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Having a bankruptcy flagged in your credit file can make obtaining a credit card, taking out a car loan or applying for a home mortgage a nonstarter for years. It can also affect your ability to land a job.
Yet in a move that’s certain to be scrutinized, the Obama administration is weighing whether to loosen bankruptcy laws so some borrowers drowning in student loan debt could unload those burdens and start fresh.
The proposal is included in a recently unveiled White House initiative called the Student Aid Bill of Rights, which is aimed at providing more protections for federal student loan borrowers.
The initiatives, including a new online outlet for filing loan complaints, come amid growing concerns about the debt that college students are carrying after graduating. The average amount of student loan debt for 2013 college graduates was $28,400.
Unlike most debts, federal law prohibits student loans from government and private lenders from being forgiven in bankruptcy proceedings, except in cases of undue hardship. Even in those rare situations — and there are fewer than 1,000 people a year trying to get rid of student loans through the courts — a bankruptcy action can be expensive and cumbersome.
But the Student Aid Bill of Rights directs government officials to explore the possible expansion of bankruptcy options on federal student loans. No details have been released.
Why has the idea been floated?
“To make sure that more and more young people can afford to go to college and then afterward aren’t so burdened with debt that you can’t do anything else,” President Barack Obama said in a speech earlier this month at Georgia Tech University, where he unveiled the proposal.
Any bankruptcy law changes would have to be approved by the Republican-controlled Congress, so substantial pushback is likely.
One possible scenario, according to financial aid experts, is to allow borrowers with private student loans from financial institutions to take bankruptcy.
That’s a small subset — only about 10 percent of student loans are made by private lenders, according to the Credit Karma online financial services firm.
Given that bankruptcy can be one of the most negative items pinned to your credit report for as long as 10 years, why make it easier to enter the system, even as a last resort? What’s the incentive to fight to stay current on student loans if the problem can be wiped out in one fell swoop?
Better for former students to focus on a host of flexible repayment options and even loan forgiveness programs that have been expanded in recent years. Also, don’t forget that many credit counseling services provide free loan restructuring advice.
Other aspects of the new Student Aid Bill of Rights plan could ease the pressure on student loan borrowers and clamp down on lending industry repayment practices.
For example, the plan directs the U.S. Department of Education to create a website by July 1, 2016, so borrowers with federal student loans can file complaints about lenders, servicing companies, collection agencies, and colleges and universities.
Another benefit of the new program applies to borrowers who make higher monthly payments than required. Under the plan, the loan servicer will have to apply the extra funds to the student loan with the highest interest rate, unless directed otherwise by the borrower.
There’s another way to deal with all this student debt — one that gets lost in the policy debates.
It starts long before the kids head to college and involves a family discussion about money — the cost of attending college, the importance of picking schools that are not financial stretches, zeroing in on a degree that balances with the cost of education and understanding that paying back debts even a little at a time requires commitment.
Over the past 25 years, the way individuals communicate with each other has changed dramatically. From telephone calls and faxes to emails and text messages, advancements in technology have made it much easier for individuals to get in touch with one another. Today, individuals communicate through text messages and emails more than they do through telephone calls. Businesses have also adapted to new communication preferences and developed strategies that allow consumers to be contacted through their preferred choice. However, when it comes to debt collection, debt collectors still operate under a set of laws from 1978 that haven’t caught up with the technological advancements of the last couple decades, making communicating with consumers through email not nearly as easy as it should be.
The reality of today is that consumers who have an account in collections want two things: to communicate with debt collectors through the method of their choosing, and to communicate with debt collectors at a time that is convenient for them. Because of the laws debt collectors are regulated under, some debt collectors will not communicate with consumers via email while some will. At the end of the day, whether or not a debt collector communicates with consumers via email is determined by their business and the risk decision the organization makes. There is no clear right or wrong answer in regards to debt collectors communicating with consumers through email, but there are certain aspects of the process that a consumer should consider when doing so.
1. You Should Make First Contact
Most debt collectors will not initiate the first contact with consumers through email. Therefore, if you want to communicate with a debt collector through email it is important for you to send the first email to start the chain.
