debt collections

What to Do When a Creditor Sues

Dan Rafter — Tue, 06 Mar 2018 09:30:14 +0000

Sometimes life gets in the way, and it can be easy for debt to pile up. But what if you miss so many payments that your creditors file lawsuits against you to collect your unpaid debt?

If you have missed enough payments, creditors can sue you to pay up. Being targeted by such a lawsuit can be scary, but you do have the right to contest the lawsuit. Either way, you should always respond to a notice that you're being sued. If you don't, the court will likely issue a judgment against you and may hold you responsible for collection costs, attorney's fees, and interest.

What should you do if a creditor sues you for unpaid debt? Here's what you can expect to happen. (See also: 5 Things Debt Collectors Don't Want You to Know)

The process

Most times, creditors would prefer to work out an arrangement with the person who owes them money. Filing a lawsuit is time-consuming and expensive.

But if you owe a lot of money, have missed multiple payments, and haven't been in communication with your creditors, you might receive a written complaint in the mail stating that your creditor or a debt collector has filed a lawsuit against you. You will also receive a summons, a written notification stating that you are scheduled to appear in court on a certain date to answer the complaint.

Do not ignore these documents. If you do, the collector or creditor may automatically win its case when you fail to show up in court. And if your creditor wins, it might gain the right to collect your unpaid debt by garnishing your wages. Think of the financial damage that a smaller paycheck could cause.

Responding

The rules vary by state, but you will usually have between 20 and 30 days to respond to a complaint. You can work out your response on your own or with the help of an attorney.

Again, you should respond even if you agree that you owe the money. This way, you can increase your odds of working out a more favorable settlement. Your debt won't simply disappear, but if you respond and are cooperative, the collector might be more likely to forgive a portion of your debt, garnish your wages at a lower rate, or work out a monthly repayment schedule that you can more easily afford.

When you file your written response to the complaint, you should either admit to or deny the debt that you owe. If you deny the debt, your response must include the reasons why you are not legally obligated to pay what your creditors say you owe.

If you instead agree that you do owe the debt, your response should include the reasons why you were unable to pay. Maybe you lost a job, an illness ate away at your savings, or you were involved in other legal action that cut deeply into your income.

When it's time for your court date, don't miss your appearance. You'll need to be there to either argue against your debt or work out a settlement that is the most favorable to you.

Defenses

If you do try to fight the lawsuit, you'll need to know what counts as a legitimate defense in the view of the court. Maybe the statute of limitations on your debt has expired. Debt does come with an expiration date, though it varies by state. In some states, creditors must file a lawsuit to collect unpaid debt within three years. In others, creditors have six years to file a lawsuit. If you can prove that the statute of limitations expired before your creditor filed its lawsuit, the case should be dropped.

Creditors must also be able to provide written documentation proving that they have ownership of the debt. This can get complicated when creditors sell your debt to collections agencies, which happens often. If the creditor or debt collector suing you can't prove that they have the right to collect on your debt — with written documentation — they will lose the lawsuit.

Creditors suing you must also be able to provide the original signed agreement on your account and a history of your balance on it. If the creditor can't provide this, that's another reason it could lose the suit.

Other viable defenses include identity theft, fraudulent charges, or a debt that should have been discharged in a bankruptcy. You should have the necessary documents on hand to verify your claims.

Bankruptcy

If you lose your lawsuit and the amount you owe is too high for you to pay, you might consider filing for bankruptcy protection. When you file for this protection, collection efforts against you will be automatically halted.

Be aware that bankruptcy should be a last resort. Filing for bankruptcy can send your credit score tumbling by 200 or more points. And a bankruptcy filing will remain on your credit report for seven to 10 years. (See also: 11 Steps to Take When Bankruptcy Is Your Only Option)

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What You Need to Know About Canceled Debt and Taxes

Holly Johnson — Thu, 15 Feb 2018 09:30:09 +0000

Imagine having years of punishing credit card debt canceled and gaining the clean slate you've always wanted. Then, out of nowhere, you receive a form in the mail that says you actually owe money for having that debt wiped away.

That situation happens all the time to consumers who have had part or all of a debt forgiven. The reality is, canceled debt may help you regain control of your finances, but the IRS still wants its share of what it sees as income you received. (See also: 12 Things You Should Know About the New Tax Law)

How debt is canceled

To understand the tax ramifications of canceled debt, it helps to know how this phenomenon works in the first place. How does someone get their debt canceled?

According to Steven J. Weil, president of RMS Accounting in Fort Lauderdale, Florida, debt can be forgiven on credit card balances, mortgages, auto loans, or nearly any other type of loan. This debt can become canceled in a variety of ways. One way is when consumers use a debt settlement company to negotiate a payment of less than they owe. (See also: 4 Ways to Negotiate Credit Card Debt)

Another example is when consumers who owe more than their homes are worth get their mortgage company to forgive the remaining balance during what is called a "short sale." A short sale is when the net proceeds from selling the property fall short of the debts secured by liens against the property. All the lien holders must agree to accept less than the amount owed on the debt in order for a short sale to go through.

