Problems with creditors and debt collectors.

What happens if I don't pay my bills?

Although everyone wants to pay his or her debts, and wants to pay them on time, it is not always possible. Sometimes there just is not enough money to go around. If you find yourself in this position, knowing the law regarding debt collection can help you negotiate the best settlement with your creditors. Here is a brief look at what your creditors may do, and may not do, when you don't pay your debts.

Can I force a creditor to accept what I can afford to pay?

The amount you owe is determined by your agreement with the creditor. For example, if your car note is $387 a month, or your credit card minimum is a certain percentage of what you owe, or the hospital bill is $1,200, that is the "legal" amount you owe. You cannot force the creditor to take anything less than that amount. If you pay less, you are "in default" and the creditor can take steps to collect the full amount owed.

This does not mean, however, that you should not try to get the creditor to agree to take less. In many cases, the creditor will work with you and accept the amount you can afford to pay. The creditor simply wants to be paid, he does not want a lawsuit. If the creditor knows you are making a good faith effort to pay as much as you can, he usually will be willing to accept the lower payments.

I am just a co-signer. Doesn't the creditor have to go after the other party first?

Assuming the documents you signed made you a co-signer, and that you were given whatever notice the contract required, your liability is the same as the party you agreed to help. The bottom line to being a co-signer is that if the other person does not pay what is owed, you must. If you do not, you may be sued and the debt will be reported as part of your credit report. There is no requirement that the creditor try to collect from the other party before coming after you.

Co-signing for another person is a very serious matter. Don't co-sign just to "help out" a friend. This may be a very costly favor.

Am I responsible for my friend's mis-use of my credit card?

As far as the law is concerned, this matter is between you and your friend. When you authorize another person to use your credit card, you became responsible for whatever amount she charges. The fact that she kept the card longer than you expected, or charged more than you thought she would, does not matter. You owe the amount of the charge.

Your friend, however, has an obligation to repay you. If she does not pay, you can file a claim against her in small claims court.

Can the creditor just take my car or furniture?

As a general rule, no creditor may take your property without first going to court and suing you. After you are sued, a creditor may take certain property. A creditor may not take "exempt" property. The Texas exemption law is discussed in the next section.

In some cases, however, a creditor may have the right to simply repossess your property when you do not pay. To have this right, you must have signed what is called a "security agreement," which in essence states that if you default the creditor may take certain property to cover the debt. The most common instance in which you give a security interest is when you buy a car. When you sign the promissory note for the car you also signed a security agreement. This agreement gives the lender the legal right to repossess your car, if you do not pay as promised.

Unless you have signed a security agreement, a creditor may not just take back the property. For example, suppose a furniture store sells you some furniture and you agree to make monthly payments. You do not sign a security agreement. If you stop paying, the store does not have the right to simply take the furniture back. The store would have to sue you and would be treated like any other creditor.

How soon may a creditor repossess a car?

Unless the parties otherwise agree, there is no time that a lender must wait before a repossession. Basically, all that the law requires is that you be in default, the lender comply with any conditions in your agreement, and the lender act in good faith.

In most cases, your agreement will define default and spell out the rights of the lender. Usually, there is a short grace period when you may pay without risk of having your car repossessed. After that grace period, the decision to repossess is left to the lender. There are no legal limits on how long the lender must wait before repossessing your car. It must, however, act in good faith. For example, if the lender knows you are on your way over with the payment, it cannot take your car simply to collect the repossession fee.

My car was repossessed, how do I still owe money?

When you borrow money, you agree to pay back a certain sum. If you give the creditor a "security interest" in your property, (discussed above) you permit the creditor to take the property if you default on your loan. The creditor, however, then has two options.

First, the creditor may keep the property and call it even. If the property is worth about the same amount as the debt, or more, the creditor will choose this option.

On the other hand, if the item is worth less than the debt, as in your case, the creditor may sell the property, and apply the proceeds to the debt. You are then responsible for the "deficiency," that is the difference between what you owed and what was obtained at the sale. In addition, you will also owe the cost of the repossession and the sale.