There are times when the first contact may be by telephone and during that conversation the consumer may express their desire to be contacted by email. Nowadays, most debt collectors record all phone calls so they retain that authorization through recordings, but it is also not uncommon for the debt collector to request the consumer send that initial email anyway so they know for certain who they are replying to. This process also ensures the debt collector has taken proper procedures to communicate with only the consumer of record.
2. You Must Identify Yourself
It is important that consumers clearly identify themselves in the email by providing the debt collector with their full name, address, and either date of birth of last four digits of the Social Security number. The reason why these identification measures should be taken is because before the debt collector engages with a consumer, they are required to take appropriate steps to ensure they are speaking with the right person. Until they confirm they are speaking with the right person, it is highly unlikely the debt collector will engage in resolution of the debt by email or phone. Keep in mind that sending sensitive personal information via email carries its own security risks, which you should seriously consider before sending information digitally.
3. You Shouldn’t Expect Many Details
While some debt collectors have become more comfortable over the years communicating with consumers through email, all debt collectors still have reservations about doing so because there is no clear cut rule or law governing electronic communications in an attempt to collect a debt. Therefore, some debt collectors will utilize email to respond to and provide direct and clear requests, but don’t expect them to engage in any back and forth conversation like they would in a phone call.
If the exchanges become more complex or if there are more than a couple of emails back and forth, it is not uncommon for debt collectors to let consumers know they will cease emails and request to be called at the office to complete the resolution of the account.
4. You Should Avoid Emailing From a Work Account
Most companies have safeguards and policies in place requiring work email accounts to be used for work-related purposes only, and that they may be monitored and reviewed by the company at any time. So be careful if you decide to contact a debt collector through your work email because your personal business matters may get uncovered during routine work email account audits. Furthermore, some debt collectors will not communicate with consumers through the consumer’s work email account in order to protect the consumer’s privacy.
In the end, the number one goal for debt collectors is to help consumers resolve their account. So it is important to debt collectors that they communicate with consumers in the method that the consumer chooses and at a time that is most convenient for them as well. However, because of dated regulations, debt collectors are generally still leery about fully embracing email to handle the entire debt collection process — and those who do may ultimately be conservative in their approach.
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If you're like many of us, you need your car to get to work or school, carpool kids or grandkids, or to do your shopping. But what happens if you are getting calls from debt collectors who you can't pay? Can a debt collector take your car?
Our reader, Marbella, who lives in California, says a collection agency told her she must appear in court over a debt of $1,200 that she defaulted on a while back:
I'm not working right now and I don't think I am until about a year. Now the thing is that I have a car under my name but my (boyfriend) also appears on the title. Could they go after the vehicle?
"Like many life situations, there's the formal, legal answer, and then there's the practical answer," says Northern California bankruptcy attorney Cathy Moran, who blogs at BankruptcyInBrief.com. "Legally, a creditor with a judgment could reach the share of a co-owned asset that its debtor owns. If there is a loan attached to the car, there has to be enough value in the car to pay off the debt from your share of the car before a creditor could have the sheriff tow the car and sell it. They'd have to give the co-owner his share of the sale price."
But practically speaking, there are a few hurdles. The first is the fact that some personal property is off-limits to creditors. In our reader's case, the California exemption protects $2,900 in equity in a vehicle. (In each state, specific property is "exempt" or safe from creditors. Types and amounts of exemptions vary by state.) "So the car would have to have enough value to pay the sheriff's fees to tow and sell it and the exemption to which you are entitled before the creditor gets anything from the sale," says Moran.
In fact, Moran says that in 37 years of law practice, the only creditor she's seen try to seize and sell a car is the Internal Revenue Service. (Note: the IRS has greater powers than other creditors when it comes to seizing property.)
And there's another hurdle: Before a creditor can go after an asset like a car they must first get a judgment in court. And to do that they must sue the consumer and win — and again, only then could they try to seize and sell the car.
"Going this route is expensive for the judgment creditor and risky in that any procedural error could open the judgment creditor to one or more federal or state consumer protection law claims," says Atlanta bankruptcy attorney Jonathan Ginsberg. "Since you are only part owner of the vehicle, the seizure option is even less attractive, especially since the total debt is only $1,200," he says. He agrees with Moran that the IRS is the only creditor that would likely go after personal property like a car.
