsuit against you and you have wages or bank accounts you want to protect from seizure.

Most student loans are backed by the federal government. The federal government has extraordinary powers to collect defaulted student loans if you don’t pay. It can seize tax refunds, deny you new federal student loans and grants, garnish a percentage of your wages without a court order, charge you very large collection fees, and even take a portion of your Social Security benefits. To make matters worse, there is no time limit for collection on federal student loans. The government can keep trying to collect for twenty, forty, or even more years.

Consequently, federal student loans require your immediate attention, both because of the federal government’s special collection powers and because of the special rights you have to cancel, reduce, or delay your payment obligations. However, these special rights require you to take action to request them—you cannot wait for the government or the loan collector to offer these options to you.

These special collection tactics and student rights apply only to federal student loans and not loans made by your school, a bank, or another financial institution without any backing from the federal government. Those are called private student loans. How you deal with private student loans will differ greatly from how you deal with federal student loans. Private student loans are discussed at the end of this chapter

First Identify What Kind of Loan You Have

Your rights and strategies will vary depending on the type student loan you have. Access information about your federal loans at the Department of Education’s National Student Loan Data System (NSLDS), by going to www.nslds.ed.gov or calling 800-4-FED-AID, TDD: 800-730-8913. When first using the online system, create a user name and password, supply an e-mail address, and provide other identity information. The NSLDS will provide your approximate loan balance, the type loans you have, who is servicing those loans, and other loan details.

You can also determine what type of loan you have by checking your loan agreement papers. If you do not have copies, request them from your loan holder. If the loan is federal, the name of the federal loan program will be written at the top of the loan document and also on the loan application and billing statements. Your credit report will also have information about your loans.

Direct Stafford Loans are the most common student loan. Since 2010, nearly all new federal student loans are Direct Loans, made directly from the federal government to you, with the school’s assistance.

Federal Family Education Loan (FFEL) Stafford Loans are similar to Direct Stafford Loans, but were given out by banks or other financial institutions, administered by state and nonprofit guaranty agencies, and ultimately backed by the United States. Before 2010, many student loans were made under the FFEL program (also known as guaranteed loans), and many borrowers are still making payments on these loans or are subject to collection on old FFEL loan debts.

PLUS Loans are loans for parents to help finance their children’s education and also for graduate and professional students. Since 2010, PLUS loans have been issued under the Direct Loan program, but were mostly FFEL loans before that.

Consolidation Loans allow you to combine one or more federal loans into a new loan that has different, hopefully better, terms—now issued only through the Direct Consolidation Loan program though some borrowers continue to repay old FFEL Consolidation Loans.

Perkins Loans were made directly from the school you attended. If you stop paying the school, the loan may eventually be turned over to the U.S. Department of Education for collection. Perkins Loans have a fixed interest rate of 5%.

Private Student Loans are also offered to students. These loans have no government involvement but are offered by banks or other private institutions. If your loan is not listed in the NSLDS, it is probably not a federal loan, unless it is a very old federal loan. Other ways to identify a private student loan include:

1. If the loan was made since 2010 and has the name of a bank on it, it is a private loan.

2. If the interest rate is 10% or higher, it is most likely a private loan.

3. If there is a co-signer on a loan, it is probably a private loan.

4. If, when you took out the loan, you received a disclosure statement that looks somewhat like the statement you get when you take out a car loan, then it is probably a private loan.

Most of the discussion in this chapter applies to federal loans only. A separate section at the end of the chapter discusses private student loans.

Rights to Cancel Your Federal Student Loan

If there were serious problems with the school, if you are disabled (or have passed away), even if you are in default on the loan, you may be able to apply to have your federal loan discharged—that is cancelled—by submitting paperwork to your loan servicer, debt collector, or directly to the Department of Education. This is an administrative process. Ask whoever is holding your loan for the appropriate discharge request form. The forms are also available at https://studentaid.ed.gov. Be prepared to meet resistance and delay, insist on your rights, and consider seeking assistance from an attorney. You may also have rights to cancel the debt by filing bankruptcy.

A successful administrative discharge may not only completely wipe out the current loan, but may in some cases allow you to get back money you paid on the loan and any money that was taken from you through tax refund intercepts, wage garnishment, or other collection methods. In some cases, the government is also required to delete negative references on your credit report.

Closed School Discharge. If your school closed while you were enrolled or within 120 days of your leaving the school, your loans can be discharged. In a few cases, the 120-day period may be extended. New rules scheduled to go into effect in July 2020 will extend this period to 180 days for borrowers who first take out loans on or after July 2020.

Unpaid Refund Discharge. You are eligible to discharge all or a portion of a loan if you left school and the school failed to pay you a refund you were owed.

Borrower Defense to Repayment Discharge. You may seek to discharge all or a portion of a loan if your school lied to you or otherwise misled you in convincing you to enroll, stay enrolled, or take out loans, or in some cases engaged in other misconduct violating state law. The rules for this discharge program have changed several times in recent years and differ depending on when your loans were disbursed. For many borrowers your eligibility for this discharge also ends after a certain number of years after leaving school, so it is important to act quickly if seeking this discharge. For more information on the particular standards applicable to your loans and how to apply for discharge, consult www.studentloanborrowerassistance.org, https://studentaid.ed.gov.

False Certification Discharge. A false certification discharge application form is available if any of the following happened to you (or to the student, if you’re a Parent PLUS borrower):

● At the time of enrollment, state law disqualified you from getting a job in the occupation for which you were being trained (for example, you were enrolled in a truck driving program even though you had a physical disability that prevented you from obtaining a truck-driving license).

● You did not have a valid high school diploma or GED when you went to the school, and your school did not ensure that you met the applicable alternative financial aid eligibility criteria (such as through an ability-to-benefit test).

● The school forged your name on the loan papers or check endorsements, and you never went to school for the times covered by the forgery.

Disability Discharge. You can discharge your loan if the Department of Veterans Affairs, the Social Security Administration, or your physician certifies that you have a total and permanent disability. Parents with PLUS Loans may apply for discharge based on their own disabilities, not those of their child. If two parents have a PLUS Loan and only one becomes disabled, the other must still repay the loan.

The first step to apply is to notify Nelnet (a company hired by the Department of Education), by calling 888-303-7818 (8 a.m. to 8 p.m. EST, 7 days a week), e-mailing DisabilityInformation@Nelnet.net, or applying at www.disabilitydischarge.com. You can designate a representative to apply on your behalf, but you first must fill out the representative designation form available at www.disabilitydischarge.com. Additional details about applying are available there as well.

Death Discharge. Your family or estate will not have to pay back your student loans if you die. Your estate should submit an original or certified copy of the death certificate to the loan holder. The death of both parents with a PLUS Loan (assuming both took out the loan) is also grounds for the “death discharge,” but not the death of only one of two obligated parents. A parent can also apply for discharge of a PLUS Loan if the student for whom the parent received the loan dies.

Other Grounds for Loan Cancellation or Forgiveness. The Public Service Loan Forgiveness program allows Direct Loan borrowers employed in certain occupations to discharge any remaining loans after making 120 qualifying payments (the equivalent of ten years of payments). Borrowers must be in specific repayment plans for their payments to qualify them for forgiveness in this program. Certain teachers who have taught for five consecutive years are also eligible for at least partial loan forgiveness. Perkins Loans also may be partially or completely cancelled for borrowers who work in certain fields. Be sure to review the details about all of these programs at https://studentaid.ed.gov.

Bankruptcy. It is very difficult, but not impossible, to discharge a student loan in bankruptcy. You must prove that repaying the loan would cause an “undue hardship” for you and your dependents. Courts generally interpret this to mean that you must have serious financial problems which are likely to persist for reasons beyond your control. It is usually better to ask the bankruptcy court to make this determination at the time of the bankruptcy filing, but if you fail to do so, the bankruptcy court can make that determination later when collection attempts on the student loan are renewed.

How to Reduce or Delay Your Payments

If loan discharge, cancellation, or forgiveness is not currently available to you, the government also offers options to lower your monthly payments, so you don’t default. Even if you do default, you can often get out of default and qualify for one of these lower payment plans (see Getting Out of Default later in this chapter).

The typical federal student loan repayment plan, called the Standard Repayment Plan, generally gives you up to ten years to repay your student loan (up to thirty years for consolidation loans). For many borrowers struggling to afford their student loans, income-driven repayment plans are the best option. These plans base monthly payments on your current income, with payments sometimes as low as $0/month, and offer forgiveness of any outstanding balance after 20–25 years of qualifying payments. Other repayment plans may lower your payments (at least initially). These plans do not reduce your total obligation, but they let you pay it off more slowly. This means that additional interest will be added to the loan, and you could end up paying more interest in exchange for more affordable monthly payments.

Income Driven Repayment Plans. In recent years, the government has created a range of income-driven repayment (IDR) plans. These plans calculate your monthly payment after considering your income. By lowering monthly payments—in some cases to zero—these plans help you avoid default, which prevents tax refund intercepts, wage garnishment, seizure of benefits, and high collection costs.

For these IDR plans, your loan servicer or lender will check with you every year to determine your income. If you fail to respond you will be dropped from the payment plan and your monthly payment will usually increase by a lot! In some instances, your balance continues to grow even though you make monthly payments, as interest will continue to be added to your loans. However, the government may pay a portion of the interest, depending on your loan type and repayment plan. Also, if you stay on an income-driven repayment plan for twenty or twenty-five years (depending on the plan), any remaining debt is forgiven, though some borrowers may owe taxes because of the forgiven debt.

Brief descriptions of these plans follow below. Detailed information about each of these repayment plans and a calculator to compute your payment amounts is available at www.ibrinfo.org or https://studentloans.gov. Pay special attention to which loan types qualify for which of these repayment plans. FFEL and Parent PLUS borrowers can only access some of these plans.

Pay As You Earn (PAYE) Repayment Plan. This is often the best option for borrowers who qualify, particularly if you would otherwise have high student loan payments relative to your income. PAYE is only for those who had no student loan obligations as of October 1, 2007, and then received a Direct Loan disbursement on or after October 1, 2011. You pay 10% of your “discretionary income”—the amount by which your adjusted gross income exceeds 150% of the poverty line for your state and family size.

In 2018, 150% of poverty was $1,517/month for a one-person household, $2,057/month for a two-person household, and $3,137/month for a four-person household. (The numbers vary in Hawaii, Alaska, or with different family sizes.) For example, if your monthly income is $120 above 150% of the poverty line, you only pay $12 a month.

If you are married, your spouse’s income is included in this calculation only if you file a joint tax return. Your monthly payments can’t go higher than your payments on the Standard Repayment Plan. After twenty years of payments on PAYE, your remaining student loans are forgiven.

