OPTIONS FOR THE RESOLUTION OF DEBTS
I frequently answer many questions from people who find themselves in debt and don’t know what to do. Whether their debt is current and about to become delinquent or those with a judgment that is already entered, the options are the same. Which one a debtor chooses depends on the debtor’s unique circumstances, the kinds of debt they have, their assets and their income. So learning about options is important and a debtor needs to know about all options in order to make an educated and informed choice about what to do. This guide is not intended to be a substitute for legal advice by a bankruptcy or consumer law attorney and any debtor should discuss these options in more detail with their attorney. It is nonetheless hoped that the information here will serve to provide the debtor with the knowledge to get started.
The options are: (1) do nothing; (2) if a lawsuit has been filed, litigate; (3) try to resolve the debt, either now or later; or (4) file bankruptcy. I will now discuss each of these options and provide a little guidance as to when the option might be utilized.
This is an option, primarily for elderly clients, but it can be for anyone with a fixed income, like Social Security or Social Security disability or with income which is exempt from garnishment (see my article on exemptions: http://www.rachelhunterlaw.com/articles/article_8_Exemptions.html). The individuals who choose this option should be at a stage of their lives where they will not need credit (like a car loan or a mortgage) and they should have few, if any, assets. The assets that they do own should be owned as a tenancy-by-the-entireties or joint-tenancy with right-of-survivorship (if land), only one of the spouses should be a debtor and the debt should be for a credit card or unsecured personal loan that is in the name of the debtor spouse. It does not work for things like medical debts, which are necessaries and for which the non-debtor spouse and/or the children might be deemed liable.
To provide an example, an elderly person lives in an apartment, has no car and has credit card debt. The person will not need to obtain credit. The person only gets income from Social Security. Such a person may be a candidate for simply doing nothing about his or her credit card or other unsecured loan debt.
TO LITIGATE OR NOT TO LITIGATE?
Litigation attorneys will probably take issue with what I am about to suggest, but where lawsuits are brought in a timely fashion, i.e., before the statute of limitations has expired, and there is no question that the debt belongs to the debtor, and any required proof is attached, litigation does not make a whole lot of sense as the creditor is going to get a judgment against the debtor – it’s just a question of when. But here are some pros and cons:
First, the negatives of litigation:
(1) Cost – litigation costs money and if the debtor wishes to hire an attorney, it's going to cost money which generally is not recoverable by the debtor, absent some rule/statute that authorizes attorney fees.
(2) Even if the debtor decides to represent him or herself and save money, the debtor is responsible for drafting an answer pro se and timely filing it with the court. Depending on where the action is brought, there may or may not be discovery. If there is, the debtor is not only going to have to respond to discovery requests by the creditor, but the defendant is going to have to formulate his/her own discovery and send it to the creditor to answer. Discovery generally consists of interrogatories (written questions), requests for production of documents (if not already attached to the complaint) and requests for admissions. Other materials (like requests for disclosure which some states require) might also be necessary. If the creditor moves for summary judgment, then the debtor must respond to that as well. Failing to respond will result in the entry of judgment.
(3) There is no law which mandates that a creditor must settle a debt for anything less than 100% of what is owed. Making a creditor respond to frivolous litigation and spend attorney fees only to have judgment entered may risk annoying the creditor to the point where they refuse to settle at all once judgment is entered.
(4) If the debtor files an answer and the case is heard in small claims or magistrate’s court, the debtor must attend or a default judgment will be entered. Obviously, if a motion is to be presented, the debtor must show up to respond or present the motion. Most debtors that I have encountered do not want to be in court at all, so this may present somewhat of a hurdle.
Now the benefits of litigation:
(1) Statute of limitations has expired: Raise the defense by timely filing an answer! If the statute has expired, in most states, if you do not file an answer with the court, then the statute of limitations defense may be waived. In such case, if you do not answer the complaint, then the creditor is going to get a judgment against you. For situations where you are only paying a lawyer to draft an answer raising the defense and then arguing a motion to dismiss, paying the lawyer usually costs far less than the amount of the debt and will be money well spent because you will ultimately avoid a judgment and get the lawsuit dismissed if you prevail.
