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.

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 and he was 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 at the moment, but they 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.

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.  so the law arms you to enforce your rights.

FDCPA creates small but powerful remedies;  the Rosenthal Act 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.

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Considering bankruptcy

If you get sued

 

Out of 19 kinds of debt that bankruptcy doesn’t wipe out, three are radically different.

Three exceptions to discharge look, not at the kind of debt such as taxes, or support or student loans.  Rather the exceptions look at  how the debt arose.

These exceptions prevent bad actors, who have incurred debts by forms of dishonesty or intentional bad behavior, from escaping the consequences in bankruptcy.

But unlike the other exceptions to the scope of the discharge, the creditor has the burden of filing a timely challenge to the discharge of its debt.

The creditor also has the burden of proving the facts that make the debt non dischargeable under the federal bankruptcy standard.  The presumption is that the debt is dischargeable.

So, what kind of bad behavior may keep a debt from being discharged.

Fraud is first

Debts that are created as a result of fraud, misrepresentation or false pretenses aren’t subject to being wiped out.  That’s §523(a)(2).

Note that the exception looks at the transaction at the being.  The debtor may have behaved badly, resisting payment, after a debt was created and still get it discharged.  The statute focuses on money, property, services to the extent obtained by fraud.

If the false statement is one about the debtor’s financial condition when the transaction is going down, that statement must be in writing to preclude discharge.

Breach of fiduciary duty survives

The second clutch of bad behaviors that can’t be discharged involve breach of fiduciary duty, embezzlement and larceny. §523(a)(4).

Embezzlement and larceny, which is a kind of theft, are easy to understand.  But bankruptcy law has a narrow definition of who is a fiduciary for these purposes.

For breach of fiduciary duty to be nondischargeable, the duty must arise under an express trust.  So trusts that are created by law to further equity or prevent undue enrichment don’t fall under this subsection.

One of the first judges I practiced before used to say that under California law, everyone is a fiduciary for everyone else.  But not in his federal court.

Willful and malicious injury gets no discharge

Debts that are grounded in intentional injury to person or property live on after bankruptcy. That’s §523(a)(6).

There’s a huge body of law tussling with the meaning of “willful” and “malicious”.  And the plot thickens when you realize that the protections for creditors created by this subsection is greater in Chapter 13 than in Chapter 7.

In Chapter 13 a debt for damages for personal injury is non dischargeable if it results from either willfulness or malice!  Damage property willfully or maliciously and you’re OK in Chapter 13.

Timing is everything

There’s a timing issue for both creditors and debtors in these three discharge exception cases.

Debtors facing state court litigation may want to file bankruptcy before trial of the matter.  Findings of fact made in a state court trial will be entitled to finality in a subsequent bankruptcy trial on the issue of dischargeability.  So,  suffer an adverse finding in state court and you’re stuck with that finding.

But since the standards of what is fraud or false representations is slightly different in federal law than in state law, you may have a dispute about whether the finding is really on the same issue that the bankruptcy court is focused on.

It may be cheaper to try the issue once, in bankruptcy court, than risk having to defend yourself twice in state court, then bankruptcy court.

Creditors must be diligent once a bankruptcy case is filed, to meet the filing deadline for challenging the discharge of their debt.  Generally, the bankruptcy court sets a deadline 60 days after the date set for the first meeting of creditors by which challenges to dischargeability must be filed.

Miss that deadline for one of these kinds of debts and you’re out of luck.  The debt will be discharged regardless of the merits of the challenge you could have brought to exclude it from discharge.

 

 

The automatic stay is the signature feature of American bankruptcy.  Just by filing a bankruptcy case, your creditors are instantly prohibited by a federal court injunction from actions to collect a debt from you or your assets.

But, there’s a whole list of actions that aren’t included in the stay;  we forget that some kinds of lawsuits with a financial aspect get excluded from the stay.

The automatic stay applies in all bankruptcy cases (unless you’ve filed more than two bankruptcy cases in the last year).

Instead of the usual rule, outside of bankruptcy, where you have to prove that you are entitled to an injunction, bankruptcy grants the injunction automatically, just for filing.  The burden is on creditors to take action to extract themselves from the stay.

The list of exceptions is long and many of the excluded actions are very specific and technical. See 11 U.S.C. 362(b).  But there are some biggies there too among the exceptions.

Here are the ones of most interest to the typical bankruptcy filer.

Family law issues

Actions to establish or modify support are not stayed.  Neither are proceedings involving custody, marital status or paternity.

Support can be collected from property that isn’t “property of the estate” without violating bankruptcy law.  And state issued licenses can be suspended for failure to pay support.  That’s subsection (b)(2).

Law enforcement

The stay doesn’t stop criminal prosecutions.  Nor does it stop the enforcement of actions grounded in the public health and safety; that’s called the government regulatory exemption.  More about that below.

Tax administration

Your state tax folks and the feds can legally demand the filing of a tax return; audit returns you’ve filed; and assess taxes they claim you owe.

Government can’t, however, record liens or levy assets to collect a tax you owed when you filed bankruptcy.

Private rights

A landlord under a lease that expired according to its terms before the bankruptcy case was filed can proceed to get possession of non residential property.

Civil contempt sanctions

Collection of court-ordered sanctions for misconduct in litigation is not prohibited by the stay.

The 9th Circuit Court of Appeals recently decided that the public’s interest in making parties to a lawsuit play by the rules outweighed the sanctioned party’s interest in getting complete protection from collection action.  The fact that the sanctions might be payable to the other party to the litigation didn’t change the state’s interest in enforcing its sanction for bad behavior in court.  The case is Dingley.

More

Automatic stay in lawsuits

What litigators must know about bankruptcy

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