“Should I File for Bankruptcy?” Part 2: Outside Indicators of Excessive Indebtedness
While you should definitely have a troublesome amount of debt before you file bankruptcy (if you are curious how much, check out Part 1 of this series!), factors outside our direct control can also push us into the “should think about filing category.” Your creditors, the people who own your debts, can do a few different things to try to collect. The process can be seriously stressful, but it can also provide clear signals that it’s time to get those debts discharged.
In this post I will describe four categories of creditor actions. First, creditor harassment. Second, collection lawsuits. Third, levies and garnishments. Fourth, foreclosures and repossessions. Then, I’ll talk about how filing bankruptcy can put a stop to all of it right away, even before discharge. Finally, if you’d like to skip the wall of text, there is a (more) succinct list of specific indications that it is time to talk to a lawyer.
Before I start, though, I should mention that this post is not legal advice about your specific situation. If you think any of this applies to you, I really recommend that you talk to an attorney.
Creditor Harassment
When you have multiple debt collection agencies calling at all hours of the day, every ring of your phone turns into a moment of panic. It’s not good for your quality of life, and is a big sign that it’s time to consider ridding yourself of your debts.
The process of collecting overdue debts is often called “dunning.” Creditors or hired collectors will make dunning calls or send dunning letters or emails on a regular schedule. The process tends to get more and more aggressive as the debts get older. Eventually some collectors will resort to frankly unethical and, in some cases, illegal tactics. Most will start getting stern in their tone and moralistic in their wording. A few will misrepresent or outright lie and tell you that you will owe even more than you do, or that you will lose your home even when they don’t have a mortgage. They will call multiple times a day, or very early in the morning or late at night. Even your family, friends, and employer can be targets of harassment. The worst ones will threaten to send the police to arrest you if you don’t pay.
Fortunately, you do have rights. First, in Minnesota at least, you cannot be arrested just for not paying a debt. It is not a crime to not pay off loans you took out legally, and most of the country has outlawed debtors’ prisons since the mid-1800s. That said, if the court orders someone to fill out a “financial disclosure form,” or to do anything else, and they disobey, they can be arrested for contempt of court.* It’s a fine line, but the point is that creditors can’t just call the police and have you arrested.
There are also statutory restrictions on how debt collectors can contact you to try to collect. The most important is the Fair Debt Collection Practices Act (FDCPA).† The FDCPA is a federal law that prohibits third-party debt collectors from using unfair methods to collect from you.‡ Collectors have to tell you that they are collectors, and that you have the right to dispute the validity of the debt. They are not allowed to call at odd hours, misrepresent the amount you owe or threaten to have you arrested. If a collector knows you are represented by a lawyer, it cannot contact you directly, but has to go through your attorney.¶ Just as important is the fact that if you can prove a collector violated these restrictions you can recover any damages incurred by the violation, plus $1,000.00 per violation and any attorney’s fees you might have paid.**
The main caveat with the FDCPA is that it only applies to third party debt collectors and subsequent debt buyers (i.e., not the lender you originally borrowed from). Fortunately, this is where hiring an attorney can be a lot of help. Though original lenders aren’t legally required to stop contacting you, most will do it anyway when they know you have a lawyer and are planning to file bankruptcy. They realize anything they do from that point on will be a waste of time, effort, and, most importantly, money. And, of course, there’s the trump card of bankruptcy: the automatic stay, discussed below.
Collection Lawsuits
Being sued to collect a debt is another indicator that it might be bankruptcy time. When their efforts fail to get you to give up your money voluntarily, some creditors will resort to suing. Though sometimes they are going after invalid debts (also something to talk to a lawyer about) in many cases they do have the right to do so. When the courts are involved, bankruptcy is probably an option to consider.
To begin a collection lawsuit a plaintiff - the person or business doing the suing - will sometimes send a “demand letter” first. The letter will essentially say, “you owe me X amount of money, pay now or I will sue you.” They don’t have to though, and it’s possible the first notice you will get is being served - either by a process server or in the mail - the Summons and Complaint.†† They always come together, and are, collectively, the legal documents that start a lawsuit.‡‡
If you don’t respond to the Complaint within the time limit, the plaintiff can go to the court and ask for a “default judgment.”||| A default judgment means the plaintiff wins whatever they asked for even though you never had a chance to present your case. If it happens, you will receive another notice from the court that judgment has been entered.¶¶ At that point there is not much you can do to contest the debt’s validity unless you have a really, really good excuse for not answering.***
Fortunately, a default judgment, or even losing a case after a full trial, doesn’t just immediately transfer your money or property to the plaintiff. They still have to get an “execution of judgment” telling the sheriff to go get cash from you if you don’t give it up voluntarily.††† More importantly, a judgment is still just another unsecured debt. Once you file bankruptcy it, too, can probably be discharged.
Levy and Garnishment
After a court has entered judgment a winning plaintiff, now a “judgment creditor,” still has to collect on that judgment. If the judgment debtor doesn’t agree to hand over a check, the creditor will have to obtain an “execution of judgment” and use it to take the money from the debtor involuntarily. The process is called either “levy” or “garnishment,” and when it starts you should immediately look for legal help.
“Garnishment” you may have heard of, hopefully not from experience. It’s where a judgment creditor sends a notice to a debtor’s employer, telling them they are required to hold back a portion of the debtor’s paycheck and pay it to the creditor.‡‡‡ Your employer is required to keep doing so until the creditor lets them know the debt is paid, or some other legal process stops it. The creditor can only keep a portion of the paycheck, but if you are already struggling to keep up with your bills, it can be debilitating.
