Survival Skills for Overwhelmed Debtors:

Debtors’ Rights Workshop

Presented by Blue Ridge Legal Services, Inc.

The Legal Aid Society Serving the Shenandoah and Roanoke ValleysUpdated June 2011

How can a creditor try to collect a defaulted debt (in a nutshell)?

• Bad credit report to credit reporting agency• Turn it over to a debt collection agency• Undertake their own collection efforts• Sell it to a Debt Buyer (“Zombie Debts”)• Repossess any collateral given for a secured debt• Obtain a “judgment” and seek post-judgment

remedies

The Federal Fair Debt Collection Practices Act

• Prohibited practices include:Cannot harass or abuseCannot lie or misleadMust respect debtor’s privacyCannot be “unfair”

The Federal Fair Debt Collection Practices Act

Other Important Rights created:

Debtor can require them to verify a debt if disputed

Debtor can tell them to stop contacting the debtor (must be in writing)

The Federal Fair Debt Collection Practices Act

• BIG LOOPHOLE: The law applies to “Debt Collection Agencies”, but not to creditors collecting their own debts.

• It DOES apply to their lawyers, however!

• By Virginia statute, it also applies directly to payday lenders, insofar as it prohibits harassment or abuse, false or misleading statements, and unfair practices in collections. See Va. Code Sec. 6.1-459(22).

The Federal Fair Debt Collection Practices Act

• TIP: The debtor should make and keep an accurate log of any collection communications and try to have a witness listen to any abusive phone calls.

• Violation of the FDCPA can result in statutory damages of $1,000 plus attorneys fees.

Repossession

• “Secured” vs. “Unsecured”• If Debtor is more than 10 days behind, the

creditor can try to repossess any collateral. • But the creditor cannot cause a breach of

the peace.• If Debtor refuses to allow the repossession

without a fight, then the creditor must go to court first.

• “Warrant in Detinue”

More on Repossession

Debtor has limited rights post-repossession:

Right to “redeem” Creditor must notice of what he’s going to do

with the collateral Creditor must give post-sale notice and account

for proceeds“Surplus”, “deficiency” or a “wash” If creditor violates these rights, Debtor has claim

for 10% of purchase price + the entire finance charge!

Judgments

• This is a civil case, not a criminal case. It is not a crime to owe someone money!!!– But note can serve time for failure to pay child support– Common client confusion as titled “warrant in debt”

• A judgment is simply an official court record that the debtor really owes a particular debt and how much.

• Creditor can do this even if debtor is paying a small amount regularly, and even if debtor is flat broke! (“The Poor Man’s Law”)

More about Judgments

• “WARRANT IN DEBT” OR “COMPLAINT”

• What Court?Where can you be sued?

The creditor must file where you live or where you incurred the debt.

More about JudgmentsDo you have to go to court?

• No – not if you agree that you owe the debt.

• But, if you don’t agree that you owe it, or disagree on the amount you need to show up.

• This is usually your one and only chance to challenge the debt.

• It is now or never!

Post-Judgment Remedies

Once a creditor gets a judgment, things can get serious!

A judgment allows the creditor to do 4 things it couldn’t do previously:

• Summons to Answer Debtors interrogatories – you must show up – don’t take anything of value– Turn-over orders

• Lien on any real estate (judgment lien) enforced by “Creditors Bill”

• Sheriff’s levy on personal belongings (“Fi Fa”)• Garnishment of wages, tax refunds and bank

accounts

Ways to Protect Poor Debtors

Because of various exemptions guaranteed by federal or state law, the poor debtor may be entirely “collection proof”:

• Tenancy by entireties• Portion of wages• Child Support• Certain government checks and payments• Poor Debtors’ Exemptions• Homestead Exemption

Tenancy by Entireties

When and husband and wife own property jointly titled with right of survivorship, it creates what’s known as a tenancy by the entireties.

One important feature of this type of ownership is that it creates an unlimited exemption against creditors of only one of the spouses.

It most commonly appears with real estate but arguably can be asserted in personal property with titles and bank accounts.

This is one important reason why lenders want both spouses to sign the loan papers.

Wage Exemptions

Under Virginia law (Va. Code Sec. 34-29), a creditor can garnish no more than 25% of the debtor’s disposable earnings for that week, but they still have to leave the debtor with a “take-home paycheck of at least 40 time the current minimum wage per week:

• Currently $290/weekly (based on $7.25/hr. minimum wage

• Will increase when minimum wage increases.

Additional Wage Exemption for Debtors with Dependent Children

Effective July 1, 2009, debtors whose household’s gross monthly income does not exceed $1,750 (that is, $406.98/wk) can claim additional wage exemptions if they have dependent children:

– $34 per week for one child– $52 per week for two children– $66 per week for three or more children

See new Va. Code Sec. 34-4.2.