But that doesn't mean Marbella — or you, if you find yourself in a similar situation — should just ignore collectors. If you are sued for a debt and fail to show up in court, the plaintiff (the collector or creditor who sues you), will get a judgment against you which may open the door for them to go after property that is easier for them to get, such as your wages or money in a bank account. Exactly what they can do to collect a judgment debt depends on state law. A consumer law attorney can tell you what's at risk and may be able to help you negotiate a settlement or raise a defense to the lawsuit in court. "You can also talk to your lawyer about possibly filing bankruptcy," Ginsberg says, "which could make the problem go away entirely."
Also worth noting is the fact that if a creditor already has a judgment against you, some property may be at risk already. Credit.com commenters often tell us that they didn't even realize there was a judgment against them until they got their credit reports or credit scores (you can check your credit scores for free every month on Credit.com) — or until they discovered their bank account had been emptied by a judgment creditor. Here's how to get your free annual credit reports to find out if a judgment is listed there. If you find one, make an appointment with a consumer bankruptcy attorney right away to discuss your options.
The most difficult part of a debt collector's job has been, and always will be, establishing communication with the consumer they are collecting from. Debt collectors go to great lengths to establish contact with consumers primarily through telephone calls and letters. In my experience, once contact is eventually established with the consumer, one of their biggest complaints is the claim they have never been notified about their debt being in collection. This would always come as a surprise because we would send consumers what is known in the debt collection industry as a "validation notice" once we received the account. The validation notice outlines the consumer's rights to validate their debt if they are unsure of it. So if a debt collector is sending validation letters – and it's my experience that the majority of debt collectors do — why aren't consumers receiving them?
The answer most likely is consumers are receiving them, but because the envelopes from debt collectors are often vague and inconspicuous, they aren't getting opened. These letters are often confused with solicitation from marketing companies who keep the return address and envelope nondescript in order to get the recipient to open the piece of mail. However, a lot of recipients won't open mail if they do not know where the letter is from or who sent it. The problem with that practice is if you are in debt and a debt collector is contacting you, the last thing you are likely to see on the envelope is anything related to a debt, most notably the name of the creditor or debt collection agency trying to collect from you.
Why the Secrecy?
So why doesn't a debt collector at least put their company name on the return address? Because that practice could be in violation of the Fair Debt Collection Practices Act. The FDCPA clearly states a debt collector may "not use any language or symbol on any envelope or in the contents of any communication effected by the mails or telegram that indicates that the debt collector is in the debt collection business or that the communication relates to the collection of a debt." Therefore, in order to remain compliant with this section of the law, debt collectors are prohibited from placing any information on the envelope, including their business name that would indicate they are a debt collector or that they are attempting to collect a debt.
But while the outside of the envelope may be vague and inconspicuous, the contents inside the envelope are more descriptive and important. Debt collection notices are often personal, confidential and time-sensitive in nature. These letters provide information the consumer needs to know as it relates to their debt, including the status of the debt and what might happen if the debt isn't resolved soon. Debt collection letters also contain specific disclosures that provide information about how consumers can dispute their debt along with other state-specific disclosures the consumer should be aware of. In addition, when consumers postdate payments with debt collectors, debt collectors may be required to send payment reminders which would also be sent within these envelopes as well.
Letters are one of the biggest expenses for debt collectors, so they want to make sure the letters are being delivered to the right consumer — and being opened by that consumer, as well. However, debt collectors must stay in compliance with the FDCPA and ultimately must hope consumers who receive the letters are going to first open the envelope, read the letter and establish communication with the debt collector so the debt can be resolved. With more consumers preferring to communicate with debt collectors non-verbally, letters will continue to play an integral part of the debt collection and resolution process. So the next time you get a piece of mail that you may not want to open because you don't recognize the return address, be sure to at least take the time to open the envelope to see whether it contains personal, confidential and time-sensitive information such as a debt collection notice.
Debt collectors are legally prohibited from misrepresenting themselves as police or lawyers when communicating with consumers. Of course, that hasn’t stopped some collectors from breaking the rules, and there are plenty of debtors who can tell stories of precisely that.