Revised Pay As You Earn (REPAYE) Repayment Plan. REPAYE incorporates many of the benefits of PAYE and makes them available to borrowers no matter when they took out their loans. Under REPAYE, you pay 10% of your discretionary income toward your student loans. However, if you are married, then your spouse’s income is included in this calculation even if you file separate tax returns. (The only exception is for spouses who are separated and borrowers who cannot reasonably access their spouse’s income information.)

Under the REPAYE plan, there is no cap on your monthly payment so that higher income borrowers could end up with payments higher than on the Standard Repayment Plan. If you only have loans from undergraduate studies, the remaining loan is forgiven after twenty years of payments. Forgiveness for loans from graduate or professional school is not available until after twenty-five years of payments.

Income-Based Repayment (IBR) Plans. There are different IBR plans based on how recent your student loans are. If, on July 1, 2014, you had a zero balance on any loans and then took out a Direct Loan after July 1, 2014, your rights are almost exactly the same as under a PAYE plan. Because PAYE offers more flexibility in switching plans, you may choose to use PAYE (or REPAYE) instead of IBR. However, PAYE and REPAYE are not available for FFEL loans, but those loans are eligible for IBR.

For older loans, IBR is not quite as generous as IBR is for newer loans. Your payments are 15% of the difference between your income and 150% of the poverty line, and forgiveness occurs after twenty-five years. In either case, as with PAYE, your spouse’s income is only included in the payment calculation if you file joint tax returns.

Income-Contingent Repayment (ICR) Plan. ICR usually requires higher payments than PAYE and REPAYE. But it is essentially the only income-driven repayment option for Parent PLUS borrowers. If you have an FFEL Parent PLUS Loan, you can consolidate it into a Direct Consolidation Loan to become eligible for ICR. The calculators at https://studentloans.gov estimate what your monthly payment will be on ICR.

Extended Repayment Plan. This option allows you to extend repayment over a longer period (usually no more than twenty-five years), thus lowering your monthly payment. These plans are generally available only if you have loans totaling more than $30,000.

Graduated Repayment Plan. Payments start out low and increase every two years. In most cases, however, the loan still must be paid over a ten-year period.

Income-Sensitive Repayment Plan. If you have an FFEL and do not want to or cannot consolidate into a Direct Loan, you best option is one of the income-driven repayment plans (discussed below) or possibly an income sensitive plan. Income-sensitive repayment allows for reduced monthly payments due to your financial circumstances. Payment is calculated based on your total gross income, rather than your discretionary income. There is no loan forgiveness under this plan even after several years of repayment.

Alternative Repayment Plan. If no other plan is affordable, Direct Loan borrowers who have “exceptional circumstances” can submit documentation to apply for a repayment plan that is affordable. High medical expenses or private student loan payments could be among the expenses you provide to your loan servicer. There is no loan forgiveness under this plan.

Deferments. If you cannot manage your monthly payment using one of the repayment options listed above, you may choose to seek a deferment instead. A loan deferment lets you temporarily delay repaying your loan, usually for up to a year, though sometimes longer. You can often renew the deferment if it ends, but if not, you must resume making payments. Deferments are not available if you are already in default, typically defined as missing nine payments. To benefit from deferment, you must first get out of default, as described later in this chapter.

Benefits from deferment depend on whether your loan is subsidized by the government. Subsidized loans are given out based on financial need. As of July 2012, graduate and professional students were no longer eligible for new subsidized loans.

For subsidized loans, the government makes interest payments for you during the deferment period. Your loan balance will be no higher after the deferment period than before. When you defer an unsubsidized loan or a PLUS Loan, you will later have to pay back the interest that accrued during the deferment period. If you can afford it, you should consider paying the interest while you are in a deferment period.

You have a legal right to a loan deferment under specified conditions. For most loans that you got after July 1, 1993, the available deferments include:

● Unemployment deferments (for up to three years);

● Economic hardship deferments (granted one year at a time for up to three years);

● In-school deferments for at least half-time study;

● Graduate fellowship deferments;

● Cancer treatment deferments;

● Rehabilitation training program deferments;

● Military service deferments (there is no time limit, but eligibility ends 180 days after demobilization or the end of active duty service); and

● Post-active duty deferments for borrowers who are enrolled in school when they are called to active duty and plan to re-enroll after their service is completed.

FFEL and Perkins Loans have somewhat different deferment rules than those for Direct Loans.

Forbearances. If you cannot qualify for a deferment, you can still request loan “forbearance,” meaning you do not have to pay for a while, and no adverse action will be taken against you during the forbearance period. Even for a subsidized loan, the government does not pay interest for you. You will eventually have to repay the full loan amount and all accrued interest. In some cases, you should be able to get a forbearance even if you’re already in default. This will not get you out of default without further action.

In some circumstances, you have a legal right to a forbearance. For example, you have a right to forbear an FFEL or Direct Loan if your total student loan payments exceed 20% of your income even if you are many months delinquent. There are limits to how many times you can automatically get this and most other forbearances. If you don’t have a right to a forbearance, loan holders still may grant you one, especially for health or other personal problems that affect your ability to make your monthly payments.

What to Expect If You Are in Default on Your Student Loan

The government has a number of aggressive collection tactics it can take if you are in default on a federal student loan, which usually means you have not made payments for at least nine months. The next section describes methods to avoid those tactics completely by getting your loan out of default status.

Denial of New Student Loans and Grants. If you’re in default, the government can deny you new federal student loans and grants.

Your Credit Report. Most student loan defaults appear on your credit report for seven years. Perkins Loans may be reported until repaid in full, and then for seven years from the date of default.

Aggressive Collection Agency Contacts. Most student loan debt collection is by private agencies hired by the government or other loan holders. Private debt collectors are likely to be aggressive and to not inform you of options that would help you out, such as loan cancellation rights or affordable repayment plans. In general, you have the same rights to deal with student loan debt collectors as with any other debt collector—as detailed in Chapter 2. Complain about problems with student loan debt collectors to the Department of Education at https://feedback.studentaid.ed.gov/ and the Consumer Financial Protection Bureau at https://consumerfinance.gov/complaint/.

Collection Fees. When you are in default, a large portion of anything you pay to a collection agency on the loan is applied to high collection fees and not to pay off your loan—fees can be as high as 25% of your payment (less in some cases). Fees on Perkins Loans can be as high as 40%.

Tax Refund Offsets. When in default, the government can intercept your tax refund, including your earned income tax credit. The only sure-fire way to avoid this is not to have a tax refund due by lowering your withholding or any estimated tax payments you make. If your joint tax refund is seized, your spouse can recover some of the amount by filing IRS Form 8379, a simple form available at www.irs.gov.

You have the right to be notified before your tax refund is taken. You can contest the taking by checking appropriate boxes on the form (for example, the school closed or the school failed to give you a refund), by returning it immediately and by asking for a hearing. Send the form back return receipt requested as proof that you sent it. Do this every year that you get a notice. If you receive notice only after your tax refund is offset, you can contest the offset after the fact.

Wage Garnishment. When in default on a federal student loan, the government can garnish part of your wages without first obtaining a court judgment. The first $217.50/week of “disposable pay” (basically your take-home pay) is protected from garnishment. If your disposable pay is less than $256/week, the government can take the amount that exceeds $217.50/wk. If you make more than $256/week, it can take 15% of the pay.

There are a number of ways to stop student loan garnishments:

1. Request a hearing and explain why you think you need not repay the loan.

2. Ask for a repayment agreement, especially before the wage garnishment begins.

3. Explain you lost your old job against your wishes and have not been continuously employed in a new job for a full year.

4. If you enter a rehabilitation plan (discussed later in this chapter), the garnishments stop after your fifth on-time rehabilitation payment.

Federal Benefit Offsets. The government can seize part of certain of your government benefits, including Social Security, Social Security Disability, certain railroad retirement benefits, and Black Lung Part B benefits. Some benefits are exempt from seizure, including Supplemental Security Income (SSI), Veterans benefits, and Black Lung Part C. To find out which benefits can be seized or are protected, go to https://www.fiscal.treasury.gov/.

For benefits the government can seize, the government cannot touch the first $750 a month. If your monthly benefits are under $832 a month, it can seize the amount that is left after $750 is protected. If your benefits are over $832 a month, it can seize 15% of your benefits.

You should also receive a notice warning you that your benefits are going to be taken, with information about your right to request a hearing with the agency that is collecting the money. Request a hearing if you think you have defenses to repayment or if you are facing financial hardships.

Lawsuits. There is no time limit for the government to sue you to collect on federal student loan debt. If you are sued, you may have defenses and you can resolve the lawsuit by getting out of default (as discussed below) and resuming payments, or by applying for loan cancellation or discharge.

License Revocations. Some states allow professional and vocational boards to refuse to certify, certify with restrictions, suspend, or revoke your professional or vocational license, or even fine you if you default on a state-guaranteed student loan. Some states may allow for suspension or revocation of your driver’s license, too. Some states also apply these policies if you are in default on federal student loans.

Getting Out of Default

As described in the prior two subsections, after you default on your federal student loan by missing nine months of payments, you may be subjected to harsh collection tactics and lose access to some of the most generous repayment plans and deferments. It is greatly to your advantage to get out of default. One way is to cancel the loan as described earlier in the chapter. Three other ways are described below, but these do not happen automatically—you must press for your rights and initiate the request.

Reach a Settlement to Pay Off Your Loan Balance. You can get out of default by negotiating a settlement with your loan holder or the Department of Education to pay a lesser amount to pay off the loan. It can be difficult to negotiate a “good” deal, and you probably will need a large, lump-sum amount to offer. Get any settlement in a writing that confirms that you no longer owe anything, then pay on time, and request a satisfaction letter as proof of your payment in case someone attempts to collect further from you. Consult with a tax professional about any tax liability from your settlement.

Loan Consolidation. Loan consolidation is taking out a new federal Direct Loan that repays at least one Perkins, FFEL, or Direct Loan. Your consolidation loan, being new, is not in default. Being a Direct Loan, it is eligible for plans to reduce your payments not available to those with FFEL or Perkins Loans. Consolidation can also simplify repayment if you currently submit payments to multiple servicers.

You can apply online and need not deal with debt collectors or servicers. You can consolidate your loans only once, although there are a few exceptions to this, such as if you are adding new loans that were not included in the first consolidation. Consolidation is not an option if your wages are presently being garnished to repay your student loans. (You can still consolidate if the government is taking part of your Social Security benefits or other income, though.) If you consolidate loans in default, collection costs may be added into the consolidation loan, increasing your loan balance by as much as 18.5%. Since the consolidation is a new loan, you may lose the right to raise defenses you have on the old loans, though there are strong arguments that you can retain those rights.