Forgiven debt doesn't just go away, says Weil. "Whether it's consumer debt, auto debt, or any other type of debt, it becomes income to the consumer when they don't pay off their debt. The government rectifies this situation by charging taxes on forgiven amounts."

Unfortunately, consumers don't always know they are required to pay income taxes on forgiven debt. So, imagine their surprise when they receive a 1099-C in the mail that could lead to a larger tax bill.

What the tax law says

Creditors and debt collectors that accept at least $600 less than the amount you owe them are required by law to file 1099-C forms and send consumers a copy to use when they file their taxes.

As Weil notes, the form should clearly list the amount of debt you had forgiven — not the amount of debt you once owed.

Weil uses the following example to explain how forgiven debt is figured. Imagine you ran up your Visa card with a $10,000 balance (including principal, interest, and late fees) and cannot keep up with the monthly payments. After the debt is sent to collections, you work with a debt settlement company to reach a settlement that says you'll pay $3,000 to have the entire debt forgiven. In this case, the $7,000 in forgiven debt would end up on the 1099-C, says Weil. This form is then sent by the creditor that accepted the settlement to the consumer.

At least that's the way it should work. In some cases, consumers don't receive the 1099-C for whatever reason. But not receiving the form doesn't remove your liability, says Weil.

When your debt is forgiven, it becomes income to you — even if the creditor you work with fails to send a 1099-C. "If you don't get the form, you need to call the creditor and ask for it," says Weil.

Weil also says that, when somebody tells you they will forgive your debt, you need to get documentation of the event in writing. An official letter from the creditor acknowledging your forgiven debt amount will suffice when you're filing your taxes in the absence of a 1099-C, he says. Further, getting the agreement in writing will also protect you down the line if the details of your forgiven debt get jumbled somehow between your creditor and the IRS. (See also: What Happens If You Don't Pay Your Taxes)

Exceptions to the rule

Weil notes that the IRS offers several exceptions that let consumers in certain financial situations avoid paying taxes on forgiven debts. Those exceptions include insolvency. If after your debt is forgiven you have no cash or assets to sell to pay taxes on your debt, you won't have to pay income taxes.

But note that the exclusion applies only to the amount by which you were insolvent. So if you had $10,000 of credit card debts canceled at a time when you had $2,000 in assets, the insolvency amount is $8,000. You'll report $2,000 ($10,000 minus the $8,000 insolvency amount) as income on your tax return.

Also, if debt forgiveness makes you solvent, then it's taxable, notes Weil.

Other exceptions that let you avoid paying taxes include debt discharged in bankruptcy, debt given as a gift by a friend or family member, and certain business real estate and farm exclusions, he says.

If you're curious whether you'll qualify for an exclusion, Weil says it's best to speak with a tax professional who can look at the details of your unique tax situation.

When consumers aren't informed

If you're a consumer who has been hit with this surprise tax in the past, you may be wondering why you weren't informed of your tax liability. According to Weil, it's up to consumers to educate themselves on the best ways to handle their debts, including forgiven debt. Ideally, the different companies we work with will warn us about taxes we might owe, but you should never count on it.

Weil says debt settlement companies in particular should really be doing their part to educate consumers on their tax liability. These companies, which may be for-profit or nonprofit, usually tell consumers to stop paying their bills and save money for debt settlement in a joint escrow account instead. This way, when (or if) the debt settlement company strikes a deal to settle your debts, you'll have the cash on hand to pay the agreed-upon settlement amount.

Considering the fact that debt settlement companies can charge high fees and are supposed to be on the side of consumers, one would think these companies would lay out all the details for those they help. But they don't always.

"There's a lot of nondisclosure," says Weil. Because of this, "consumers should be very careful of debt consolidation and settlement agencies, particularly those that are for-profit."

The bottom line: You may owe taxes on forgiven debts, and you may receive a 1099-C in the mail from your creditor. If you don't receive the form, the onus is on you to figure out your tax liability.

This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Always Answer the Call: Expert Advice on Debt Collection

Thursday Bram — Thu, 14 Jun 2012 10:24:13 +0000

Paying down debt can be a difficult proposition, particularly if the situation has progressed to the point where you have to deal with a debt collector. But there are steps that you can take to make the process more manageable and less stressful. Expert Michelle Dunn has experience on both sides of the table — both as a debt collector and as a debtor. (See also: How to Deal With Collection Agencies)

Why You Should Always Answer the Call

In an ideal world, you would pay off every bill long before it could go to debt collection. But if something goes wrong and you wind up dealing with calls from a debt collector, you can still pay off your debt and resolve the situation. Ignoring debt collectors is the worst option. Dunn points out: “You will have to deal with them calling and sending you letters, and the debt may be reported to your credit report. You should never ignore a collection agency — that only intensifies the calls...and can promote court action.”