For example, assume you bought a car for $10,000 and made a $2,000 down-payment. You then financed the remaining balance of $8,000. After making payments totaling $2,000 you defaulted and the car was repossessed. The cost of the repossession was $500 and the car was sold for $4,000. You still owe the creditor $2,500. ($8,000-$2,000+$500-$4,000) the creditor has the right to use whatever collection methods are generally available to try to collect the remaining balance.

What legal limits are here on the conduct of debt collectors?

The answer to this question depends on how you define "debt collector." As a debtor, you don't care whether it is the creditor or a third party contacting you. But under the law, whether it is the creditor itself or a third party makes a big difference.

There are basically two debt collection statutes, a state law and a federal law. The state law applies to anyone trying to collect a consumer debt. The federal law applies to only a third party trying to collect a consumer debt for another. For example, if a representative of a store contacts you about a past due bill, the state law applies. If an outside collection agency contacts you about the department store bill, the agency is subject to the state law and the federal law.

A. Texas Debt Collection Act.

State law is more limited that federal law. (The federal law follows this section) It prohibits only certain conduct that is expressly stated to be wrongful. To determine whether a particular act or practice is prohibited under state law, you must review the provisions of the law. Here are the prohibitions under state law:

§ 392.301. Threats or Coercion

(a) In debt collection, a debt collector may not use threats, coercion, or attempts to coerce that employ any of the following practices:

(1) using or threatening to use violence or other criminal means to cause harm to a person or property of a person;

(2) accusing falsely or threatening to accuse falsely a person of fraud or any other crime;

(3) representing or threatening to represent to any person other than the consumer that a consumer is willfully refusing to pay a nondisputed consumer debt when the debt is in dispute and the consumer has notified in writing the debt collector of the dispute;

(4) threatening to sell or assign to another the obligation of the consumer and falsely representing that the result of the sale or assignment would be that the consumer would lose a defense to the consumer debt or would be subject to illegal collection attempts;

(5) threatening that the debtor will be arrested for nonpayment of a consumer debt without proper court proceedings;

(6) threatening to file a charge, complaint, or criminal action against a debtor when the debtor has not violated a criminal law;

(7) threatening that nonpayment of a consumer debt will result in the seizure, repossession, or sale of the person's property without proper court proceedings; or

(8) threatening to take an action prohibited by law.

(b) Subsection (a) does not prevent a debt collector from:

(1) informing a debtor that the debtor may be arrested after proper court proceedings if the debtor has violated a criminal law of this state;

(2) threatening to institute civil lawsuits or other judicial proceedings to collect a consumer debt; or

(3) exercising or threatening to exercise a statutory or contractual right of seizure, repossession, or sale that does not require court proceedings.

§ 392.302. Harassment; Abuse

In debt collection, a debt collector may not oppress, harass, or abuse a person by:

(1) using profane or obscene language or language intended to abuse unreasonably the hearer or reader;

(2) placing telephone calls without disclosing the name of the individual making the call and with the intent to annoy, harass, or threaten a person at the called number;

(3) causing a person to incur a long distance telephone toll, telegram fee, or other charge by a medium of communication without first disclosing the name of the person making the communication; or

(4) causing a telephone to ring repeatedly or continuously, or making repeated or continuous telephone calls, with the intent to harass a person at the called number.

§ 392.303. Unfair or Unconscionable Means

(a) In debt collection, a debt collector may not use unfair or unconscionable means that employ the following practices:

(1) seeking or obtaining a written statement or acknowledgment in any form that specifies that a consumer's obligation is one incurred for necessaries of life if the obligation was not incurred for those necessaries; or

(2) collecting or attempting to collect interest or a charge, fee, or expense incidental to the obligation unless the interest or incidental charge, fee, or expense is expressly authorized by the agreement creating the obligation or legally chargeable to the consumer.

(b) Notwithstanding Subsection (a)(2), a creditor may charge a reasonable reinstatement fee as consideration for renewal of a real property loan or contract of sale, after default, if the additional fee is included in a written contract executed at the time of renewal.

§ 392.304. Fraudulent, Deceptive, or Misleading Representations

(a) Except as otherwise provided by this section, in debt collection or obtaining information concerning a consumer, a debt collector may not use a fraudulent, deceptive, or misleading representation that employs the following practices:

(1) using a name other than the:

(A) true business or professional name or the true personal or legal name of the debt collector while engaged in debt collection; or

(B) name appearing on the face of the credit card while engaged in the collection of a credit card debt;

(2) failing to maintain a list of all business or professional names known to be used or formerly used by persons collecting consumer debts or attempting to collect consumer debts for the debt collector;

(3) representing falsely that the debt collector has information or something of value for the consumer in order to solicit or discover information about the consumer;

(4) failing to disclose clearly in any communication with the debtor the name of the person to whom the debt has been assigned or is owed when making a demand for money;

(5) failing to disclose clearly in any communication with the debtor that the debt collector is attempting to collect a consumer debt unless the communication is for the purpose of discovering the location of the debtor;

(6) using a written communication that fails to indicate clearly the name of the debt collector and the debt collector's street address or post office box and telephone number if the written notice refers to a delinquent consumer debt;

(7) using a written communication that demands a response to a place other than the debt collector's or creditor's street address or post office box;

(8) misrepresenting the character, extent, or amount of a consumer debt, or misrepresenting the consumer debt's status in a judicial or governmental proceeding;

(9) representing falsely that a debt collector is vouched for, bonded by, or affiliated with, or is an instrumentality, agent, or official of, this state or an agency of federal, state, or local government;

(10) using, distributing, or selling a written communication that simulates or is represented falsely to be a document authorized, issued, or approved by a court, an official, a governmental agency, or any other governmental authority or that creates a false impression about the communication's source, authorization, or approval;

(11) using a seal, insignia, or design that simulates that of a governmental agency;

(12) representing that a consumer debt may be increased by the addition of attorney's fees, investigation fees, service fees, or other charges if a written contract or statute does not authorize the additional fees or charges;

(13) representing that a consumer debt will definitely be increased by the addition of attorney's fees, investigation fees, service fees, or other charges if the award of the fees or charges is subject to judicial discretion;

(14) representing falsely the status or nature of the services rendered by the debt collector or the debt collector's business;

(15) using a written communication that violates the United States postal laws and regulations;

(16) using a communication that purports to be from an attorney or law firm if it is not;

(17) representing that a consumer debt is being collected by an attorney if it is not; or

(18) representing that a consumer debt is being collected by an independent, bona fide organization engaged in the business of collecting past due accounts when the debt is being collected by a subterfuge organization under the control and direction of the person who is owed the debt.

(b) Subsection (a)(4) does not apply to a person servicing or collecting real property first lien mortgage loans or credit card debts.

(c) Subsection (a)(6) does not require a debt collector to disclose the names and addresses of employees of the debt collector.

(d) Subsection (a)(7) does not require a response to the address of an employee of a debt collector.

(e) Subsection (a)(18) does not prohibit a creditor from owning or operating a bona fide debt collection agency.

B. Federal Debt Collection Act

The Federal Debt Collection law applies only to a person who is in the business of collecting debts or regularly collects debts for another. This includes businesses that are generally described as debt collectors or collection agencies. It can also include an attorney if the attorney regularly engages in debt collection. As noted above, a business collecting debts for itself is not subject to the federal law, and is regulated by only the Texas Debt Collection Act.

Federal law is much more restrictive than state law. Debt collectors subject to federal law are very highly regulated! Under federal law, a debt collector may not contact a debtor at unusual or inconvenient times. This includes calling before 8am or after 9pm. You also may not be called at work once the debt collector knows that your employer prohibits such calls. Finally, a debt collector may contact third parties only to try and locate you, and only if he does not disclose that he is trying to collect a debt.

Federal law prohibits any conduct that harasses or abuses you. Debt collectors also may not use false or misleading representations or an unfair act or practice. Although the federal law gives some specific examples of conduct that may violate its provisions, it prohibits any conduct that is abusive, harassing, false, misleading or unfair.