You must either pay the consolidation loan through enrollment in an income-driven repayment plan (such as PAYE, described above) or by first making three consecutive reasonable and affordable monthly payments. Because you need to do only one or the other, do not believe a collection agency that tells you that you have to make three payments on your old loans before you can consolidate. Consolidation also extends your repayment term and, therefore reduces monthly payments if they are not otherwise reduced through enrollment in a payment plan that takes your income into account.

Distinguish Direct Consolidation Loans from private loan consolidation products. It is dangerous to consolidate federal loans into a private consolidation loan. If you consolidate into a private loan, you lose the rights you have under the federal loan program, including rights to cancel or reduce your loan payments. Private lenders may even offer you bonuses if you agree to consolidate with them, but this may not be the right choice for you. Read the fine print!

Loan Rehabilitation. This section explains how to get out of default by “rehabilitating” your Direct or FFEL Loan—the rules are slightly different for Perkins Loans. Loan rehabilitation requires you make nine payments within twenty days of the due date during a period of ten consecutive months. After five consecutive payments, wage garnishments stop. If needed, call the collection agency or your loan holder to remind them to stop the garnishments. Once you make six consecutive payments, you re-establish eligibility for new federal student loans and grants. You must complete all nine payments, and then a Direct Loan gets out of default. For an FFEL Loan, the loan holder must also sell your defaulted loan to a new lender. If you don’t make all of your payments, you have to start the rehabilitation process all over again.

Rehabilitation payments need not be at your old payment amount, but can be at a “reasonable and affordable” amount. Request lower payments and the collector should offer payments equal to 15% of the difference between your income and 150% of the poverty line. In 2018, 150% of poverty was $1,517/month for a one-person household, $2,057/month for a two-person household, and $3,137/month for a four-person household. (The numbers vary in Hawaii, Alaska, or with different family sizes.) For example, if your monthly income is $120 above 150% of the poverty line, you only pay $18 a month.

If the amount is still too high, try to negotiate a lower amount based on your income and expenses. The minimum monthly payment for rehabilitation is $5—even if your income is below 150% of the poverty line, you still have to pay $5 each month during rehabilitation.

After a successful rehabilitation, you are no longer in default, the default notation is removed from your credit record, and a new repayment schedule is established, but you are still paying on the same loan. You should have access to all of the flexible and income-driven repayment plans that fit your loan type, and you regain eligibility for deferments and forbearances you have not exhausted. The amount of your rehabilitated loan increases as much as 16% to reflect collection costs. Once you rehabilitate your loan, you will not be able to do it again if you end up back in default.

Pros and Cons of Consolidation vs. Rehabilitation. Weigh the pros and cons between consolidation and rehabilitation; do not be pressured by a debt collector to choose one or the other. Make sure that you can afford to make the new payments for the option you choose so that you don’t end up back in default.

Consolidation gets you out of default as soon as the loan is consolidated; rehabilitation requires nine payments in ten months; and for FFEL loans, there must be a buyer for your loan. Consolidation removes all loans from default with the one consolidation; rehabilitation may require you to separately deal with each loan. If you have an FFEL or Perkins Loan, only consolidation into the Direct Loan program gives you access to some of the newer income-driven repayment plans. Consolidation allows you to apply online; rehabilitation requires you to work out a payment amount with debt collectors. When you consolidate, you choose your new servicer, but you don’t have that option when you rehabilitate a loan.

Rehabilitation’s main benefit is that if you successfully complete the rehabilitation process, the default notation on your credit report is erased, but any other negative information still remains. After consolidation, the credit report notes that you had a defaulted loan for a period of time, but that the loan is paid in full. If you have claims and defenses concerning your federal student loan, you may lose the right to raise them after consolidation (though that is disputed), but not after rehabilitation.

More Help with Federal Student Loan Problems

Free information to help you with all types of student loan problems is available at the Department of Education website to use for general information is https://studentaid.ed.gov and for information about your loans or how to manage your loans, you can use https://studentloans.gov. Useful publications to download from these websites, available in English and Spanish, include Do You Need Money for College?, The Guide to Federal Student Aid, and Federal Student Loans: Basics for Students.

Borrowers can submit problems online at https://feedback.studentaid.ed.gov to the Department of Education’s Federal Student Aid Ombudsman or by calling toll-free 877-557-2575. Many guaranty agencies and private lenders also have ombudsman or customer advocate units. Another source to receive complaints is the Consumer Financial Protection Bureau at https://consumerfinance.gov/complaint. You can also contact your state or local consumer protection agency to make a complaint or seek assistance.

Private Student Loans

Dealing with Your Private Student Loans. Private student loan payments are lower priority than paying your mortgage, rent, utilities, car loan, or even your federal student loans. Private student loans should be treated like your credit card or medical debt—the only difference being that, as with federal student loans, it is very difficult to discharge most private student loans in bankruptcy.

Private student loan lenders or collectors may be willing to negotiate because they do not have as many collection tools as the federal government. They cannot intercept your taxes, seize your Social Security benefits, seize your wages before going to court, or deny you future government loans. A defaulted private loan may, however, show up on your credit report.

Private lenders often hire collection agencies. You have the same rights as with any other debt to fight back against any collection harassment or abuse. See Chapter 2.

If a number of years have passed since you last made a payment or requested a deferment or forbearance, consult an attorney before you contact the lender or start making payments again. A “statute of limitations” may have already expired on the loan, meaning the lender can no longer sue you on the debt. Payment now or even a new promise to pay may suddenly give the lender the right to sue you for years into the future.

It can be complicated to determine the number of years before the statute of limitations prevents suit on a debt, hence the need for legal help. In many places, the number of years is six after your default, but in some states and for certain loans it may be only three or four years, or even as long as twenty. The attorney will want to see a copy of the loan agreement to help determine this. If you do not have a copy, request one from the lender whose contact information may be on collection letters or your credit report. If you reach out to the lender, avoid making payments or promises to repay, and don’t contact the lender unless you are prepared for them to follow up with collection efforts.

Private student loans do not have the same flexible repayment, loan cancellation, and other borrower protections that federal student loans have, but there may be steps you can take to help. See if the loan agreement says anything about relief if you are having trouble making payments. If the statute of limitations has not expired, you may choose to negotiate for lower payments or even principal reduction.

The borrower or the borrower’s estate will generally be liable for the loan even if the borrower becomes permanently disabled or dies, but some private student loan lenders voluntarily cancel the debt in these circumstances. For loans extended after November 20, 2018, the lender cannot declare a default and ask for the immediate payment of the full loan amount from either the student or a co-signer just because the student has declared bankruptcy or dies. For loans extended after that date, a co-signer’s legal obligation is also released upon the student’s death. Even for loans extended before November 20, 2018, lenders may voluntarily implement the same protections.

You cannot consolidate private loans into federal loans. You should not consolidate federal loans into private ones. But you can look into consolidating higher interest private loans into a lower interest private loan. Also, if your private student loan’s interest rate is more than 6%, and you go on military active duty after taking out the loan, you have a right to reduce the interest rate to 6% while you are on active duty. If the lender does not adjust your rate automatically, notify it of your active duty status.

In general, the ability to discharge private student loans in bankruptcy is subject to the same difficult standard as applies to federal student loans. But there is an important exception. If the school you attended (such as an unlicensed vocational school) is not eligible to participate in one of the federal student financial assistance programs, then you can discharge the private student loan in bankruptcy just like any other unsecured debt.

Defending Against a Private Student Loan Collection Lawsuit. Private student loan lenders do not have the collection tools available to the government, so that they are more likely to sue on an unpaid debt. But you have a number of defenses to such lawsuits.

If the school itself initially gave you the loan or referred you to a private lender, then you can raise as a defense to the collection law suit any claim or defense you have against the school. A viable defense might be that the school misrepresented graduates’ employment prospects or the overall quality of the program, or engaged in other serious misconduct, but not that the math teacher was too tough.

Look carefully at any collection fees the private lender is seeking. The right to those fees must be stated in the loan agreement, and state law may further limit collection fees.

If you have a dispute or questions, it is prudent first to contact the lender. Private student loan lenders may have an ombudsman or other customer advocate unit. The Consumer Financial Protection Bureau has a complaint system for borrowers experiencing problems with private student loans. To ask a question or file a complaint, go to https://consumerfinance.gov/complaint or call toll-free 855-411-CFPB. You can also contact your state or local consumer protection agency to make a complaint or seek assistance.

When buying a car on credit, you almost always must put up the car as collateral for the loan. Sometimes consumers also use their cars as collateral for an unrelated small loan. Most of these are high cost auto title or “auto pawn” loans, which are legal in some states but illegal in others.

If your car is collateral for a loan and you get behind on your payments or violate other loan terms, you risk the immediate repossession of your car. Miss one or two payments and your car may be gone.

A repossession agent may break into your car and drive or tow it away. The process is called “self-help” because the creditor is not required to go to court to get permission from a judge to repossess your car. In most states, the creditor does not even have to notify you that a repossession is about to take place.

There are important exceptions to a creditor’s right to use “self-help” repossession:

● The creditor must have taken the car as collateral or the car must have been leased to you. For example, if you do not pay a medical debt or a credit card debt, the medical provider or card issuer cannot repossess your car.

● In some states, the creditor must first give you notice of the right to catch up on delinquent payments. (See Curing a Default below.)

● A self-help repossession cannot breach the peace.

● Self-help repossession is generally illegal on certain American Indian reservations. In Louisiana, self-help repossession is illegal unless the creditor is a licensed financial institution or bank that has a state or U.S. charter and the repossession agent has a state license. In Wisconsin, the consumer can object to self-help repossession if the consumer does so within 15 days of receiving notice of a pending repossession. Self-help repossession is legal in Maryland only if the credit agreement allows it.

● A creditor cannot use self-help to repossess a car owned by active duty military personnel if the debt was incurred before the individual entered active duty. Children, spouses, and other dependents of active duty military personnel are similarly protected, but only if they apply to a court for an order prohibiting repossession.

After the creditor repossesses your car, the creditor will then sell it, typically for much less than it is worth. If so, you may find yourself being sued for the amount of money that the creditor claims remains to be paid on the loan after deducting the proceeds of the sale. This can be thousands of dollars.

This chapter provides advice on how to avoid repossession and what to do if a car is repossessed. Manufactured home repossessions are discussed in Chapter 16.

Strategies to Prevent Repossession

Keeping Current on Car Payments. Do not pay credit card debts, medical bills, or other low priority debts ahead of car payments. If you skip payments on low priority debts, you will not be in immediate danger of losing your property. Skip one or two car payments and you risk losing your car. If you find it necessary to miss payments on low priority debts, try to get caught up on your back-payments as soon as possible.