“Levy” is similar, but the notice goes to your bank.|||| The creditor is only entitled to take a percentage of the funds in your accounts, but the initial notice can result in the bank freezing all of your money. Not great.
Fortunately there are restrictions on how much a creditor can garnish or levy (sometimes both!). The restrictions are more or less the same as the exemptions you are entitled to claim when you file bankruptcy. In fact, they come from the same body of law!¶¶¶ If you have low enough income, your entire paycheck is exempt. Same if you receive “assistance based on need” from any government agency. The money in your bank account should also be exempt for a few weeks. Even if you have a higher income, a creditor can only take up to 25% of your paycheck or bank account. And, of course, filing bankruptcy can clear it right up.
Foreclosure and Repossession
If you have a mortgage or a car loan, you probably know that if you don’t make payments your lender will eventually take back the thing you purchased with the money you borrowed. Collateral that can be recovered that way is also referred to as “secured” property. When you take out a mortgage or borrow money for a car or other large purchase you grant the bank the right to repossess if you don’t pay on time.
If your debts have been keeping you from making payments on your home or car loan and your bank has started foreclosing on the mortgage or trying to repossess the car, it is definitely time to think about bankruptcy. While you won’t be able to both discharge the loans and keep the property, filing will keep you in your home and driving your car while the case proceeds. Plus, if your unsecured debts are discharged you will have more room in your budget to make payments on your secured loans and eventually catch up. Many lenders are willing to work out deals to avoid repossession or foreclosure because they believe they will make more money in the long run.
Unfortunately, bankruptcy doesn’t stop residential evictions the way it does mortgage foreclosures (even though it does apply to commercial evictions, which doesn’t seem very fair to me, but that’s another subject for yet another post).¶¶¶ Still, it’s worth talking to an attorney about your legal options if you’re being evicted. Like I said, Getting a discharge could help you free up some monthly cash for rent, and many landlords are open to negotiating a deal for back rent to keep you in your home and avoid having to find a new renter.
Instant Relief: The Automatic Stay
So far this post might seem like a dirge of financial doom and gloom, so this seems like a good time to talk about the good news a bankruptcy filing brings with it. As soon as you file, without the court even having to do anything, the “automatic stay” goes into effect.**** The stay is a type of restraining order that applies to almost all collection activities. It will stop a bankruptcy foreclosure or a car repossession in its tracks. Creditors have to stop calling, writing letters, suing you, really doing pretty much anything to try to collect. If they violate the stay they are subject to penalties. It’s one of the aspects of the Code that is most helpful for debtors and is, by itself, almost a reason to think about filing bankruptcy. And did I mention that it’s automatic? Just filing, by itself, makes it happen, and nothing a creditor does after it starts is valid.
Examples
The wall of text above was probably a bit much, so here’s a summary checklist of things that should make you think about filing:
Creditors or collection agencies are sending you multiple letters and calling incessantly.
One or more creditors have sued or threatened to sue to collect a debt.
You were served a summons and complaint.
Someone has sued you for some other reason and the amount demanded is more than you can afford, especially if you think you might lose.
A court entered a default judgment against you or you lost a court case.
Your wages have been garnished.
Your bank account has been levied.
Your mortgage is being foreclosed.
Your car is in danger of being repossessed.
Other property is being repossessed.
You are being evicted for not paying rent.
If any number of the above have happened to you I strongly recommend that you talk to a bankruptcy or debt relief attorney. That recommendation is even stronger if you are at risk of losing your house or car, or can’t buy daily necessities because your debt payments are too high.
The main factor to consider in filing bankruptcy is your ability to make debt payments while also living your life. But each of the events above is a strong indicator that the amount of debt you have could be high enough to justify filing, and that you should at least talk to a professional about it. Get on it before your creditors get ahold of your money or stuff!
Footnotes. Citations? You’re welcome!
* Minn. Stat. §§ 588.01 subd. 3(3), 588.04(b).
† 15 USC § 1692, et seq. Minnesota has its own debt collection statute, but because one of its provisions is, essentially “violations of the FDCPA are also violations of this law,” I’ll focus on the Federal one.
‡ 15 USC § 1692a(6).
|| 15 USC §§ 1692c, 1692e(4).
¶ Id. § 1692c(c).
** Id. § 1692k.
†† Minn. Civ. Pro. R. 3.01, 3.02. Keep in mind that you don’t have to accept service by mail. If the Complaint comes by mail, it should include a “waiver of service.” Signing it and sending it in starts the clock on a default judgment. If you don’t accept service by mail, there’s a chance you will end up paying the costs of personal service, but we’re already way beyond the scope of this post, so I won’t go into the gory details.
‡‡ Now, in Minnesota we have something referred to as “pocket pleading,” which allows a plaintiff to serve the Complaint on a defendant without filing it in court. These days, plaintiffs must file it within a certain time period, but it’s worth remembering that even if you don’t find the case on the court’s official docket the complaint still needs to be dealt with.
||| Minn. Civ. Pro. R. 55.01.
¶¶ Minn. Civ. Pro. R. 77.04.
*** See Minn. Civ. Pro. R. 60.02.
††† See Minn. Stat. § 550.01, et seq.
‡‡‡ Minn. Stat. § 550.136. The Statutes use the term "levy upon earnings" but the traditional term, "garnishment" is more commonly used by most practitioners.
|||| Minn. Stat. § 550.135 subd. 3.
¶¶¶ See Minn. Stat. § 550.37.
**** 11 U.S.C. 362(b)(22).
†††† 11 U.S.C. § 362(a).