Finally, under federal law, a debt collector must provide you with notice that you have the right to dispute the debt, and if you do, the debt collector must take steps to validate the debt. A copy of that verification must be mailed to you.

A debt collector who violates the Federal Debt Collection Act may be liable for actual damages as well as a penalty of up to $1,000. Perhaps the most valuable right under federal law is the one discussed next.

Is there any way to stop a debt collector from bothering me?

If the person contacting you is a "debt collector," that is someone collecting a debt for another, there is a federal law that will help. Under the Federal Debt Collection Law, if you send the debt collector a letter insisting that he stop contacting you, he must stop. The law permits just one more letter informing you what additional steps may be taken. I should point out that stopping the informal collection efforts will not stop a lawsuit. If you want to avoid a lawsuit, the best thing to do is try to work out some form of a payment plan that you can afford.

When do I no longer legally owe a debt?

Actually there is no time limit on how long you "owe" a debt. Until it is paid, it exists. On the other hand, there are time limits on the steps that may be taken to collect it.

For example, a lawsuit generally must be filed within four years of the time you default. If the person waits longer, they will be "barred" from filing a suit. Also, negative information on your credit report becomes obsolete after seven years and generally may not be reported.

There is no time limit, however, regarding when a creditor must stop asking you to pay. Also, as long as you do not pay, that creditor does not have do business with you.

If I am sued and lose, what happens next?

If you are sued and the creditor prevails, the court will issue a "judgment" against. This may be filed with the county clerk's office, and will become public record. A judgment stays "alive" for ten years, but may be renewed indefinitely.

Once the creditor has a judgment, he may take steps to try and enforce the judgment by taking some of your property to satisfy the judgment. Basically, the creditor may take what the law calls "non-exempt" property. Exempt property is property that the legislature has determined a debtor may keep, even if he is sued and loses. As the next few sections discuss, there are several different kinds of exempt property.

Can a creditor take my home?

As discussed above, once a creditor has a judgment he may take non-exempt property to satisfy it. By simply filing an "abstract of judgment," the creditor gets a lien on non-exempt real estate. Under Texas law, however, your homestead is "exempt." This means that a creditor may not force you to sell your home. The only exceptions to his rule are creditors who loan you money to buy, build or repair the home, creditors who make a "home equity loan," and certain government entities collecting taxes. Here is what the Texas Homestead Exemption law states:

§ 41.001. Interests in Land Exempt from Seizure

(a) A homestead and one or more lots used for a place of burial of the dead are exempt from seizure for the claims of creditors except for encumbrances properly fixed on homestead property.

(b) Encumbrances may be properly fixed on homestead property for:

(1) purchase money;

(2) taxes on the property;

(3) work and material used in constructing improvements on the property if contracted for in writing as provided by Sections 53.254 (a), (b),and (c);

(4) an owelty of partition imposed against the entirety of the property by a court order or by a written agreement of the parties to the partition, including a debt of one spouse in favor of the other spouse resulting from a division or an award of a family homestead in a divorce proceeding; or

(5) the refinance of a lien against a homestead, including a federal tax lien resulting from the tax debt of both spouses, if the homestead is a family homestead, or from the tax debt of the owner.

(c) The homestead claimant's proceeds of a sale of a homestead are not subject to seizure for a creditor's claim for six months after the date of sale.

§ 41.002. Definition of Homestead

(a) If used for the purposes of an urban home or as both an urban home and a place to exercise a calling or business, the homestead of a family or a single, adult person, not otherwise entitled to a homestead,shall consist of not more than 10 acres of land which may be in one or more contiguous lots, together with any improvements thereon.

(b) If used for the purposes of a rural home, the homestead shall consist of:

(1) for a family, not more than 200 acres, which may be in one or more parcels, with the improvements thereon; or

(2) for a single, adult person, not otherwise entitled to a homestead, not more than 100 acres, which may be in one or more parcels, with the improvements thereon.