(2) Some states require documentation to be attached to a complaint and some do not. Where documentation is required and is not attached to the complaint, it may make sense to hire a lawyer and raise the proper objections. Obviously, if the creditor can supply the information, this may only buy some time, but in cases where a debt is bought by a junk debt buyer who sues, this may become much more important. The more times debts are sold, the less likely it is that a debt buyer will have the documentation to be able to prove that the debtor owes a debt. Again, it will be well worth the money spent to get a lawyer and object and defend in such cases.
(3) Identity theft or fraud situations: Sadly, it is becoming more common that people are being sued either for debts created by their relatives/family members which they did not know about or which were created by others because of identity theft. If this happens to you, by all means, get a lawyer. You should not have to pay on a debt that it is not yours.
(4) Delay: In most states, wage garnishment is allowed. And there are other situations where a debtor may not have money to resolve the debt today, but may have the money later (either because of a tax refund, inheritance or some other transaction). In any of these cases, delay is important. Every month of delay of the judgment is another month in which the debtor can try to build up funds to hopefully resolve the debt.
(5) Leverage: By signaling to the creditor that litigation is going to be more costly and time-consuming than expected, the debtor can often use these circumstances to extract a better settlement, especially in situations where a junk debt buyer now owns the debt and has difficulty in establishing liability. The debtor can often use lack of proof by the junk debt buyer to obtain a lower settlement and thereby save extended costs in litigation.
(6) Counter-claims/cross-claims: if an original creditor is suing and a debtor has counter-claims, these generally should be raised in any lawsuit by the creditor. Why? Even if not required, the existence of the counter-claims may be useful in reducing the amount claimed by the creditor. An example of this may arise in cases where the debt collection law firm has violated the Fair Debt Collection Practices Act (FDCPA) in some way.
Some benefits to non-litigation:
(1) If the debtor has sufficient funds, there is no need to divert precious resources by hiring an attorney for litigation. The funds can be put towards an immediate settlement of the debt or a payment arrangement if necessary.
(2) If the debtor lives in a non-wage garnishment state and is largely judgment proof (meaning the debtor has few assets that the creditor can seize or, with proper planning, any assets will be considered exempt and/or safe from seizure), then the entry of judgment may actually be a benefit to the debtor. Most credit cards carry a default interest rate of 29% or even higher. Every month that the debt is unpaid subjects the debtor to continuing interest and late fees. However, once judgment is entered, the legal rate of interest applies to all judgments and is relatively low (6% in PA or 8% in NC; in GA it can vary as per the contract, but the legal rate is 7%). While this may not be a big deal for smaller debts, on large accounts of $10,000 or $20,000, on which it will take a debtor longer to accrue funds, the savings can be important.
(3) Just less aggravation and stress for the debtor. For a civil suit, the debtor is not required to appear in court (at least prior to the entry of judgment – post-judgment supplemental proceedings are a different matter and beyond the scope of this article). The debtor will not be thrown in jail. And debts can be settled at any time, even after judgment, when the debtor has funds, not on the creditor’s timetable.
So, should you litigate? Bottom line, if you are the victim of identity theft or fraud, if the statute of limitations has expired, if you are expecting money in the future and want to delay judgment, if required documentation is not attached to the complaint, if a junk debt buyer is suing and does not offer very much to prove its your debt or if you any have counter- or cross-claims, then it may make sense to litigate. But you will only know if any of these circumstances apply by having the summons and complaint reviewed by an attorney.
Otherwise, if your assets are exempt from seizure, and if you live in one of the few non-wage garnishments states like PA or NC, then it may make sense to allow judgment to be entered and resolve the debt when the debtor is in a financial position to do so. So don’t feel that you have to answer a complaint. Think of the summons as an invitation to participate in the legal process, not a mandate.
RESOLVING THE DEBT
There are several ways to resolve a debt: (1) by paying the debt in full, (2) by settlement of some type; or (3) by way of bankruptcy. Which you choose again depends on your circumstances and when you pay – either pre- or post-judgment.
If you have the means to pay the debt in full, then obviously you should do so. Payments can always be made directly to the creditor. Some courts, like NC, allow a debtor to also pay any debts for which judgment has been entered directly to the clerk of court.