The question of what exactly qualifies as misrepresentation is at the center of a lawsuit filed Dec. 1 in U.S. District Court in San Francisco. The suit alleges that debt collection company CorrectiveSolutions violated the Fair Debt Collection Practices Act (FDCPA) after using letterhead of various prosecutors’ offices when contacting debtors. The complaint calls into question the process surrounding CorrectiveSolutions’ alleged practice of representing themselves as law enforcement to consumers and threatening legal action for failing to pay the debt. The tricky part of this case, however, lies in the fact that CorrectiveSolutions is under contract with several California’s district attorney offices for the expressed purposes of interceding on the government agency’s behalf. The legal dispute focuses on the way they intervened.
It’s all tied to California’s Bad Check Restitution Program. The program allows people who bounce checks and the businesses who received the checks to settle the case out of court through what’s known as a diversion program. In this diversion program, an offender can avoid prosecution by paying the amount the bad check was written for, plus fees, in addition to taking an 8-hour bad-check-offender class at the offender’s own expense. Through this program, people and businesses who receive bad checks can submit a complaint, along with evidence, to the mailing address listed on the DA’s website.
Under California Penal Code 1001.60, the DA is permitted to contract private companies, like CorrectiveSolutions, to help execute this program. However, district attorneys may refer cases to the program only if the check writer is believed to have violated state laws, like intentionally defrauding the recipient. A lawyer with the DA’s office is required to review the cases to ensure they meet various criteria. For example, if a business wants a bad-check writer pursued for violating the law, they must first make attempts to contact the debtor three times before the case qualifies for the program, according to Teresa Drenick, assistant district attorney in Alameda County.
The lawsuit contends that prosecutors have allowed debt collectors to use DA letterhead without first vetting the claim that the debtor violated the law. The American Bar Association recently condemned the general practice of allowing debt collectors to use prosecutors’ letterhead, as it makes the prosecutor “party to deception” and violates Bar Association rules, the association’s Committee on Ethics and Professional Responsibility wrote in an opinion issued Nov. 12. The opinion does not specifically reference California or the district attorneys’ offices mentioned in the lawsuit.
Credit.com reached out to the district attorneys’ offices in the five counties mentioned in the lawsuit (Alameda, Calaveras, El Dorado, Glenn and Orange counties), but only two responded. Joe D’Agostino, assistant district attorney in Orange County, said they’re studying the Bar Association’s opinion.
“The program is run in a method that matches what the statute is,” D’Agostino said, referencing California Penal Code Section 1001.60, which describes the district attorney’s ability to contract the bad check diversion program to a private party. “The Bar Association’s opinion came down fairly recently, so we’re studying it. We always want to follow the rules and follow the procedure.”
Drenick, the assistant DA in Alameda County, wrote in a email statement to Credit.com that CorrectiveSolutions sends the DA’s office a list of cases each month, which is reviewed by the office to ensure the debt is legitimate and would meet legal requirements for pursuing a criminal case. Then, CorrectiveSolutions is given approval to contact the debtor using the DA’s letterhead. She did not specify whether or not an attorney reviews the bad check diversion cases, as the statute requires, and she did not respond to a request for clarification.
“If we agree to allow the case to go by way of diversion, we authorize CorrectiveSolutions to send the check writer a letter on behalf of our DA Bad Check program advising that their check was returned for insufficient funds and offering them the option of participating in the diversion program to avoid criminal prosecution,” Drenick wrote. “It is a well thought-out diversion program. Last year (2013) our program returned $69,132.01 to local businesses as payment on dishonored checks through the Bad Check program. … There is no ‘rental’ of our letterhead; rather, a statutorily-authorized diversion program that helps local businesses collect on bad checks while giving the check writers an opportunity to avoid a criminal conviction/record.”
The future of this practice seems to depend on prosecutors’ reactions to the Bar Association’s opinion and the outcome of this litigation in California. Meanwhile, consumers may remain subject to the debt-collection tactic that the lawsuit is calling into question. CorrectiveSolutions did not respond to multiple requests for comment from Credit.com.
If your state doesn’t have a diversion program like California’s, writing a bad check can still come back to haunt you. If you bounce a check, the recipient may sue you over the unpaid sum, which may result in a judgment on your credit report — a credit score killer. (You’re entitled to free credit reports once a year under federal law and you can get a free credit report summary at Credit.com.) Debt collection can be confusing and intimidating for consumers, even when collectors follow the guidelines in the FDCPA. If you’re dealing with a debt collector, make sure you know your consumer debt collection rights, and form an action plan for paying off your debt.
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