It’s crucial to actually respond to those phone calls and letters to verify that the debt is being correctly handled. If there is an error, whether in the amount of the debt or if it’s even your debt at all, you have only a limited amount of time to address it. Dunn says, "You must ask for verification within the first 30 days of being contacted. If you wait and ignore the calls and letters and the 30 days goes by, by law you are acknowledging that you owe the money. It will be much harder for you to dispute the debt after that, and you may lose in court, since the law states you have 30 days to dispute the debt or request the verification. So the best thing to do is make payments or stay on top of the situation and dispute within those first 30 days, in writing!”

If the debt collector can verify the debt, you need to set up a payment plan with the collector and then make regular payments as scheduled. Dunn notes that even if you are making payments as scheduled, a collector can still take you to court if he believes you can afford to make a larger payment. It’s worth your while to do everything to discharge such a debt as quickly as possible.

Worry About Your Credit Score Later

If you’ve reached the point where a debt has gone to collections, your credit score is going to take a hit no matter what you do. It’s easy to get caught up with thinking that you need to fix your credit as soon as possible, but the reality is that your credit can’t be your first priority. Dunn weighs the chance of going to court against a good credit score: “You must pay everything off before you can think about repairing your credit. When accounts are placed with a third-party agency, make a payment [on each account], or you can end up in court.”

Eventually, you’ll be able to refocus on your your credit, but in the meanwhile, eliminating debts that have been handed over to collectors has to come first. Dunn says, “Once accounts are placed for collection, you just have to make payments to them all until they are paid in full.” Of course, you should keep up with the minimum payments on your current bills, as well.

“The only way to get out of debt faster is to pay it off faster. Budget your money, cancel your credit cards, get rid of the cell phone, get rid of cable and internet, carpool, bring your lunch to work — get a part time job. The only way to get yourself out of the hole you dug is hard work; you need to make more money somehow and send as much of it as you can to the creditor,” says Dunn. “The most important thing to remember is that it is easier to work with and pay off the original creditor than a collection agency. Don't let your debts get out of your creditors’ hands — work with them, communicate, and avoid being placed for collection. You will have a much easier time of it.”

Dunn’s own experiences with debt have made her particularly aware of what is necessary to pay off debt; during her divorce, she found herself with only her income to provide for two children. She pulled it together. Her experiences and her extensive advice on how to handle debt collectors are detailed in her e-book, Dealing With Aggressive Debt Collectors.

This article is from Thursday Bram of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Deal With Your Debt or You May Go to Jail

Hollis Colquhoun — Thu, 05 Aug 2010 14:00:07 +0000

Collection agencies are using severe methods to go after debtors. They're going through the courts to collect. The choices are show up, pay up — or get locked up.

First, the collection agency files a lawsuit against the debtor. (The agency should send the debtor an official notification in the mail.) If the debtor doesn't appear at the hearing, the judge can vote in favor of the collection agency (called a default judgment) then schedule another hearing to review the debtor's assets. If the debtor doesn't appear at this hearing, the judge can declare that the debtor is in contempt of court and issue a warrant for his/her arrest. Not only will the debtor have pay what is owed, but also court fines and, in some cases, bail money.

Federal law abolished debtor's prison in 1833. However, this scenario has been appearing with increasing regularity in Minnesota, Wisconsin, New Jersey, Arkansas, Indiana, Illinois and Washington. According to the Minneapolis-St. Paul Star Tribune, in 2009, there were 845 cases of debtors being sent to prison in Minnesota.

How can you protect yourself and stay out of jail? Follow these five steps:

1. Open your mail

When your account is months past due, your original creditor will usually sell your account to a third-party collection agency for pennies on the dollar (that way they get something for your loan balance). Then, of course, the collection agency wants to make a profit, so they start calling and sending threatening letters to scare the money out of you. If you contact the agency in writing that you want them to stop calling, by law, they should stop.

However, if you don't respond they might decide to take you to court. In that case they should send you an official notice of a court hearing with a date so that you can attend and defend yourself. The notice should also have the official court address on the envelope, but sometimes (wrongly) the agency will send an "unofficial" letter giving you notice. Don't put your mail in a big pile or in a brown bag and assume it will go away. Open and read everything; if there is a collection notice, you will know.

2. Know what you owe

Keep track of your outstanding loans. Look at your statements and keep a file. If you are having trouble making timely payments, contact the creditor and let them know. Some creditors will offer a reduced payment/lower interest program. In the case of medical debt, most doctors and hospitals don't charge interest and will usually agree to a payment plan.

