Friday, January 16, 2015

Debtor's Rights


By far, the most common questions I receive concern Creditor's Rights (what Creditors can, and cannot do, and what Debtors can do about it).  It is only by understanding Creditor's Rights that Debtor's Rights may be understood. 


      Judgment Proof means that a Creditor cannot successfully sue you and obtain a Court Order stating that you owe a certain amount to a certain Creditor.  This Order is called a Judgment and entitles the Creditor to exercise five primary rights:

      (1)  writ of garnishment (taking 25% of your net pay for 60 days, then renewing the writ indefinitely, to collect up to the amount of the Judgment at 12% plus costs of collection),

      (2) writ of attachment (seizure of  bank accounts, property in your home, or any other property you own),

      (3)  liens on real property (above the amount of the homestead exemption in your primary residence only - otherwise the lien is not limited under the Washington State exemptions),

      (4)  service of a subpoena to appear at a Judgment Debtor exam, bring documents, and testify under oath about your financial affairs, and

      (5) reporting the Judgment to the credit bureaus, which will interfere with obtaining credit on acceptable terms for a house or vehicle.

      Judgment Proof status applies to debts in which the date of last activity on the account (typically a payment or promise to pay) is older than the 6-year statute of limitations.  If you have received a discharge in Chapter 7 or Chapter 13 bankruptcy, and the debt existed prior to filing and was dischargeable, then you have Judgment Proof status.  If you can prove that you paid the debt in full, you have Judgment Proof status.

      It is important to note that the 6-year Statute of Limitations barring entry of a Judgment, does not affect the right of Credit Bureaus to report negative credit information for 7-years or a Chapter 7 Discharge for 10 years.


      Collection Proof status is more common.  Collection Proof means that a creditor can successfully sue you and obtain a Judgment, but that Judgment may not be currently collectible because the Debtor's income is exempt (Social Security, Social Security Disability, Pensions, Unemployment, and IRA or 401(k) mandatory distributions).  A Judgment is valid for 10 years, and may be renewed for another 10 years, so sometime over the 20-year period a Debtor may receive an inheritance or other windfall that makes the Judgment collectible.

      In addition to exempt income, Collection Proof status also requires the value of the Debtor's assets to be less than the available exemption amounts (Exemption amounts are the value of property Debtor's get to keep in Bankruptcy).  For example, under the Washington State Exemptions the homestead exemption is $125,000.  If a Debtor has more equity than that, then a Judgment may be collected against that Debtor.

      Collection Proof Status also applies to Debtors with below median income for their family size (not just exempt sources of income which are always below median amounts), with only exempt assets, who are eligible for Chapter 7 or Chapter 13 with no payment to unsecured creditors.

      Therefore, it is important to note that a prior bankruptcy discharge may temporarily negate Collection Proof Status.  For example, a Chapter 7 discharge may only be entered after 8 full years have passed since the filing of a previous Chapter 7 in which a Discharge was entered; this period is reduced to 4 years if the second case is a Chapter 13 Bankruptcy.


Below is a letter that Debtor's with exempt income can use by simply attaching a copy of a letter from Social Security with the Debtor's name on it and mailing to creditors.

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      By far the broadest category of debt status is Voluntary Payment status.  Voluntary Payment status simply means that the Debtor is choosing to pay.  This choice may be perfectly rational and reasonable under the circumstances or the choice may create needless suffering for Debtors.  The key is to have the awareness necessary to determine what type of choice you are making.

     The diagram below shows that 98% of all Chapter 7 cases filed in Washington State are no asset cases, meaning that Debtors keep everything they have and nothing is sold to pay creditors.  Less than 2% of Chapter 7 Debtors surrender any property to the Trustee.  All Judgment Proof and Collection Proof Debtors are also no asset Chapter 7 eligible (assuming no prior discharge), but they don't have to file to protect themselves from creditors.  Only a very small number of Chapter 13 filers repay 100% to unsecured creditors.  Most Debtors don't even repay at least 50% to unsecured creditors because they don't complete their Chapter 13 plans.
Historically, Chapter 7 is about 70% of all filings and Chapter 13 about 30%.

      Some Debtors are not aware of their rights (or chooses to waive them).  They may be willing to send a check to the Creditor (or someone purporting to be the creditor) even though the debt is much older than 6 years, even though the Debtor has only exempt income and assets, or even though the Debtor is eligible for a Chapter 7 Bankruptcy.  Debtors often continue to pay unsecured creditors in an exercise in futility, long after their debt-to-income ratio becomes higher than 50% (or 100% or even 200% or more), and any meaningful hope of repayment is long gone.

      A Collection Agency may call a Debtor and ask for voluntary payment even if the debt is much older than 6 years.  Debtors are not required to talk to Creditors on the phone, and they should not do so.  Debtors should never send money on the basis of a phone call alone.  Some debt collectors don't even own the debts they are trying to collect, they have stolen the account information.  If a Debtor pays such a debt collector, it will have no effect on the balance.

     Voluntary Payment status also includes Debtors who are making a rational choice to settle debts that they would have to pay in full, or at least pay a substantial percentage of the full amount, in Chapter 13 if they were unsuccessful in settling the debt.

     The vast majority of debts, including taxes, are paid voluntarily without any coercion by creditors. Most of time this makes sense for most people.  However, sometimes it doesn't.  My hope is that this information has assisted you in making the decision for yourself without undue pressure from Creditors.




 Below is a summary of the Fair Debt Collection Practices Act, and some common violations:

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      *** Telling Debtors that a warrant has been issued for their arrest, and they will go to jail if they don't pay.  This is false. 

      *** Telling Debtors they have to pay the debts of their deceased family members.  This is false. 

      *** Telling Debtors that they have to send a post-dated check.  This is false.

      *** Telling Debtors that the creditor has the right to call their employer.  They don't if you tell them that your employer prohibits phone calls from debt collectors.


      Debtor's can complain about violations of the Fair Debt Collection Practices Act to the Federal Trade Commission and/or the Consumer Financial Protection Bureau and the Washington State Attorney General at the links below.

      The best way to assert your rights as a Debtor, and protect yourself from abuse is to not speak to creditors by phone other than to ask them for a fax number so your lawyer (me), can fax a cease and desist letter.  Ask the creditor not to call back.  Hang up regardless of whether you get the fax number or not.

 14205 SE 36th St Ste 100
Bellevue, WA 98006-1553
Phone: 425-649-1190
Fax: 425-223-3197


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