If a lawsuit has been filed and payment is made in full, the creditor or law firm will dismiss the case. If preferable, get any case dismissed with prejudice. Those words “with prejudice” mean that any lawsuits on the debt cannot be re-filed again. If a judgment has already been entered and payments are made directly to the clerk of court, the clerk will automatically mark the judgment as satisfied upon receipt of payment. If paying the creditor directly, then the creditor has an obligation to mark the judgment as satisfied within 60-90 days of receipt of your final payment. Most states have procedures where this is not done. If a judgment is not marked satisfied, then the debtor writes to the creditor and demands that it be done. For creditors who refuse, the law may specify a procedure – usually, an application is made to the court and the court orders it to be done. There are also sanctions for those creditors who force a debtor to engage in such drastic remedies and they usually involve the debtor being awarded a small sum of damages and attorney’ fees.
There are different methods of resolving a debt. For a more in-depth discussion, see my article at http://rachelhunterlaw.com/articles/article_????. If a debtor is seeking to settle the debt using debt negotiation, lump sum payments are preferred. Settlements can range from anywhere as low as 10% to 100% of the debt. Most credit card debt will typically settle for 20% to 40% pre-judgment and 50%-80% post-judgment. These are just general guidelines and may or may not apply to any particular case. Ultimate settlement depends on a whole host of other factors which is beyond the scope of this article.
Once the debtor and creditor agree on a settlement amount, the debtor should request a settlement letter indicating the balance owed, the settlement amount, how it is paid, where it is paid and when the settlement payment(s) will be due. If this is a debt with a debt collector or original creditor, then make sure the letter includes that there will be no further collection activity and that no further monies will be owed once the settlement is paid. If settlement is made after the filing of a lawsuit, make sure the letter includes an agreement stating that the lawsuit will be dismissed with prejudice once the settlement is paid. If a judgment is entered, make sure that the letter acknowledges that the judgment will be marked satisfied once the settlement is paid. Pay via money order or certified check and make a copy before it is sent. Keep the proof of payment and settlement letter forever as debts have a way of re-surfacing and you want to be able to prove that payment was made if that happens. Follow up any settlements by getting a closure letter acknowledging that the settlement was received, that no further collection activity will occur, that no further monies are owed and that the matter will be reported as “paid debt settled” or “paid collection account” to the credit bureaus. If a lawsuit is filed, get a copy of the dismissal. If a judgment is entered, then get a copy of the satisfaction of judgment once it is filed.
Finally, settlements are usually made in a lump sum or over a short period of time. If you want to resolve a debt, but want to pay in increments, the creditors will probably permit this. However, payments are made on the full balance and are typically 1% to 4% of the debt for things like credit cards. Again, this is an estimate and actual experience will depend on your unique situation. If a lawsuit has been filed, a creditor may want the debtor to sign an agreement authorizing the entry of judgment. The agreement, sometimes set forth in a separate document called a consent judgment or consent agreement, also will provide that the creditor will not seek to collect on the judgment by garnishing wages or seizing bank accounts or other assets for so long as the debtor makes the agreed payments. It will be up to the debtor to faithfully make the payments as agreed. The creditors don’t send a bill so it's important to be diligent about this and keep records. Make sure that any consent judgments specify whether or not interest will continue to accrue. Many debtors forget to factor this in only to find out that additional sums are owed.
Bankruptcy is the option of last resort. I liken it to possessing a nuclear weapon – a country would not set off a nuclear weapon unless it absolutely had to and there were no other alternatives left. I say this because bankruptcy has its own consequences and a debtor who obtains bankruptcy discharge may not be able to get another discharge for as long as eight (8) years (depending on the kind of bankruptcy filed).
I am not a bankruptcy lawyer and I don’t file bankruptcy. But as I deal with debtors, I need to know about it to advise clients of their options given their circumstances. So I will highlight the main features. Of course, this guide is not intended to be a substitute for an actual consult with a bankruptcy attorney.