Keep Your Car’s Damage Insurance Current. If your damage insurance lapses, the creditor is likely to add replacement insurance to your car payments that is much more expensive and offers much less protection than insurance you could purchase yourself. You will have even more trouble keeping up your now higher cost car payments.

Consider Cancelling Other Insurance and Add-ons. Often, as part of a car sale, the dealer has sold you add-on products—a service contract, credit life insurance, credit accident and health (or disability) insurance, credit unemployment insurance, GAP insurance, theft protection, tire protection, key fob replacement, or an auto club membership. These add-ons are often overpriced or even worth very little. Find out whether you can cancel these add-ons and get a rebate of the unused part of their cost. The rebate may help you make one or more of your payments on the car and may make future payments lower.

Negotiate with the Creditor. Some creditors may be willing to allow you to skip a payment or make a payment late. If you get an agreement, confirm it in writing. Make sure the agreement is one that you can comply with. For example, if the creditor allows you to make a payment ten days late, make sure before you agree to this that you really can make the payment then.

Curing a Default. The following states give consumers a right to cure—a second chance to make up late car payments before repossession: California, Colorado, Connecticut, the District of Columbia, Iowa, Kansas, Maine, Massachusetts, Missouri, Nebraska, New Hampshire, Puerto Rico, Rhode Island, South Carolina, South Dakota, Virginia, West Virginia, and Wisconsin. Pay attention to the notice you will get telling you how many days you have to pay the amount past-due to avoid repossession. Rights to cure auto leases are available in Connecticut, the District of Columbia, Illinois, Iowa, Kansas, Maine, New Hampshire, New Jersey, New York, Rhode Island, West Virginia, and Wisconsin.

Sell the Car. If you cannot afford your car loan payments, insurance, and maintenance costs, you are generally better off selling the car than having it repossessed. Selling the car yourself before it is repossessed will bring in a much higher price than a repossession sale would, you will not have to pay the creditor for the creditor’s repossession, storage, and sales expenses, and you can obtain a larger rebate on any service contract, automobile insurance, or credit insurance that you cancel along with the sale. Your credit rating will also be higher than if the car is repossessed.

Because the creditor has a lien on your car, you can only sell it with clear title if you use the sale proceeds to pay the creditor the full outstanding balance. If you cannot sell the car for as much as is owed on the loan, you will have to pay the creditor the difference, unless you convince the creditor to take less.

Avoid anyone who offers to “broker” a sale or lease of your car to another consumer. In many states car brokerage is illegal. A scammer may take money from both you and the new “purchaser,” but not complete the paperwork for a real transfer in ownership or forward payments to your lessor or creditor. Instead, you will lose the use of your car but still owe the creditor or lessor the full amount.

Thwarting a Self-Help Repossession. Self-help repossession can take place on the street or even in your driveway. But a repossessor cannot legally break into a locked garage. Repossessors also cannot seize a car they cannot find, but most states make it a criminal offense to conceal collateral (such as your car) or to move it out of state. It is also becoming more and more difficult to hide a car because of technological advancements in tracking cars.

Do not be swayed by any legal advice offered by the repossessor.

Never resort to force. Never meet force with force. If the repossessor uses force or threats, or otherwise breaches the peace, call the police. Do not take matters into your own hands. After the fact, consult an attorney. There are significant legal remedies available to challenge an illegal repossession.

Never resist government officials in the performance of their duties, but make sure the person is not just impersonating a government official. Government officials should only operate pursuant to written court orders and should not assist self-help repossessions. Ask for the official’s identity and the reason why the official is there. Inspect any documents the official waives around claiming to be a court order.

When you are delinquent on a car loan, it is risky to bring your car in for repairs to the dealer or anyone else the creditor would know. Do not drive the car to the creditor’s place of business to discuss a work-out agreement. You may have to walk home if you fail to reach a satisfactory arrangement.

Minimize the Loss of Personal Property Inside the Car. Property left in a car has a way of disappearing after the car is seized. If you anticipate a repossession, remove your personal property such as tools, GPS devices, media players, clothes, and sporting equipment from your car. Remove any important records from the glove compartment. There are some items, however, such as children’s car seats and a spare tire, that should be left in the car while you use it. Make a list of these items and photograph them so that you will be in a better position to claim them if the car is repossessed.

What to Do After Your Car Is Repossessed

Get Back Personal Property Left in the Car. Creditors cannot keep your personal property that was left in your car after it has been repossessed. The lender can only keep the car itself. As soon as possible, demand both by phone and in writing any property left in the car specifying each item. Make the request quickly before the property disappears.

Try to reinstate the loan. Reinstating the contract allows you to recover the repossessed car by paying only the back-due payments, not the full amount of the debt.

You may also have to pay the costs of the repossession and any storage charges, plus possibly two payments in advance. You must act quickly. In most states where it is allowed, you have only a few weeks to reinstate after repossession.

You Can Redeem the Car. In every state, after a repossession, you can redeem the car. This means that you can get the car back by paying the full remaining amount due plus expenses (redemption does not apply to leases). The creditor must notify you of the date of the car’s sale or a date after which the car will be sold and the creditor must include a telephone number to call to find out how much you have to pay to redeem the car. You can redeem the car up until the very moment before the car is sold.

Get the Car Back by Filing Bankruptcy. You can get your car back by filing bankruptcy, even after it has been repossessed, as long as you do so before the creditor sells it. Once you get the car back, if you want to keep it for the long-term, you must make payment arrangements, which as explained below, will vary depending on whether you file a chapter 7 or 13 bankruptcy.

In a chapter 7 bankruptcy, you must pay the creditor the lesser of the full remaining balance of the debt or the car’s value. Some creditors let you make this payment in installments, but other creditors will require you to pay the full amount in one lump sum.

In a chapter 13 bankruptcy, you have several ways of keeping the car. Probably the best one is to set up a plan to pay off the car loan in monthly installments over a period as long as five years. The interest rate charged in a chapter 13 plan can, in some instances, be lower than what you are paying on the car loan. You may even reduce the amount owed to the current value of the car, if the car’s value is less than the amount you owe, particularly if you bought the car over 910 days before your bankruptcy filing.

When the Repossession Was Wrongful. You can file a lawsuit to get the car back and receive damages if the car was taken improperly, but this will require the help of an attorney.

Creditors’ Collection Efforts After the Repossession Sale—The Deficiency Action

After repossession, the creditor will sell your car and apply the sale price (after deducting all repossession and sale expenses) against the amount you owe. If the net sales proceeds are more than the amount you owe, the creditor must pay you the “surplus.” Far more commonly, however, the net sale proceeds will be less than the amount you owe. When the net sale proceeds is less than the amount you owe, it is called a “deficiency.” If there is a remaining amount due, creditors will then come after you for the deficiency. When a lessor repossesses a leased vehicle, the result is the same. The car is sold and the lessor seeks a further amount called “an early termination charge.”

Once your car has been repossessed, your deficiency obligation is no longer backed up by any collateral, and should be treated as a low priority debt just like a hospital bill or a credit card debt. You should not pay it ahead of more pressing obligations, such as rent or utility bills. With a repossession already indicated on your credit record, an unpaid deficiency amount will not do much more to hurt your credit score.

Many defenses may be available to you if a creditor attempts to collect this deficiency through a lawsuit. The flip side of creditors being able to seize and sell your car without court supervision is that they have to strictly follow certain rules, and they often do not. Your legal rights are strong where the creditor or lessor trips up and you may be able to eliminate the amount demanded, or even end up with a positive recovery for yourself. But you will need help from a lawyer to effectively defend a lawsuit seeking a deficiency or early termination charge.

Here are some defenses to look for :

1. Claims concerning the car or the credit terms. Was the car a lemon, or did the dealer misrepresent the car’s quality or the credit terms?

2. Is the car collateral on the loan? Sometimes the creditor trips up on a technical requirement to make the car collateral for the debt. Does one spouse own the car and the other spouse is obligated on the loan? Is the car collateral for an earlier loan but not listed as collateral in a refinancing of the original car loan? If the creditor has not taken the car as collateral, it cannot repossess the car, even if you defaulted on a loan used to purchase the car.

3. Were you in “default” when the car was seized? If a creditor routinely accepts your late payments, the creditor may be prohibited from seizing the car just because a payment is late. It may have to notify you first that it will no longer accept late payments. You may not be in default if you gave the creditor notice you were withholding payments because the car was a lemon. Did the creditor repossess before your right to cure period had expired?

4. Did the car’s repossession breach the peace? When a seizure is wrongful, the creditor generally should not keep the car or collect a deficiency. The creditor may owe you money instead.

5. Improper repossession sale or miscalculation of the deficiency. If the creditor does not sell your car, but instead keeps it, the creditor cannot seek a deficiency. If the creditor sells the car, it must strictly follow correct procedures as to notices and the sale. Failure to follow the procedures exactly often can eliminate the deficiency.

You must be notified that the creditor will sell your car, describing the car, the nature of the sale, the time and place of a public auction or the date after which the car will be sold privately, and other important information. The sale cannot be too rushed and it cannot be overly delayed. Every aspect of the sale, including the advertising, the manner, the time, the place, and the terms must be “commercially reasonable.” Look out for low price sales to insiders.

Check to see if the creditor correctly calculated the amount of its claimed deficiency. If the creditor asks you to pay a deficiency after the car has been sold, in most states the creditor must send you a summary of its calculations, along with an address or phone number where you can get additional information.

Your Rights in the Mortgage Foreclosure Process

Preliminary Notices. To protect your rights, you need to be informed about what is happening—the worst thing you can do is ignore everything. If you are behind on your mortgage payments, stay on top of things: carefully read the notices you receive, keep track of deadlines, and contact the servicer or foreclosure attorney at regular intervals.

In every state, you are entitled to notice of a pending foreclosure on your home. But do not rely on the fact that you will get this notice—either because of servicer negligence or problems with mail delivery. Always pick up any certified or registered mail, even if returned to the post office. Keep all the notices that you receive from the servicer, lender, or foreclosure attorney in one place, like a folder or notebook. Also document all related phone calls with the date, time, name of person that you spoke with, and the substance of your conversation.

Notice of Default. You will almost always get a “notice of default” or “notice of delinquency” from the loan servicer that says that you have fallen behind on your payments. It may look like any other collection letter. It tells you how many payments you are behind and the payment amount to catch up and get out of default, often called “the arrears.” It will also give you a deadline to make this payment to avoid foreclosure.

Typically, your payment of the total amount of the arrears will stop any foreclosure. Partial payments are often rejected unless they are made as part of a workout agreement or loan modification.

