You can stop a debt collector cold, wherever you live, using federal law.

Consider that the weapons of a debt collector are fear, shame, and annoyance.

The weapon delivery system is communication.

Those weapons don’t have to be any more threatening than a plastic toy pistol, if you understand what’s going on.

To use those emotional weapons, the collector needs to get to you, either by phone or in writing.

They need to stir those negative emotions in the hope of getting you to pay them instead of some other pressing need.

Disarming the debt collector

Turns out, you have a weapon of your own.

It’s paper, but it works.

Invoke your legal right to be left alone and you disarm them.

Collectors are functionally weaponless if they can’t reach you.

Afraid to answer the phone

The woman on my phone was petrified about the balance on her husband’s credit card.

A mid life stroke left him in a nursing facility; she was supporting the family singlehandedly.  The credit card issuer wrote that she had only 10 days to pay or they’d refer the matter to their attorneys.

Paying the credit card was not a priority for this family at the moment, but the collector had convinced her the world would end if she didn’t pay now.

I proposed a letter of her own:  claim the right to be left alone.

Getting collectors to stop

The Fair Debt Collection Practices Act has a hidden gem:  the right to be left alone.

FDCPA is federal law.  It applies to outside collectors for the original creditor.  It doesn’t apply to the original creditor using in-house collectors to get you to pay.

California doubles down and makes the same right to be left alone apply not just to a third party collector but to the original creditor as well.  The law is known as the Rosenthal Act.

Cutting off communication doesn’t make the debt go away.  It doesn’t keep the creditor from suing on the debt, if they really want to do so.

It does keep them from ratcheting up those emotions, fear, shame and annoyance, that may lead you to pay the wrong bills first.

Debt collectors make the most money if they can get you to write them a check to go away.  It’s much cheaper and faster than suing you.

And verbal intimidation is much less likely to send you scurrying for bankruptcy.

How to do it

To mute the collector, you must put your demand in writing and send it to the collector.

There are two magic phrases: either “stop communicating with me” or  “I refuse to pay“.

Either one, in writing, cuts off the collector’s right to harass you.  See 15 USC 1692c(c) and Cal. Civil Code 1788.17

There are a couple of exceptions, things the collector can legally communicate after you send that letter.

1. They can tell you their efforts are being terminated.
2. They can tell you what kinds of remedies remain available to them.

That’s it.

Remedies if they break the law

There’s no meaningful right if there is no remedy. Sso the law arms you to enforce your rights.

FDCPA creates small but powerful remedies;  the Rosenthal Act in California adopts them.

A debt collector who violates the law is liable to the victim for

• Actual damages
• Statutory damages up to $1000
• Attorneys fees and the costs of suit

A successful enforcement action requires that you assemble evidence:  a copy of the letter you wrote; a log of collection actions after that letter that violate your rights; and an account of the damages that those violations caused you.

A consumer rights lawyer can help you vindicate your right to be left alone.

What to do when it’s quiet

Once your adrenaline goes down, and you can think about your debts without fear, you can look at the big picture.

• Is your debt problem bigger than this one creditor?
• Is your cash situation likely to change significantly in the near term?
• Are you crippling your budget to pay creditors at the expense of essentials?
• Do you have a financial reserve if there’s an emergency?

If the problem is bigger than the creditor on the phone, see a reputable, non profit credit counselor or an experienced bankruptcy lawyer to explore your option.

More

Are there alternatives to bankruptcy

Considering bankruptcy

If you get sued

While most liens survive a bankruptcy discharge, some liens get wiped out.

Think of mortgages, tax liens, and judgment liens.

Each of them is a lien, but some get different treatment in bankruptcy.

Some liens can even be reduced or eliminated .

Lien basics

A lien gives the creditor holding the lien an interest in the debtor’s property, real or personal.  With that interest comes the right to compel a sale of the property to pay the debt secured by the lien.

Liens come in three varieties:  voluntary, judicial, and statutory.

Ordinarily, the lien must be paid off before any of the value in the collateral goes to the owner of the property.

And while you’re stuck with some liens after bankruptcy, some can be whittled down to size, and some can be eliminated altogether when you file bankruptcy.

But first, we’ve got to know which kind of lien we’re dealing with.

Voluntary liens

Voluntary liens are ones that you agree to create in favor of a creditor.  A mortgage is a classic example, as is the lender’s lien on your car.

In business, a lender often insists on a lien on business assets to secure repayment of a loan.  The lien puts the lender ahead of other unsecured creditors in the fight to be paid.

Judicial liens

Judicial liens are, not surprisingly, created by judges.  They result from court judgments or orders creating temporary liens during the course of a lawsuit.

State law determines whether a judgment automatically becomes a judicial lien.  In California, the winning party must take an additional step of recording an abstract of judgment to create a lien on real estate in that county.

Statutory liens

Statutory liens are created by law.  Tax liens are ones we encounter most frequently.

Provisions of the tax statutes say that unpaid taxes become a lien on all the taxpayer’s assets.

Bankruptcy changes the rules

A cornerstone proposition in bankruptcy law says that a lien is only a “secured claim” to the extent that there is value in the asset for the lien to attach to.

A creditor may have a lien with a face value of $100,000.  But if the property it attaches to had only $15,000 of available equity, the lien holder has a secured claim for $15,000 and an unsecured claim for $85,000.

Another cornerstone of bankruptcy law says that, without additional proceedings in bankruptcy court, liens survive bankruptcy as a charge on the property they attach to.