There are two (2) kinds of bankruptcies that most individual persons file: they are bankruptcies under either chapter 7 or chapter 13 of the Bankruptcy Code. Reorganizations for municipalities is done under chapter 9, corporations and for high asset/debt persons are done under chapter 11, family farms/fisheries under chapter 12 and are beyond the scope of this article.
Chapter 7 Bankruptcy
Bankruptcy under this chapter is a “straight liquidation.” What this means is that the debtor files bankruptcy and gets to keep any property that is exempt under the federal or state exemptions. Any excess assets which exceed the exemptions are turned over to the trustee and sold and used to pay the creditors. The debtor then gets a discharge.
The process is usually very quick and is completed within six (6) to twelve (12) months depending on how busy the court is. After the bankruptcy petition is filed, the debtor has what is called a 341 meeting within about 90 days after filing the petition. The debtor must attend the meeting and answer questions about the debts from any creditors that attend and/or the trustee. The debtor then gets a discharge.
Chapter 7 is not for everyone. As part of the 2005 amendments to the Bankruptcy Code, debtors must now undergo credit counseling in the six (6)-month period preceding the filing of the bankruptcy petition. Usually, this is not an obstacle. Of greater importance is the fact that the court now “means tests” individuals. The means test is really an income test. If a debtor has too much income or too many assets, then a chapter 7 bankruptcy cannot be filed and a debtor must consider a chapter 13 if he/she wants bankruptcy relief. The means test is complicated and income of the debtor and spouse (if any) must be evaluated by the bankruptcy attorney. And each state has a different means test.
Chapter 7 bankruptcies will stay on a debtor’s credit report for ten (10) years from the date of discharge. That does not mean that a debtor emerging from bankruptcy cannot buy anything on credit for ten (10) years. Usually, the debtor should start rebuilding credit immediately, but the debtor does need to consider what happened to land them in bankruptcy court in the first place. So while credit can be re-built the debtor needs to learn to use credit wisely if this was a problem.
Bankruptcies under chapter 13 are sometimes called “wage earner” plans. This is somewhat of a misnomer as a debtor does not have to be employed. A debtor just needs to have a steady stream of income to enable the debtor to make the payments.
Under a chapter 13, a debtor still has to undergo the consumer credit counseling and still has the meeting with creditors. However, under a chapter 13, the debtor retains his/her assets. In exchange, the debtor and bankruptcy attorney come up with a plan as to what debts will be paid and by how much. Debtors who are behind on their mortgage payments and want to save their home from foreclosure will use the chapter 13 plan to get caught up on their mortgage. If no mortgage is involved, then a portion of things like medical, credit card or other dischargeable debts will have to be paid through the plan.
Plans are for a three (3)-to five (5) year period. Once a debtor completes the plan, the debtor then obtains a discharge.
Chapter 13 bankruptcies will stay on a debtor’s credit report for seven (7) years after the date of discharge.
Not all debtors are right for a chapter 13 bankruptcy. Five years can be a long long time and many things can happen. Payment plans may be too high for a debtor to manage for that length of time especially if the debtor loses his/her job or suffers some additional financial setback. If a debtor misses too many payments, the bankruptcy will be dismissed without a discharge and the debtor will be right back where he/she started. Other debtors have too many assets or an interest in inherited property for even a chapter 13.
Other General Considerations applicable to both Chapter 7 and Chapter 13
Where a debtor is are married and only one spouse has the bulk of the debts, then the bankruptcy can be filed by only the debtor spouse (this is only for equitable distribution states – community property states may have different rules). However, assets that are jointly owned will still have to be included. Also, if the non-debtor spouse does not file he/she will remain liable for any debts that are in his/her name.
As an example: a husband and wife have a home and both are on the mortgage. The husband has most of the debts and only he needs to file. He includes the mortgage in his chapter 7 bankruptcy and discharges his liability but because his wife is also on the mortgage, the wife needs to keep paying the mortgage if they wish to keep the home.
Not all debts can be discharged in bankruptcy. Student loan debt (whether private or federal absent a hardship), some tax debt, child support, alimony and other things (like fraud, criminal penalties or restitution) generally cannot be discharged. A debtor will have to discuss with his/her bankruptcy attorney whether a debt is dischargeable.
Copyright (c) 2012 by Rachel Lea Hunter
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