If you cannot pay the total arrears, review the prior chapter about seeking a workout agreement or loan modification. Otherwise, do not delay, but review immediately your other rights to deal with the foreclosure. The deeper you get into the foreclosure process, the harder it will be to stop it. A big advantage to paying off an arrearage when you get the initial notice is that you will not yet be responsible for major foreclosure fees and costs that come due after the case is referred to an attorney for foreclosure.

Notice of Acceleration. After notice of default, or sometimes combined with the notice of default, you typically receive a notice of acceleration. It says that now you don’t just owe the past-due installments, but you owe the full mortgage balance, payable either immediately or by a certain date. Receipt of a notice of acceleration indicates that the foreclosure process is moving quickly and that you must act immediately to deal with the pending foreclosure.

The Right to Reinstate. Many states and mortgage contracts allow you a second chance even after the servicer demands the full balance on the loan, by “reinstating” the mortgage. Usually, this means getting caught up on your missed payments together with foreclosure fees and costs. Many mortgage contracts give you this “right to reinstate” up until five days before the foreclosure sale, and some servicers accept payment right up to the sale date. Your servicer may require that the payment be by certified or bank check and sent to the law firm handling the foreclosure.

Occasionally, servicers claim you did not meet your obligations in some other way, such as failing to keep the property insured. These defaults can also be “cured” by taking care of the problem.

Even where you do not have a legal right to reinstate your mortgage, servicers often will agree to reinstate voluntarily, although others will not. When the servicer will not allow reinstatement, you can often force the lender to allow a reinstatement by taking the matter to court. Most judges will not want to put your family on the street when you have money to pay the arrears, and even in states where judges do not have this power, offering to pay in front of a judge sometimes embarrasses the lender into accepting the payment.

Using Bankruptcy to Cure the Default. Even where the servicer will not accept payment of your arrears to reinstate the mortgage, if you file for bankruptcy before a foreclosure sale is completed, you then have a right to cure any default by paying the amount overdue. In a chapter 7 bankruptcy, you have to pay the arrearage immediately if you want to avoid foreclosure. If you file under chapter 13, you can make those payments in installments over a period of years.

The Right to Redeem. You also can “redeem” your home up to the time of a foreclosure sale (and in a few states for a limited number of days after the foreclosure sale). To redeem, you must pay the servicer the whole mortgage balance in one payment plus the lender’s foreclosure fees and costs. Some states allow a second type of redemption where, after the foreclosure sale, you pay the person who bought your home at the foreclosure sale the amount that person paid to purchase the home plus the person’s related costs. Unless you can obtain a new loan to do so, either type of redemption is clearly impractical for you if you are having trouble even making your monthly payments.

How Long Does Foreclosure Take? A foreclosure can take from three months to a year or more. Much depends on your state, the servicer, and your own actions. Check local practice and stay on top of all foreclosure-related notices. But no matter how long the foreclosure takes, your own delay in developing a plan always will make matters worse for you.

How a Lender Gets Permission to Foreclose. Foreclosure procedures are established by state law and by local practice. In some states, the lender first files suit in a court, usually in the county where your home is located. You receive a summons or a similar notice usually brought to the house by a sheriff, constable, marshal, or process server. This notice gives you a period of time to respond to the foreclosure lawsuit and to raise your defenses. Your answer must be in writing and filed with the court. If you do not respond at all, a default judgment will be entered against you. If you file a response the court may only enter a judgment against you if it finds your defenses have no merit. A court judgment for the lender gives the lender permission to sell your home unless you can work out an agreement or take some other action (such as bankruptcy) to prevent the sale.

Other states use “non-judicial foreclosures.” Servicers are allowed to hold a foreclosure sale without a court or other official permission to go forward. They advertise the home for sale, using a legal notice in a newspaper. The servicer sends you a notice of the time and place for the sale. If you want to challenge this type of foreclosure, you must either file for bankruptcy or file a lawsuit and ask the court to stop the sale. With a lawsuit, you may have to file a bond protecting the lender.

The Foreclosure Sale. Servicers must send you notice of the date and time your home will be sold. In some states, this notice is combined with the notice of acceleration, discussed above. The sale date is a key date because that is when you lose your rights as the owner to obtain a workout or to use the bankruptcy process to prevent foreclosure.

Generally, a foreclosure sale is a poorly advertised and poorly attended auction, either at your home or at a local courthouse or government building. Where a court ordered the foreclosure, the auctioneer will be a sheriff or court official. Otherwise, it will be conducted by someone hired by the servicer. Often only the foreclosing lender attends, who bids no more than the balance of the debt. You can bid at the auction, but you will have to make an immediate down-payment and pay the balance within a short period of time. After a foreclosure sale you will receive notices about eviction. In most states the servicer must go through a separate court procedure to get permission to evict you. Only a government official can carry out an eviction. The eviction consists of a supervised change of locks and removal of your personal property from the house.

The Mortgage Deficiency or Surplus. Once a foreclosure sale is completed, pay careful attention to all notices you receive. These may include notices of who bought the property and how much they paid. Always ask on your own who bought the property and the sale price because sometimes this information is not sent to you.

If the sale does not bring in enough to pay off the amount due on the loan, in many, but not all states, you will remain responsible for the balance, called a “deficiency”—the remainder due on the loan plus costs, minus the amount the lender was paid from the sale proceeds. You may also receive notices about the deficiency, including collection letters and court papers. In some states your deficiency can be limited if you act to protect your legal rights by responding to these notices or court papers. If you do have to pay a deficiency, this will be an unsecured debt like credit card or medical debt and it is thus low priority debt, until the lender sues you for that debt. Because deficiency claims are unsecured debts, they can be discharged in bankruptcy.

An exception is if your loan is insured, guaranteed, or made by the VA or the Rural Housing Service (RHS). When these agencies seek a deficiency, they can seize your federal tax refund. Also they can seize a portion of your Social Security and certain other federal benefits, although the first $750 a month is protected from seizure. But, even though the debt is owed to the federal government, you can also discharge it in bankruptcy.

On the other hand, if the sale brings in enough to pay off the amount due including all foreclosure costs, you are entitled to any amount by which the sale price exceeds that, called a “surplus.” Although consumers are rarely owed a surplus, if your home sells for more than the outstanding balance, contact the servicer or its foreclosure attorney. If they say you are entitled to a surplus, be sure to give them your new address when you move, so they can send you a check.

If the servicer does not tell you whether you are entitled to a surplus, send a Qualified Written Request to the servicer, as described in Chapter 16. If fees and costs eat up your surplus, and they seem unreasonable, dispute them or even challenge them in court.

Getting Legal Advice to Stop a Foreclosure; Advice to Avoid

When threatened with foreclosure, immediately seek legal help. It is better to get this help too soon rather than too late. Free help may be available at a neighborhood legal services office (go to https://www.lawhelp.org to find a legal services office) or a bar association panel of pro bono attorneys. A small number of lawyers in your area may handle foreclosure defense cases for a fee and many lawyers will help you file a bankruptcy. Exercise care in hiring a lawyer. The highest priced lawyer may not be the best. Find someone you feel comfortable with, at a price you can afford. Also try to get a referral for the lawyer from someone you trust. More information about finding a lawyer can be found in Chapter 1.

Another good source of help is nonprofit foreclosure prevention counseling (sometimes called “default counseling”). Contact a local nonprofit housing organization to find out where this service is offered in your community or call 800-569-4287 (TDD 800-877-8339) or visit www.hud.gov to find a HUD-approved housing counseling agency near you.

Scams to Avoid. Some businesses offer help to people facing foreclosure in order to rip them off. A pending foreclosure of your home is public information and scam artists will find that information and then contact you. Scammers may ask for thousands of dollars, saying they are offering you a loan or have arranged a payment plan or loan modification. In reality they will do nothing. Even worse, these scammers may (even without you realizing it) have you sign your deed over to them, with a bogus option to buy it back.

If someone seeks you out to save your home, odds are the offer is bogus and will only get you deeper into debt and prevent you from taking the steps that will save your home or improve your situation. Requests for high fees or for money to pay the mortgage are another sign of a scam. An offer of a new mortgage as a way out of foreclosure will be on terrible terms and will just make your situation impossible to resolve. If you do sign a new mortgage under pressure of foreclosure, you have three business days to cancel.

Delaying the Foreclosure Process

Foreclosure can move very quickly, but you can exercise your legal rights to slow down the process. Delay gives you time to put in place a long-term solution, such as to refinance your mortgage, sell your home privately, arrange a workout agreement or loan modification, or save up money to get you caught up on your payments. You cannot properly delay foreclosure just because you need more time. The actions you take must be based on some underlying legal claim or defense that is raised in good faith.

Procedural Defenses May Delay the Process. Foreclosures are rarely contested by homeowners, and lenders’ attorneys may be sloppy in their procedures and sometimes do not comply with pre-foreclosure requirements. Lender errors can be to your benefit when you are contesting foreclosure, forcing the lender to start over or at least to comply with procedural requirements.

You are likely to need the help of a lawyer or other professional to determine lender compliance with required procedures. Examples are failure to give you proper notice, failure to give you a fair chance to correct the default, failure to properly advertise the sale, failure to introduce the original documents in the foreclosure proceeding, failure to sue all the proper parties, failure to bring the foreclosure proceeding in the name of the real mortgage owner, or discouraging bids at the foreclosure sale. There may also be procedural requirements that involve considering you for loss mitigation options. Under certain state laws you may be able to defend against a foreclosure if the servicer seriously violated these procedures.

In states where foreclosure actions are brought in court, raise defenses in that action. In states where lenders use the nonjudicial foreclosure process, you have to bring a legal case of your own, asking the court to stop the foreclosure.

Servicer’s Past Acceptance of Late or Partial Payments As Grounds for Foreclosure Delay. Courts may refuse to allow foreclosure if the servicer surprises you by suddenly calling the whole loan due when the servicer has been lenient in the past in accepting late or partial payments. It instead must warn you that late or partial payments are no longer acceptable before it calls the whole loan due and attempts a foreclosure. If the servicer accepts a payment after the foreclosure has started, you can argue that there is no longer a default, and the servicer must restart the foreclosure process. This may involve giving a new notice of acceleration.

Asking the Court for More Time. A judge may give you a delay if foreclosure will cause serious hardship. The hardship should be documented and involve more than just the loss of your home, such as that a family member has a serious illness. The hardship must be temporary as well; if permanent, the judge may feel that now is as good a time as any to allow the foreclosure.

If you have a great deal of equity in your home, a judge may allow you a short period of time to sell the home without foreclosure, allowing you to get the best possible price and recover your home equity. Even if you are unable to make payments during this time, the lender is not hurt because there is enough value in the property to eventually pay the lender’s full claim.

A Chapter 7 Bankruptcy May Create a Temporary Delay. A chapter 7 bankruptcy case cannot address a foreclosure in the long-term but filing the bankruptcy typically delays the foreclosure at least 60 days, as long as you have not recently filed another bankruptcy case. While the bankruptcy is pending, the lender cannot continue foreclosure without permission of the court.

You cannot file a chapter 7 bankruptcy solely to delay foreclosure. You must have some other legitimate purpose for filing bankruptcy. For most homeowners in financial distress, this is hardly a problem because there are lots of other debts outstanding.

A Chapter 13 Bankruptcy May Stop a Foreclosure Permanently

Unlike a chapter 7 bankruptcy that only delays a foreclosure, a chapter 13 bankruptcy filing may eliminate the threat of foreclosure by letting you slowly get caught up on past-due payments over a period of years, while at the same time, you must continue to make your regular monthly payment. Do not file the chapter 13 bankruptcy too soon, and instead pursue options to modify your payments discussed in the prior chapter. But you definitely do not want to wait too long and certainly should file the chapter 13 bankruptcy before the foreclosure sale.

You also need to leave yourself enough time to participate in required credit counseling with an approved credit counseling agency before filing bankruptcy. Fortunately you can do this over the internet or by telephone. See Chapter 25 for more information about this requirement.

Curing Delinquent Payments and Reinstating the Mortgage. Chapter 13 bankruptcy works best where you fell behind in your mortgage payments because of a temporary financial setback and you have resolved the problem that caused your setback. Filing the chapter 13 bankruptcy (the same as in chapter 7) automatically stops the foreclosure—at least temporarily. In addition you can pay back your delinquent payments in installments over a period of three to five years, but you must also make your regular monthly payments as they come due. You may have to pay interest on the back-due amount, a commission to the bankruptcy trustee for handling your payments, and certain fees the servicer has already charged, if they are legitimate.

For example, assume you are six months behind on $800 monthly mortgage payments so that you owe $4,800 and also assume the servicer has charged $600 in various fees. In a five-year chapter 13 case, you cure by making future $800 payments as they come due and catching up on the past-due $5,400 in sixty monthly payments of $90 each, plus interest and the trustee’s commission, so you pay $890 a month plus interest and the commission.

As long as there has not been a foreclosure sale, you can cure delinquent payments in a chapter 13 bankruptcy even if the servicer has already demanded you pay at once the full loan amount or even if a court has ordered a foreclosure sale. The bankruptcy process also gives you an opportunity to raise defenses to the lenders’ claim, including defenses that fees are excessive. These defenses can be raised as part of the determination as to how much you have to pay under your chapter 13 bankruptcy plan. Chapter 13 bankruptcy may also permit you to get rid of other liens and mortgages on your property. These bankruptcy options are discussed in Chapter 25.

Sale of a Home in a Chapter 13 Bankruptcy. If you can no longer afford your future mortgage payments, you will not benefit from bankruptcy’s ability to cure past delinquencies. You can, however, use the bankruptcy process to sell the home on your own in an orderly fashion, thereby keeping your equity and avoiding the problems of a foreclosure sale. This is likely to work only if the home’s sale price is enough pay both the mortgage lender and at least something to your other creditors.

Request that the court approve your realtor. When a sale is arranged, many title insurance companies require that you obtain an order from the bankruptcy court approving the sale and allowing the property to be sold free of liens.

State Temporary Bans on Foreclosure; Conference and Mediation Programs

Several states and local court systems have created programs that offer settlement conferences and mediations for foreclosures. These programs are designed to encourage the servicer to agree to alternatives to foreclosure. Even though how these programs work will vary, they all give you the opportunity to discuss your situation with a live person as opposed to leaving messages in the servicer’s voicemail system. Often the programs refer you to housing counselors and other advocates who can help you through the process.

Carefully review any notices you receive about mediation programs. Sometimes a mediation session is scheduled automatically when a servicer starts a foreclosure. In other programs, you have to request mediation and you may have only a limited time to make the request.

State and local governments also have at various times authorized stays of foreclosures limited to the duration of a particular economic crisis or natural disaster. Check for any restrictions on foreclosures in your state. State bans are only temporary, but they may give you an opportunity to get back on your feet.

Your Options After the Foreclosure Sale

Redemption and Setting Aside the Sale. Some states, for a very limited number of days after the foreclosure sale, allow you to “redeem” the home back from the lender—in other words, they allow you to pay off the full mortgage and related fees and charges. This way, you end up with clear title to the property. Another option in some states is to redeem your home from the person purchasing it at the foreclosure sale, paying that person the total purchase price plus interest and allowable costs. State law may provide you only a very limited number of days after a foreclosure sale to redeem in this manner, but other states give you up to a year to redeem from the purchaser. Even if you do not have a right to redeem after the sale, you may be able to buy the home back from the purchaser, particularly if the buyer was your mortgage lender.

In some areas there are local nonprofit agencies that help borrowers with financing to purchase their homes back after foreclosures. Another option is to find another purchaser for your home willing to pay more than the redemption amount. You still lose your home, but you get to keep the difference between what you sell the home for and the redemption amount. Those funds may be very helpful in your search for new housing. Redemption has strict time deadlines and strict procedures, so it is best to try to have an attorney to assist you in redeeming the home.

You can also ask a court to set aside the foreclosure sale because proper procedures were not followed or because the price was unconscionably low. This is a long shot and you must act quickly, almost always with an attorney’s help.

Rights As a Tenant in Your Own House. After the foreclosures sale, you are a tenant at will in your own home, now owned by someone else. To evict you, the new owner must comply with your state’s landlord-tenant eviction law. This usually means filing a lawsuit in court. You can save the new owner from dealing with the difficulty and time involved in an eviction processes by vacating voluntarily if the new owner gives you cash to help in the move and to find new housing. This option is called “cash for keys.” You can also offer the new owner that you will pay rent if you are allowed to stay in the home. Even a short extension can help you find a new place to live.

Special Protections Against Foreclosure for FHA, VA, and RHS Mortgages

FHA Loans. Lenders cannot begin legal foreclosure proceedings on an FHA-insured loan if your only default is an inability to pay an escrow shortage in a lump sum. They also cannot foreclose for missed payments until at least three monthly payments are overdue. After the President declares a disaster affecting your home, the lender may not start or continue a foreclosure on your home for 90 days.

You also may be able to delay a foreclosure if the servicer has failed to comply with servicer requirements for an FHA-insured mortgage loan. Key requirements are that the servicer must:

● Consider whether you qualify for FHA loss mitigation options before initiating a foreclosure.

● Give you notice of your default by the end of the second month of your delinquency, explaining what you must do to get reinstated.

● Make reasonable efforts to arrange face-to-face or telephone interviews with you before three full monthly installments are overdue.

If you have an FHA mortgage and are threatened with foreclosure, and you do not have an attorney, you should at least contact a HUD-approved counselor. To find a HUD-approved counselor, call 800-569-4287 (TDD 800-877-8339) or check www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm. Sometimes a counselor can convince a lender to give you a second chance. Alternatively you can call HUD for help at 877-622-8525. Stay on the line until a HUD field officer picks up.

VA Mortgages. If you have a VA mortgage, the lender cannot foreclose unless you fail to make three full monthly payments. The lender must give the VA thirty days’ warning of its intent to foreclose and must make all reasonable efforts at forbearance before actually foreclosing on the property. The lender must consider temporary suspension of payments, extension of the loan, and acceptance of partial payments. If the lender still intends to foreclose, you can stop the foreclosure by paying all overdue payments, all late charges, and any of the lender’s foreclosure expenses to date.

The lender’s failure to meet its obligations in this area can be a defense to foreclosure. For example, send a letter to the lender asking it to consider foreclosure avoidance strategies. The lender’s failure to respond appropriately is evidence of its failure to meet its responsibilities. Another option is to contact the regional VA office serving your state, explain the reasons for your default, and ask about the best plan for getting your mortgage payments back on track.

RHS Mortgages. For private loans guaranteed by the Rural Housing Service (RHS), the lender must follow RHS guidelines when they foreclose. For example, you can assert a defense to foreclosure that the lender failed to consider RHS loss mitigation options before foreclosing.

Other loans come directly from the RHS. Before it forecloses, RHS must notify you about loss mitigation options, consider you for them if you ask, and implement the options you qualify for. RHS’s failure to perform any of these obligations can be raised as a defense to foreclosure. You can also appeal the RHS’s loss mitigation decisions with the Department of Agriculture (RHS’s parent agency), and a foreclosure should not proceed until an appeal has been resolved.

Special Protections for Active Duty Military

If you are on active duty in the military or left within the past nine months, or you are the spouse or dependent of someone on active duty, you have special protections from foreclosure under the Servicemembers Civil Relief Act. This Act applies to all types of mortgage loans, but only applies if you entered into the loan before your current period of active duty.

Even if you are in a state that allows nonjudicial foreclosures, the lender must obtain a court order or your written permission to foreclose on your home. You can also ask make a written request with the court for a ninety day (or even longer) delay in any court foreclosure case brought against you. The request must explain why your military duties affect your ability to appear in court, give the date when you will be able to appear, and include a statement by your commanding officer that your military duties prevent you from appearing in court and that leave is not authorized.

Make sure you get in writing that the case against you has been delayed. The court also can lower your mortgage payments or add your back payments to your loan balance if your military service affects your ability to make your payments.

Foreclosure of Land Installment Sales

Your foreclosure rights are very different if you have a special type of home mortgage called an “installment land contact,” “land sale contract,” “contract for deed,” or “bond for deed.” This chapter calls them “land installment sales.” In a land installment sale scenario, you do not take title to your home until you have made all the monthly payments that are due, often for more than 10 or even more than 20 years. You pay property taxes and are responsible for repairs, but you do not yet have title to your home.

Land installment sales have far fewer protections from foreclosure than do other types of home mortgages because state foreclosure laws often do not apply. You may not have the right to certain notices, and may not have the right to reinstate or cure delinquent payments or to redeem your home.

In fact, if you miss a payment, the lender may try to evict you under your state’s rules for landlords and tenants, which offer you less protection than state laws dealing with foreclosures. Fortunately, this is not always the case—for example, in Illinois, Maryland, Ohio, Oklahoma, and Texas, your rights are closer to those that apply in a normal home foreclosure.

Some (but not all) bankruptcy courts treat land installment sales like mortgage loans, so that a chapter 13 bankruptcy plan can cure back-payments over a three-year to five-year period. When bankruptcy courts do not treat land installment sales like mortgages, you still have important rights in bankruptcy to keep your home.

Foreclosure Protections Where Mortgage Resulted from a Home Improvement Scam

You have special rights if your foreclosure results from a home improvement loan and the contractor deceived you or performed shoddy work, and the contractor was the one who initiated the loan or referred you to the lender. In this scenario, you can argue in court that you do not have to pay the loan because of the contractor’s performance.