Certain Government Benefits

Certain government benefits are entirely exempt from creditors, including:

– Social Security benefits (including SSI)– Veterans Benefits– Black Lung Benefits– Unemployment Compensation Benefits– Workers Compensation Benefits– Public Assistance (e.g. TANF) benefits

Poor Debtors Exemptions

Section 34-26 of the VA Code:• $1,000 in clothing• $5,000 in household furnishings• $10,000 in tools of your trade (including a vehicle)• a car or truck up to $2,000 ($6,000 as of July 1st)• a “family firearm” worth up to $3,000 as of July 1st

• burial lot, wedding rings, heirlooms, pets, and medical equipment

• husband and wife each get this!• w/ help, file a “Claim for Exemption” form to assert

Homestead Exemption

Section 34-4 et seq. of VA Code:

• $5,000 (+$500 per dependent) in other property• can’t be used against secured purchases• Once in a lifetime• $21.50 to record deed• Debtors age 65 or older will be able to claim

$10,000 effective July 1, 2009• Veterans with 40% service connected disability

can claim an additional $2,000; this increases to $10,000 July 1, 2009 (see new Va. Code Sec. 34-4.1)

Declining Value of Protection of Homestead Exemption in Virginia

Virginia Homestead Exemption Levels

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

18701890

19101930

19501970

19751980

2000

Actual Exemption Amount Adjusted for Inflation

Child and Spousal Support Debts- the normal rules don’t apply!

Virtually none of these exemptions apply to support obligations, other than:

• Very limited garnishment protection- up to 60% of the obligor’s disposable income can be taken for child support (65% if more than 12 weeks in arrears)

• Poor Debtors Exemptions and Tenancy by Entireties still apply.

Things a Debtor SHOULDN’T Do

• Quit your job• Get a consolidation loan, payday loan or car title

loan• Fraudulently “give” or “sell” property to a friend or

relative to hide it from creditors.• Take out a high interest second mortgage (home

equity loan)• Fall for a foreclosure rescue scam• Use a sketchy credit repair or debt settlement

company• Lie about what you own• Fail to show up for debtors interrogatories• Volunteer information• Forego food, rent and other necessities to pay debts

Prioritizing Bills

What do I pay first if I can’t pay them all?1. Rent/mortgage2. Utilities needed for shelter3. Food and medicine4. Child/spousal support obligations* and taxes5. Car loan for care needed for employment6. Child care costs, if needed for employment7. other secured loans8. Other unsecured debts, including credit

cards*File Motion to Amend?

What if the Debtor is NOT collection proof?

• “Write-offs” for hospital bills (charity care)• Try to agree on payments• Non-profit consumer credit counseling

services• Wait to see if the horse will talk?• Bankruptcy

Bankruptcy

The Debtor’s right to get back on his/her feet if overwhelmed by debts.

2 Relevant Types of Bankruptcy:• Chapter 7 (“straight”)• Chapter 13 (“wage earner pay back plan”)

Which kind is appropriate?

A few essentials on Chapter 7 Bankruptcies

• Detailed petition and documentation• $299 Filing Fee unless you’re REALLY poor• 3-4 months from the time it’s filed• usually 1 “court” date• Must list ALL creditors• Debts not listed aren’t discharged… or are they?• Stops all collection activity• Wipes out most debts• Depending on your assets, you might not lose

anything, unless…

Bankruptcy essentials (continued)

Depending on your assets, you might not lose anything, unless…

• Buying items on credit (secured)• - keep paying/reaffirm• - redeem• - give it back• Your assets are too valuable to fully

exempt– For example, a house with lots of equity.

Non-dischargeable Debts in Chapter 7

• Child support• Alimony• Fines/penalties• Debts not listed• Obtaining $ by false pretenses• Fraud/embezzlement• Willful injury to person or property• All student loans (unless it meets hardship standard)• Injuries from DUI• Income taxes less than 3 years old• Property taxes less than 1 year old• Taxes where return was not filed• Withholding taxes

Consequences of Bankruptcy

• Can’t file again for 8 years• Can own property• May be able to borrow $• Effect on credit? Depends• Government and employers cannot

discriminate against you• Don’t lose any civil rights

When should you take bankruptcy?

• Debts of $4,000?• Something to lose and you’re about to

lose it.• No future debts.• When it will accomplish something, that

is, when you will be able to take advantage of a fresh start and not squander it!

What BRLS can do for a client with debt-related legal problems:

• Advise the client as to his/her legal rights and protections

• Take action against abusive debt collector • Help dispute a debt in court if the client has

a valid defense or counterclaim• Help the client assert an exemption (for

wages, bank accounts, tax refunds, etc.) if necessary

• Assist the client in filing for bankruptcy protection (in the right circumstances, listed earlier)

Other Types of Cases that BRLS Handles

• Evictions and other landlord-tenant issues• Foreclosures• Predatory Lending• Illegal utility shut-offs• Public Benefits• Wills• Medicaid, Medicare, Nursing Home issues, and

other access to health care issues• Access to Education• Domestic Violence (and other family law cases

when resources allow)• And lots of other things…

Other Resources

• Virginia Legal Aid Community’s Client Information Website– www.VaLegalAid.org

• National Consumer Law Center– www.consumerlaw.org/advice/consumer_info

• Registered consumer credit counseling organizations in Virginia– www.scc.virginia.bfi/reg_inst/credit.pdf

• The Community Tax Law Project– www.ctlp.org

For electronic copies of this PowerPoint Presentation, contact John Whitfield at jwhitfield@brls.org.