(c) A homestead is considered to be urban if, at the time the designation is made, the property is:

(1) located within the limits of a municipality or its extraterritorial jurisdiction or a platted subdivision; and

(2) served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality:

(A) electric;

(B) natural gas;

(C) sewer;

(D) storm sewer; and

(E) water.

(d) The definition of a homestead as provided in this section applies to all homesteads in this state whenever created.

What personal property may a creditor take?

Texas law also protects certain personal property, Under the law, some property is designated as "exempt." Exempt property may not be taken by your creditors, even if they sue you and win. here is the Texas Personal Property Exemption Statute.

42.001. Personal Property Exemption

(a) Personal property, as described in Section 42.002, is exempt from garnishment, attachment, execution, or other seizure if:

(1) the property is provided for a family and has an aggregate fair market value of not more than $ 60,000, exclusive of the amount of any liens, security interests, or other charges encumbering the property; or

(2) the property is owned by a single adult, who is not a member of a family, and has an aggregate fair market value of not more than $ 30,000, exclusive of the amount of any liens, security interests, or other charges encumbering the property.

(b) The following personal property is exempt from seizure and is not included in the aggregate limitations prescribed by Subsection (a):

(1) current wages for personal services, except for the enforcement of court-ordered child support payments;

(2) professionally prescribed health aids of a debtor or a dependent of a debtor; and

(3) alimony, support, or separate maintenance received or to be received by the debtor for the support of the debtor or a dependent of the debtor.

(c) This section does not prevent seizure by a secured creditor with a contractual landlord's lien or other security in the property to be seized.

(d) Unpaid commissions for personal services not to exceed 25 percent of the aggregate limitations prescribed by Subsection (a) are exempt from seizure and are included in the aggregate.

§ 42.002. Personal Property

(a) The following personal property is exempt under Section 42.001(a):

(1) home furnishings, including family heirlooms;

(2) provisions for consumption;

(3) farming or ranching vehicles and implements;

(4) tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession;

(5) wearing apparel;

(6) jewelry not to exceed 25 percent of the aggregate limitations prescribed by Section 42.001(a);

(7) two firearms;

(8) athletic and sporting equipment, including bicycles;

(9) a two-wheeled, three-wheeled, or four-wheeled motor vehicle for each member of a family or single adult who holds a driver's license or who does not hold a driver's license but who relies on another person to operate the vehicle for the benefit of the nonlicensed person;

(10) the following animals and forage on hand for their consumption:

(A) two horses, mules, or donkeys and a saddle, blanket, and bridle for each;

(B) 12 head of cattle;

(C) 60 head of other types of livestock; and

(D) 120 fowl; and

(11) household pets.

What is garnishment? Can my wages be garnished?

First, in most cases, a creditor can not get a writ of garnishment without first going to court and getting a judgment against you. Once a creditor has a judgment he may use what is called a writ of garnishment to get money or property that you are "owed" by another person. For example, when you put money in a bank account the bank has an obligation to return that money to you. In effect, they are a debtor and owe you the money. A creditor with a writ of garnishment may garnish these funds and take them to satisfy the judgment.

Similarly, when you are an employee, your employer owes you your wages. As a general rule, however, there is no wage garnishment in Texas. The Texas Constitution makes current wages "exempt" property. There are exceptions, however, for child support, student loans and certain taxes. In other words, the average creditor who sues you and gets a judgment may not garnish your wages. (I also should point out that a threat by a debt collector to garnish your wages, when he has no legal right to do so, probably violates the Federal Debt Collection Act.)

Finally, note that only "wages" are exempt. Many people are self employed and do not work for wages. For example, if you are a self employed repair person, the money you are owed by your customers is not wages. If the debtor sues you and gets a judgment, he may use what is called a writ of garnishment, to take the money you are owed by your clients.

Can my creditors take my IRA?

As I noted above, without first suing you, a creditor generally may not just take any of your property. Even after you are sued, however, Texas law makes a qualified retirement plan "exempt" property. this means that a creditor may not take your IRA, even if he has successfully sued you.