The loan agreement may even say that you can raise the seller’s conduct as a defense on the loan. Because you do not owe on the loan, they cannot foreclose. On the other hand, small errors or minor problems with the work probably will not be enough to be a foreclosure defense.

You will have to raise this issue either in the judicial foreclosure action or in your own court action where the lender seeks to foreclose without a judge’s order. You may fare best where you get the help of an attorney. Ask the attorney to refer to NCLC’s Federal Deception Law Chapter 4, updated at www.nclc.org/library.

Foreclosures of Manufactured (Mobile) Homes

The law often is unclear as to whether a manufactured home is considered real estate. If the manufactured home is treated as real estate, the foreclosure rules are similar to any other home. If the manufactured home is treated as personal property, the foreclosure rules then are similar to car repossessions discussed in Chapter 14, above. The answer will vary from state to state and often will depend on where the home was when the loan documents were signed. Was it on the dealer’s lot or was it attached semi-permanently to your own land or at a manufactured home park? Is there a title to the home or are the ownership documents recorded in the local land records?

You should consider seeking a loan modification (as discussed in the prior chapter) if you are behind on payments, whether your manufactured home is classified as real estate or as personal property. Similarly, no matter how your state law treats manufactured homes, filing bankruptcy can stop its seizure and provide options for curing the default. In addition, manufactured home loan documents often state that you have the right to “cure” your delinquent payments. You can stop the seizure if within 30 days of the notice date you pay past-due amounts, late charges, and related fees.

If your manufactured home is treated as personal property, a lender may send a representative to repossess your manufactured home; more likely, however, your lender will take you to court and try to have the court order a sheriff to seize your manufactured home. Like other court actions, you should get legal help as soon as possible to defend against the lender’s claims.

Manufactured Home Evictions from Parks. If you rent park space for your manufactured home, failure to make your lot rent payments can result in your eviction. Typically, the park owner must first file a legal action to evict you. In some states, this legal action will be similar to other landlord and tenant actions, as discussed in Chapter 20. Other states have special legislation dealing with manufactured home park evictions, and these may even allow a park owner to seize your home.

You will need to check with a specialist who is knowledgeable about these issues in your state, such as a lawyer, manufactured home park tenants’ association, or manufactured home owners’ association. You should deal with your lot rent as a priority debt just as high as your manufactured home loan payment.

Foreclosure for Unpaid Condominium Fees

If you do not pay your condominium fees, in many states the condo association has a priority lien on your home, meaning that it can foreclose on your unit to collect the amount due. Such a lien can also complicate your ability to obtain a loan modification from your mortgage lender, unless you first get caught up on your condo fees. Other times the condo association may just sue you in court for the fees.

Communicate with the condo association’s trustees or property manager if you cannot pay your condominium fees. Let them know the reason and see what kind of payment plan you can work out. As the other owners are your neighbors, they may be willing to work out an agreement that helps you through difficult times.

Federal law provides the right to file bankruptcy for people with debt problems. Bankruptcy can be the right choice if you have no better way to deal with your debts. While you should consider other options first, do not wait until the last minute to think about bankruptcy. Important rights may be lost by delay.

What Bankruptcy Can and Cannot Do

Bankruptcy may make it possible for you to:

● Eliminate your responsibility for many of your debts and get a fresh start. When a debt is discharged at the close of a successful bankruptcy, you have no further legal obligation to pay that debt.

● Stop foreclosure on your house or manufactured home and allow you an opportunity to catch up on missed payments.

● Prevent repossession of your car or other property, or force the creditor to return property even after it has been repossessed.

● Stop wage garnishment, debt collection harassment, and other similar collection activities to give you some breathing room.

● Prevent termination of utility service or restore service if it has already been terminated.

● Lower the monthly payments on some debts, including car loans.

● Allow you an opportunity to challenge the claims of creditors who seek to collect more than they are legally entitled.

Bankruptcy, however, cannot cure every financial problem, nor is it an appropriate step for every individual. In bankruptcy, it is usually not possible to:

● Eliminate certain rights of “secured” creditors. A “secured” creditor has taken some form of lien on your property as collateral for a debt. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process, but you generally cannot keep the collateral unless you continue to pay the debt.

● Discharge certain types of special debts, such as child support, alimony, most student loans, court restitution orders, criminal fines, and some taxes.

● Protect all cosigners on their debts. When a relative or friend has cosigned a loan and you discharge the loan in bankruptcy, the cosigner may still have an obligation to repay all or part of the loan.

● Discharge debts that are incurred after bankruptcy has been filed.

Understanding the Difference Between a Chapter 7 and a Chapter 13 Bankruptcy

Your rights are very different depending on whether you file a chapter 7 or a chapter 13 bankruptcy. In a chapter 7 bankruptcy (called a “liquidation”), you eliminate most of your debts, but may lose your property other than “exempt” property—that is property the law says creditors cannot reach unless they take that property as collateral. For many families most of their property is exempt. In a chapter 13 case (called a “reorganization”), you keep all your property, and pay a portion or all of your debts in installments over a period of three to five years.

How a Bankruptcy Can Help You

An Immediate Stop of Foreclosures, Evictions, Repossessions, Utility Shut-Offs, Garnishments, and Other Creditor Actions. Your bankruptcy filing will automatically and immediately, without any further legal proceedings, stop most creditor actions against you and your property, at least temporarily.

Your request for bankruptcy protection creates an “automatic stay,” which stops the continuation of or the start of repossessions, garnishments, attachments, utility shut-offs, foreclosures, evictions, and debt collection harassment. The automatic stay provides you time to sort things out and address your financial problems. A creditor cannot take action against you or your property without bankruptcy court permission. Some creditors seek such permission immediately; others never seek permission.

Permission to continue collection activity is rarely granted to unsecured creditors. Secured creditors can get “relief from the stay” in a chapter 7 case to continue foreclosure or repossession of their collateral. But an automatic stay will almost always continue to be in effect to protect you in a chapter 13 bankruptcy case as long as you are making payments on the secured debt.

If the creditor takes action against you despite the automatic stay, the creditor may have to pay you damages and attorney fees and the creditor’s actions against you can be reversed. For example, a foreclosure sale which is held in violation of the automatic stay can be set aside.

Discharge of Most Debts. When you successfully complete a bankruptcy, there is a “discharge” (that is, a cancellation) of many of your unsecured debts, such as medical bills and credit card obligations, which eliminates all debt collection and other actions concerning those debts. Certain debts may not be discharged, such as most taxes, liens associated with many secured debts, alimony, child support, and debts you incurred after the bankruptcy case was started. After bankruptcy, you will continue to owe those debts. Student loans can be discharged only if you can prove that repayment will be an undue hardship on you and your family.

Bankruptcy cannot prevent creditors from taking your home or car unless you make sufficient payments on your mortgage or car loan. The bankruptcy though prevents these creditors from seeking additional cash from you after they take the collateral. For example, if you do not pay a car loan, the creditor can seize and sell your car, but the bankruptcy prevents the creditor from seeking additional payment from you if the car’s sale price does not cover the full amount of the debt.

Protection Against Wage Garnishment, Bank Seizures, and Enforcement of Judgment Liens. After you file bankruptcy, creditors are prohibited from garnishing your wages or other income or your bank account. Bankruptcy even stops government agencies from recovering Social Security or other public benefit overpayments, so long as your receipt of the overpayment was not based on fraud.

Bankruptcy also is an effective tool to deal with some types of court judgments against you. If a court judgment for money does not create a lien against your property, that judgment debt can be discharged in bankruptcy. If the judgment does create a lien on your property, you may ask the bankruptcy court to remove the lien if it affects “exempt property,” and then the creditor can never touch that property.

Protection of Your Household Goods from Seizure. Most families’ household goods are exempt from seizure—you keep them even in bankruptcy. This is the case even when a creditor has taken household goods as security for a loan, as long as that loan was not used to purchase those goods. If those household goods were taken as security to purchase those goods (such as when you purchase furniture on credit and the store takes the furniture as collateral for the loan), then see the next paragraphs on “secured creditors” where your rights are explained.

Added Flexibility in Dealing with Auto Loans, Mortgages, and Other Secured Creditors. Bankruptcy can help deal with creditors who take your property as collateral for their loans, such as car loans and mortgage loans. You still have to make payments on these loans if you want to keep the collateral. However, bankruptcy does provide added flexibility in dealing with these debts.

A chapter 7 bankruptcy lets you keep your car by paying the creditor the lesser of what you owe on the loan or the car’s value. If your car is worth $1,000, and the remaining amount on your car loan is $3,000, you can keep the car by paying the creditor only the $1,000. The $1,000 payment usually must be made in a lump sum before the chapter 7 bankruptcy ends (usually after three to five months). Some creditors instead let you pay that amount in installments over a number of months even after the bankruptcy ends, but that is up to the creditor.

A chapter 13 bankruptcy gives you greater flexibility to keep your property. For example, if you are six months delinquent on a mortgage, filing a chapter 13 bankruptcy stops a threatened foreclosure and allows you to gradually catch up on the back-payments, over as many as three to five years. In some cases a chapter 13 filing also allows you to make lower monthly payments by extending the repayment period or lowering the loan’s interest rate. But you have to keep making payments until the loan is paid off.

Utility Terminations. A bankruptcy filing stops a threatened utility termination and restores terminated service, at least for twenty days. To keep utility service beyond twenty days after the bankruptcy filing, you provide a security deposit (usually equal to approximately twice the average monthly bill) and keep current on new utility charges, but you need not pay the past-due charges incurred before the bankruptcy was filed. Often you can take sixty days to pay the deposit and some utilities may not require a deposit.

Driver Licenses. If your driver’s license was or will be taken away because you have not paid a court judgment, such as one arising from an automobile accident, bankruptcy normally can discharge the obligation to pay the court judgment, and you then have a right to regain or retain the driver’s license.

The Best Time to File for Bankruptcy

It is often stated that bankruptcy is a “last resort” for financially troubled consumers. This is not really true. In some cases, legal rights can be lost by delaying a bankruptcy. Be especially careful to get early advice about bankruptcy if you are concerned about saving your home or your car or protecting your bank account or wages from seizure.

For example, bankruptcy may not help you after your home is sold at a foreclosure sale or money in your bank account is seized. Bankruptcy can stop an eviction proceeding, but you have fewer rights in bankruptcy after a court has ordered you to be evicted. Act quickly to consider your bankruptcy rights.

While not ideal, all is not lost if you wait to the last minute before a foreclosure, repossession, or garnishment. Bankruptcies in an emergency can be filed with little preparation by filing only a brief petition, a statement of your Social Security number, and a list containing the names and addresses of your creditors. Additional forms must be completed and filed shortly thereafter.