3. Review your credit report regularly and dispute errors

Checking your credit report every four to six months will show you where you stand with your debt and debt payments. (Go to AnnualCreditReport.com.)You can see if an account is so delinquent that it has been sold to a collection agency. It will appear above the Account History section under Collections.

For example, it isn't unusual for a person who has been in the hospital to find medical debt in collection that he or she wasn't even aware of. (Hospitals can send dozens of bills so it is easy to miss paying a few.) Also, landlords, utilities and phone companies can come up with final charges, but you might not get the bill if you've moved. Five months later, the charge will show up as a collection item. Review each item in your report, and if something is incorrect, write to the credit bureau to dispute it. (Go to FTC.gov for dispute forms.)

4. Show up in court if you get a notice

You need to appear in front of the judge to plead your case. If you don't show, then the judge will only hear the collection agency's version of the situation. When there are extenuating circumstances, you can ask the judge for special consideration and work out a compromise payment plan. Also, if you're experiencing financial hardship, bring a financial statement detailing your assets and liabilities and a cash-flow statement with your income and essential expenses.

5. Demand to see proof of the original debt

When you're in court pleading your case, ask the collection agency to show proof of your original debt. In some cases, your account has changed hands several times and the collection agency has no written legal evidence of the original loan. That may win your case right there.

Many people are struggling with debt, and collection agencies are getting more aggressive in coming after delinquent accounts. Even if your accounts are in collection, you do have rights. (Go to FTC.gov for more information on the Fair Debt Collection Practices Act or read a previous Wise Bread article on the FDCPA.) Be aware of the potential consequences of ignoring your debts, and be pro-active if you're summoned to court. Otherwise, you might be taking an expensive ride in a paddy wagon to the Big House.

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Guest Post Blurb:

This is a guest post by Hollis Colquhoun. Hollis has over 20 years of experience in the financial industry, is an Accredited Financial Counselor and co-author of Women Empowering Themselves: A Financial Survival Guide. Contact her at Women Empowering Themselves. Here are more articles by Hollis:

This article is from Hollis Colquhoun of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Look Out Consumers: Debt Collections Get Scarier

Tisha Tolar — Wed, 24 Jun 2009 17:07:44 +0000

As if we don't have enough on our collective plates worrying about our legitimate debts, it is now coming to light that more scam artists are trying to collect on debts you may not even have. Just this week in the state of New York, an ex-con and his cronies were busted and a nationwide debt collection company was shut down. Based in Buffalo, NY, the “debt collection agency” operated using several different company names, including Central Resource Man, Interchange Payment Solutions, Next Step Services, Silverbay Services, Teleport, Final Claims Asset Locators and Final Control Asset Locators.

The apparent ring leader was Tobias Boyland, a convicted felon who, along with three other individuals ran debt collection practices in at least four different locations in Western New York. The complaints that were filed against them with the District Attorney's office alleged that Boyland and his team would contact individuals about debt collections, often using threats of being arrested to frighten people into paying back debts. The team also intimidated consumers by lying to them about the status of their debts that have have gone to court. Some involved in the ring even posed as law enforcement officers to add to the intimidation. In many cases, the amount of the debt was inflated or had already passed the statue of limitation, Consumers were scared, believing they were being sued or face legitimate incarceration, they started paying up. While this ploy is scary on its own, many of the collection calls the companies were making were about debts that didn't even exist!

Due to the scare tactics, many consumer volunteered their checking account information, sent money via Western Union, or mailed out money orders. All of the monies were directed to be sent outside of the Buffalo area, to further mislead authorities and consumers alike. The Fair Debt Collection Practices Act prohibits any debt collection company to pose as an attorney or a member of law enforcement, threaten a lawsuit, accuse debt holders of a crime, or threaten arrest. The fraudsters violated many aspects of this federal law and were arrested. At the time of arrest, Boyland was in possession of a loaded semi-automatic pistol. New York Attorney General Andrew Cuomo and his office has been pursuing deceptive debt collection practitioners and has successfully shut down several operations and will continue to do so.

We as consumers now have an additional concern to worry about concerning debt. While many people are getting much better about handling their debts and avoiding it altogether, there are still many families struggling to get back on track. Knowing the debts they do owe can lead them to be victims of fraudulent practices, makes the burden and humiliation of debt even bigger. When you are dealing with debt collectors and making an honest attempt to clean up your credit, make sure you know your rights. Review the Fair Debt Collection Practices Act.

Get smart about your personal finances and your debts. Make notes on the dates and times you are contacted by a collection agency. Be certain you actually owe the debt before you take any action. If you feel that something is amiss with the way your debt is being handled, speak up! Contact your local authorities. While it can be very scary to deal with thug-like callers demanding money, don't make additional financial mistakes by sending money to just anyone. Know your rights and take a stand when it comes to people messing with your money, your credit score, and your sanity.

This article is from Tisha Tolar of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: