Module #2B (somewhat)

When Credit Goes Bad

After signing a contract or loan/debt agreement, you have a:

3-day Rescind Period – “Cooling off” period. Every debtor has the right to cancel the new loan or a purchase within 3 days (buyer’s remorse)

I.What to do if it is THEIR (the creditor’s) fault?

What RECOURSE (ways to remedy unfair treatment)

do you have asa debtor if the creditor made an error?

  • Dispute charges (if an error was made)– within 60 days
  • Send a letter to the creditor explaining the problem
  • FAIR CREDIT REPORTING ACT – if you are denied a loan, this gives you the right to see your credit file (for free) within 30 days of being turned down for the loan
  • THE TRUTH IN LENDING ACT – Lenders are required to tell you IN WRITING the true interest rate & total finance charge before you sign the application; can’t mislead in false advertisements
  • FAIR CREDIT BILLING ACT – applies to open-end credit only; protects consumers who have billing disputes; creditors don’t charge interest on the disputed amount until it’s resolved

A.CONSUMER ADVOCACY GROUPS

  • **Better Business Bureau (BBB) – promotes responsible business practices
  • **Consumers Union– Publishes Consumer Reports; An organization that tests & gives information about goods & services

For the most up-to-date info, go to:

This is a service of the Washington State Library

B.FILE A LAWSUIT

1.Small Claims Court (amount in question must be under $5,000)

  • File a “complaint” against the party, “serve” the complaint via certified mail, appear before a judge, who hears both sides of the story & makes a “ruling”
  • Can go to Small Claims Court for suits against individuals, too

2.For amounts higher than $5,000, contact an attorney

II.What to do if it is YOUR fault? – Going “delinquent” is overdue debt

1

  • 1st payment DEFAULT
  • Universal Default Clause– states that if you are late on your payments, the creditor CAN and WILL raise your interest rate (APR)

1

  • Contact creditors – see if they are willing to work with you
  • See if they will not assess late fees
  • Change the due date
  • Make payments every other month
  • Re-finance the loan

1

A.Reasons you may get into debt trouble:

1.Spouse’s debt is your responsibility

2.Illness, then loss of job because of it

3.Divorce

4.Business losses

5.Living beyond your means (trying to keep up with the Jones family across the street)

B.Create a plan:

1.Only make purchases when you have the CASH to do so

2.Put “plastic” away

3.Close unused accounts, keeping only 1-3 major credit cards (MasterCard or Visa)

4.Pay off credit balances with this in mind:

  • Look at an account with the lowest balanceOR the highest APRtriple or quadruple payments to pay it off first.
  • Make minimum payments on everything else.
  • When one card balance is paid to 0, start on another balance (next lowest balance or card that has the highest interest rate).

C.Collection Calls & Letters

1.The Fair Debt Collection Practices Act (FDCPA) – Protects the debtor from being harassed by the collector (creditor)

  • Can’t swear at you
  • Must call between reasonable hours (8 a.m. to 9 p.m.)
  • Can’t call excessively in a day or in a week (once per day, 2-3 days per week)
  • Can’t threaten debtors
  • Can’t contact a debtor if they have retained an attorney and/or have a bankruptcy case number
  • Can’t collect (pay) more than what is owed – can’t add more to your debt, unless it’s just interest
  • Can’t send the debtor misleading letters to be from a court of law or government agency

Problems with a creditor can be reported to the

Federal Trade Commission (FTC)

If the creditor has unsuccessfully attempted to collect on your outstanding debt, they may send it to a “collection agency.”

Shows up on credit report that it was “sent to agency”

Now, more fees will be attached to your total debt

2.Consumer Credit Counseling (CCCA)

  • Association of Independent Consumer Credit Counseling Agencies (AICCCA)
  • They help work out a budget for you or create re-payment plans by working with your creditors (ask them to accept a lower monthly payment, lower interest rate, etc.)
  • CCCA makes you tear up all of your credit cards!!

D.LEGAL ACTION AGAINST YOU! – Ms. Daniels specialty! ;)

1.REPOSSESSION of cars & other portable goods – after 90 days of no payments being made, cars stand a good chance of getting repossessed.

Voluntary Repossession vs. Involuntary Repossession

2.FORECLOSUREon houses and other non-portable goods – bank takes back the property, changing the locks.

3.After property is back in the bank’s possession, the house or the car goes to (sheriff’s) auction.

  • Whatever is owed on the loan less the auction price = amount still owed by the debtor
  • Debtor still must pay the remaining balance (includes repo fees) – can negotiate a settlement amount OR wait a couple years (when you want another house or car) then pay it off

For example, a car repossessed on Nov. 15th:

Nov. 15thOutstanding car loan balance:$12,500

Nov. 25thCar sold at auction:- 10,000

Nov. 26thRemaining debt still owed: 2,500

Nov. 30th:The $2,500 gets charged off or written off as a “profit & loss write off” & shows up as such on your credit bureau as a debt YOU STILL OWE

Dec. 1st:The “recovery department” in a bank attempts to collect the $2,500 from you, coming up with monthly payment amounts or a settlement amount

If no arrangements are made, the bank will sue you to get a “judgment”

JUDGMENT– this is a ruling by the courts that say you must pay this debt

1.LIEN: Once a judgment is obtained, the bank can put a lien on any property you own. The property cannot transfer to a new owner until this debt is paid off first.

  • Lienholder was Daniels

2.GARNISHMENT: when bank contacts your employer & legally has the amount deducted from your paycheck & sent to the creditor/bank (only a portion in each paycheck can be deducted—up to 60%)

3.ATTACH BANK ACCOUNTS – amounts can be deducted from savings & checking accounts

Look in the fine print: “Right to offset accounts”

Once you PAY OFF (or settle) the remaining $2,500, your credit bureau will reflect a 0 (zero) balance owed, but it will STILL say: “Charged off Repossession—Paid in Full” for 7 years after the final payment was made

E.BANKRUPTCY– last resort when too deeply in debt!

  • Must have been enrolled in some sort of Credit Counseling for at least 6 months prior to being allowed to file bankruptcy (as of 2005)

1.Chapter 7Liquidation(straight bankruptcy)

  • All unsecured debt goes away (it gets “discharged” or dismissed after final court date & assets are sold)
  • Must turn in assets of other debt (the car, if you have a car loan)
  • Must show a very low income or be unemployed
  • Must go to financial counseling
  • Can have “exemptions” that will allow you to keep your house and car – varies state-by-state (according to bankruptcy laws)

2.Chapter 13“Wage Earner” Plan

  • Debtor still has a good source of steady income
  • You want to keep your assets, so work out a payment plan to re-pay the debts (smaller payments, lower interest) over a 3-5 year period
  • Judge makes the final decisions on any asset that MUST be turned back to the creditor & how much all creditors will get paid.
  • Since creditors are re-paid, they are happier 
  • Since you are repaying most of your debt, it looks “better” on your credit bureau
  • Creditors must stop accruing interest & assessing late fees on the account at the time of the filing

New laws in 2005: Makes it harder to file Chapter 7 as they want debtors to HAVE to pay back most/some of their debt; so, more Chapter 13 filings are occurring now.

DEBT that still must be paid off in a Chap. 7 or Chap. 13 bankruptcy (these are NOT dischargable/dismissable):

1

  • Student Loans
  • Child Support
  • Spousal Support (alimony)
  • Fines & penalties from crimes
  • Tax debt (IRS)

1

Means Test – Determines whether you qualify to file Ch. 7 or a Ch. 13 – see Activity One Worksheet!

Bankruptcies stay on credit bureaus for at least 10 years!!!

1