So, we really want to know which liens are vulnerable to being voided or whittled down by a proceeding in bankruptcy and in which chapter of bankruptcy those proceedings can be brought.

Judicial liens lose to exemptions

In any chapter of bankruptcy, the debtor can avoid (invalidate) a judicial lien that impairs an exemption to which the debtor is entitled.  11 USC 522(f).

Depending on the numbers, the lien can be eliminated altogether if there is not enough value in the asset to pay the exemption and have anything left for the lien.  Or, the judicial lien may be reduced as required so there is value to fund the exemption.

This works only for judicial liens.  Exemptions don’t protect assets from voluntary or statutory liens.

Chapter 13 smites worthless liens

Lienholders are at risk in Chapter 13, where the debtor is reorganizing his financial affairs, in ways they are not in Chapter 7.

Liens that aren’t secured claims ( that is, that don’t attach to value equal to the lien) can be voided at the completion of the payment plan.

With two exceptions, even voluntary liens, which are usually beyond altering, can be stripped down to collateral value.  The exceptions are

• voluntary liens on a principal residence where the lien attaches to some value, and
• purchase money liens created within 910 days of a bankruptcy filing to buy a vehicle.

In all other situations, a lien is worth only the value of the collateral that secures it.

So, huge tax liens get cut down to the value of the available collateral, and wiped out at plan’s end.  Totally unsecured deeds of trust or mortgages can be avoided.

You gotta appreciate the power of Chapter 13.

More

How Chapter 13 works

Understand tax liens in bankruptcy

Cutting the car loan down to size

Bankruptcy can strip down what you’re paying on your car loan to just the bare essentials, saving you bundles.

Consider my client whose car loan balance was grossly inflated to the point  that she owed twice the value of  her car, bought just a year ago.

Before bankruptcy “reform”, she could have stripped the loan balance down to what the car was actually worth.  In essence, the old bankruptcy law gave the lender what it would have gotten by repossession.

But not today.

Bankruptcy “reform” of a decade ago prohibits stripping down the loan balance on cars bought in the past 2+years.

What Chapter 13 can do to car loans

Now that bankruptcy “reform” has shielded the car lender from the real world consequences of the car’s depreciation, the choices seem to be pay or surrender the car.

But not so fast.

Here in Silicon Valley we often retort: RTFM.  In a bankruptcy case, it’s read the underlying contract.

When I did, I found thousands of dollars worth of financed “stuff” that even bankruptcy reform didn’t require the buyer to pay in full.

Ride along as we point out all the excess expense that Chapter 13 carves out of the car loan.

The underwater trade-in

It seems that my client had traded in her previous car  when she still owed $9,000 on it.  The trade-in value (at least in this deal) was $5,000.

So the loan for the new wheels included the $4,000 difference between the old loan and the trade-in credit.  In bankruptcy circles, we call that “negative equity”.

The amount needed to pay off the old car, after credit for the trade-in allowance, was added to the price of the new car, in calculating the new car loan.

And thanks to a 9th Circuit decision called Penrod,  the negative equity portion of the car loan wasn’t entitled to protection from strip-down.

So, we’ve wiped out $4000 of the loan balance, or at least booted it out of the “must pay” category of debts in her Chapter 13, to the “maybe they get something” category of general unsecured creditors.

Gap insurance inflates the balance

As I read on, I found $900 worth of “gap insurance”.  This is extra insurance that covers the gap between the insured value of the car and the loan  balance in the early years of the loan.

Even in car loans not larded with all the add ons and extras found in this deal, once you drive the car off the lot, it is worth less than the purchase price and therefore, usually worth less than the balance on the loan.

If you total the car at the first stop light after leaving the dealership, regular insurance pays what the car was worth just before the accident.  Gap insurance will pay you the difference between the car’s insured value and the loan balance.

Without gap insurance, the car buyer gets a check for the car’s value and still owes the car lender.

But in Chapter 13, the car buyer is protected from that liability by bankruptcy law.

So, my client doesn’t need gap insurance, and we’ve reduced the must-pay portion of the loan by $900.

Service contract is extra

Last on the list of extras plumping the balance of the car loan was a $2000 service contract good for 75,000 miles.

My sense is that the terms of a service contract bought from the manufacturer of the car is carefully calculated to be profitable to the manufacturer.

After discussion, the client decided to reject the service contract and pay for repairs as needed.

We reduced the must-pay balance by another $2000.

Calculating the protected balance

When I added up the extras we carved out of the original loan balance, those extras were 30% of the loan amount.

So, we reduced the car lender’s secured claim that just recited the loan balance on its books  by 30% and got the amount of the loan that was really the purchase-money portion of the deal.  That will be paid in full through the Chapter 13 plan, regardless of what the collateral is now worth.

The car lender still gets a better deal in bankruptcy than it would if they repoed the car in the real world, but then, the car creditors had crafty lobbyists when bankruptcy “reform” was enacted.

Wait, there’s more

We aren’t done whittling this debt down to size, because Chapter 13 allows us reduce the interest rate paid on car loans to today’s market rate.

My client was paying a bit over 10% per year on the car loan.  In Chapter 13, she’ll pay 4-5%.

The ability to change the interest rate on loans secured by personal property, as opposed to real property, was not changed by bankruptcy amendments of 2005.

And this is just one reason I love Chapter 13.

Image courtesy of Daniel Olnes & Flickr.