But you must still complete an approved budget and credit counseling briefing before filing your bankruptcy. The counseling usually takes less than an hour, and can be done over the phone or over the internet.

On the other hand, if you are not facing immediate loss of property, but in the future you will incur new debts that you will not be able to pay, a bankruptcy filing should be delayed until you incur those new debts. New debts incurred after the bankruptcy filing are not discharged in that bankruptcy case—you will still be obligated to repay those new debts. If you file too soon and incur a lot of debt after the filing, you may be back to where you started from or even worse.

If you file a first bankruptcy too soon, you will find it more difficult to file a second bankruptcy to discharge the new debts incurred after you file the first bankruptcy. After you first file a chapter 7 bankruptcy, you have to wait eight years to file another chapter 7 case. There is more flexibility to file a chapter 13 case after first filing a chapter 7 bankruptcy. Thus it is a good idea to wait to file for bankruptcy until your debts have peaked.

If you decide to wait to file bankruptcy, avoid the temptation to go on expensive vacations or credit card shopping sprees that you do not intend to repay. In a chapter 7 bankruptcy, debts incurred in this way can be declared non-dischargeable. On the other hand, pre-bankruptcy expenses for medical care and other essentials are rarely challenged. Similarly, it may make sense before filing bankruptcy to purchase in installments needed medical or automobile insurance.

The Cost of Filing Bankruptcy

Unfortunately, it is expensive to file bankruptcy. Bankruptcy is a legal proceeding with complicated rules and paperwork. You may want to get professional legal help, especially if you hope to use bankruptcy to prevent foreclosure or repossession. Most bankruptcy attorneys provide a free consultation to help you decide whether bankruptcy is the right choice. If the attorney takes the case, the attorney will expect to be paid, unless he or she works for a nonprofit legal services office or is doing the bankruptcy on a pro bono basis.

You also have to pay the court a bankruptcy filing fee—$310 for chapter 13 or $335 for chapter 7. The fee can be paid in four installments over 120 days (or 180 days with court permission). You can also ask the court to waive the filing fee in a chapter 7 case if your household income is less than 150% of the official poverty guidelines (for 2018, $24,690 for a family of two or $37,650 for a family of four). No waiver is allowed in a chapter 13 case.

In a chapter 13 case, you pay your debts over time, and you usually have to pay the trustee handling your payments a 10% commission on each payment. While this can add up, you will be paying far lower interest on your debts in a chapter 13 plan than if you had not filed bankruptcy. Even more significantly in a chapter 13 plan, you may only have to repay a small percentage of what you owe on most of your unsecured debts.

Common Misconceptions About Bankruptcy

When You File Bankruptcy Typically You Will Lose Little or None of Your Property. People are wrong who believe that a bankruptcy filing results in the loss of most of their property. Everyone who files bankruptcy gets to keep some of their possessions, and most people get to keep all of them.

No matter the type of bankruptcy you file, unless property is collateral for a loan, you get to keep all your property that is protected by “exemption” laws. Exemption laws typically protect clothes, appliances, furniture, jewelry, and often even your car and home.

An exemption law may state that you get to keep property that is worth less than a certain amount. What that property is worth is based not on how much the property cost, but rather on your “equity” in the property: the amount that the property is worth in its present condition minus how much you owe on a loan for that property.

For example, if an exemption law protects a $2,000 motor vehicle, this dollar amount applies to $2,000 of your equity in the car, not to the total value of the car. If your car has a total value of $7,000 today with a $5,000 car loan balance, you have $2,000 in equity in the car. In this scenario, you can fully protect a $7,000 car with the $2,000 exemption. You will still have to repay the $5,000 car loan in the bankruptcy or the auto lender will take the car, but you won’t lose the car to pay your other creditors.

What property and the amount of that property that is exempt varies widely from state to state and the application of exemptions in bankruptcy can be complex, particularly if you have moved within the last two years to a different state or bought a home within the last 40 months. You should discuss what property is exempt with a bankruptcy attorney, but the general rule of thumb is that, for most consumers filing bankruptcy, much of their property is exempt.

What property you keep also depends on the type of bankruptcy you choose—a chapter 7 or a chapter 13. In a chapter 7 case, you keep your exempt possessions, but other property may be sold, with the money distributed to pay your creditors. In a chapter 13 case, you keep all your property by paying their nonexempt value over time from future income under a plan approved by the bankruptcy court. If you have very valuable property, it might be sold in a chapter 7 bankruptcy, but you keep it if you pay its value to your creditors over a number of years in a chapter 13 plan.

The Effect of Bankruptcy on Your Credit Report. The effect of a bankruptcy on your credit report is of understandable concern. Most often, you should not worry about bankruptcy making it harder for you to obtain credit. If you are delinquent on a number of debts, this already appears on your credit record. A bankruptcy is unlikely to make your credit rating any worse, but instead may make it easier for you to obtain future credit.

New creditors will see that old obligations have been discharged in the bankruptcy and that you have fewer other creditors competing with them for payment. Creditors also recognize that you cannot receive a second chapter 7 bankruptcy discharge for another eight years.

After bankruptcy, your credit file will also list the outstanding balance as zero dollars for each of your debts. The credit file will list the fact that you filed bankruptcy and that certain debts at one time were delinquent, but creditors are most interested in what you owe now on each debt. That your credit report shows that you owe nothing on a debt improves your credit standing.

After your bankruptcy is complete, check your credit report to make sure all the debts you discharged in bankruptcy are listed as now owing zero dollars. File a dispute with the credit bureaus if your discharged debts continue to be listed as having a balance owed.

Bankruptcy also often will enhance the stability of your employment and income. Wage garnishments, continuous collection calls, car repossessions, telephone disconnections, and other consequences of an unaffordable debt burden are eliminated, and this should help you find and hold steady employment. Steady income is key to creditworthiness.

Bankruptcy will make it more difficult for you to obtain a new conventional mortgage to purchase a home. Even then, most lenders will not hold the bankruptcy against you if you re-establish a good credit reputation for two to four years after your bankruptcy.

After bankruptcy, some new lenders may demand collateral as security, ask for a cosigner, or want to know why bankruptcy was filed. Other creditors, such as some local retailers, may not even check your credit report.

Bankruptcies stay on your credit record for ten years from the bankruptcy filing, while your debts are usually only reported for seven years from their delinquency. If delinquencies on your debts are five or six years old, bankruptcy will not help your credit record. The debts will be deleted from your credit report within a year or two, while the bankruptcy will stay on your record for ten years.

If You File Bankruptcy, You Usually Do Not Need to Go to Court, unless something out of the ordinary occurs. You will have to attend one meeting with the bankruptcy trustee (not with a judge). Creditors are invited to that meeting but rarely attend. In the rare case that you do receive a notice to go to court, it is important that you go and also check with your attorney if you have one. Before your case is closed, you must also take a course in personal finances, which will last for approximately two hours.

The Effect of Bankruptcy on Your Reputation in the Community. Most people find their reputations do not suffer from filing bankruptcy. Bankruptcies are not generally announced publicly, although they are a matter of public record. It is unlikely that your friends and neighbors will know that you filed bankruptcy unless you tell them.

However, especially in a small town, where debts are owed to local people, reputational issues connected with filing bankruptcy may arise. In such a situation, weigh possible embarrassment and damage to reputation against bankruptcy’s potential advantages. If you believe that your reputation in a small town is a concern, you may choose to voluntarily pay selected debts after bankruptcy, but you cannot leave selected creditors out of the bankruptcy process entirely.

Feelings of Moral Obligation. Most people want to pay their debts and make every effort to do so if payment is possible. If bankruptcy is the right solution to your financial problems, you should balance these feelings of obligation with the importance of protecting your family.

Bankruptcy is a legal right. A provision concerning bankruptcy is even contained in the United States Constitution. Big corporations like Kmart, American Airlines, Chrysler, and Macy’s, and famous people like Toni Braxton, Tammy Wynette, Larry King, Mickey Rooney, Henry Ford, and Walt Disney have all chosen to file bankruptcy.

The book of Deuteronomy states:

At the end of every seven years thou shalt make a release. And this is the manner of the release: every creditor shall release that which he has lent unto his neighbor and his brother; because the Lord’s release hath been proclaimed. (Deut. 15:1–2.)

Most importantly, during hard times, bankruptcy may be the only way to provide your family with food, clothing, and shelter. This book explores alternatives to bankruptcy, and these should be considered carefully. But it may be that bankruptcy is your best or only realistic alternative.

Potential Discrimination After Bankruptcy. The federal bankruptcy law offers you protection against being discriminated against because you have filed for bankruptcy. Government agencies, such as housing authorities and licensing departments, cannot deny you benefits because of a previous bankruptcy, including debts discharged in bankruptcy that were owed to those agencies. Government agencies and private entities involved in student loan programs also cannot discriminate against you based upon a bankruptcy filing.

Employers are not permitted to discriminate against you for filing bankruptcy. However, for some sensitive jobs which involve money or security, your bankruptcy may be considered evidence of financial problems which could be detrimental to your work. Bankruptcy law does not prevent discrimination by others, including private creditors, deciding whether to grant you any new loans.

When Bankruptcy May Be the Wrong Solution

There are at least seven situations in which bankruptcy may not be the right option for you:

1. If all your assets and income are exempt, then you are “collection-proof.” In that case, most creditors can do virtually nothing to harm you even if you don’t filing bankruptcy. At which point, there may not be a compelling reason to file for bankruptcy. Waiting until you are no longer collection-proof is generally more prudent than filing right away, unless you are concerned with a home mortgage, car loan, or other secured loan.

2. The debts at issue are secured by your property—such as home mortgages or car loans—and you do not have sufficient income to keep up payments while also catching up on past-due amounts. Bankruptcy may not help you when the long-term expense of keeping your home or car exceeds your long-term income.

3. You have valuable assets that are not exempt in the bankruptcy process and you do not want to lose these assets. A chapter 13 filing may still help if you can afford the necessary payments.

4. Your main reason for filing bankruptcy is to discharge a student loan, alimony or child support obligations, court restitution orders, criminal fines, or some taxes. These obligations are difficult if not impossible to discharge in bankruptcy.

5. You have only a few debts and strong defenses for each. Instead of filing for bankruptcy, you can raise these defenses aggressively. Usually the disputes can be settled out of court in an acceptable way. If they are not settled, you can use bankruptcy later.

6. Because of a prior bankruptcy, you cannot receive a discharge in a chapter 7 bankruptcy. However, in most cases, a chapter 13 petition can still be filed.

7. You can afford to pay all of your current debts without hardship.