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Evaluation Copy – Not for Sale or Redistribution
Table of Contents
Introduction....................................................................................................................i Chapter 1- The Credit Industry ........................................................................................1 Chapter 2 -- Settlement Strategy......................................................................................8 Step 1 - Assessment.....................................................................................................8 Step 2 – Identification..................................................................................................9 Step 4 – Determine Ownership and Litigiousness ......................................................10 Step 5 – Triage Based on Permanency and Litigiousness ...........................................11 Step 6 – Determine Who To Settle With ....................................................................11 Step 7 – Bank Some Settlement Money for Hard Cases Before Paying Easier Cases..13 When to Change Course ............................................................................................13 What if I do get sued?................................................................................................14 Basics of Negotiation.................................................................................................18 Mechanics of Settlement............................................................................................19 Chapter 3 – Bankruptcy.................................................................................................20 Chapter 4 - Nasty Surprises for Debtors.........................................................................29 Re-aging....................................................................................................................30 Renumbering .............................................................................................................30 Lurking .....................................................................................................................31 Report Poisoning .......................................................................................................35 Arbitration.................................................................................................................38 Distant Forum Abuse.................................................................................................39 Phantom Payments and other Limitations Busters......................................................41 Trojan Checks ...........................................................................................................46 Pretexting and Tattletale Insiders ...............................................................................46 Accidentally Becoming a “Ghost” .............................................................................48 Zombie Collections and Repeated Collections on the Same Debt...............................50 The Affidavit of Debt ................................................................................................51 The Perils of Being Unbanked ...................................................................................52 The Perils of Ordering Checks from Checksystems Affiliates ....................................56 The Perils of Banking Out of the Country..................................................................56 Fraudulent Transfer Laws ..........................................................................................57 Loss of State (and Federal) Tax Refunds ...................................................................57 Wage Garnishment ....................................................................................................58 Arrest and Jailing.......................................................................................................58 Badges on a Percentage .............................................................................................60 Judgment Revival ......................................................................................................60 Outrageous Judgment Interest....................................................................................61 Harassment................................................................................................................62 Inspection of Property ...............................................................................................64 Involuntary Bankruptcy .............................................................................................65 Lack of a Judgment Satisfaction ................................................................................65 Creditors who can’t be found.....................................................................................66
Evaluation Copy – Not for Sale or Redistribution After the Judgment .................................................................................................. 121 Conclusion .............................................................................................................. 122 Chapter 7 -- Bogus Solutions and other Pitfalls............................................................ 124 Debt Termination .................................................................................................... 124 Volenti Non Fit Injuria ............................................................................................ 124 Accord and Satisfaction ........................................................................................... 125 Debt Consolidation.................................................................................................. 125 Credit Counselors .................................................................................................... 125 Debt Settlement Companies..................................................................................... 126 Bankruptcy.............................................................................................................. 127 Attorneys................................................................................................................. 127 “Helpful” Collectors ............................................................................................... 128 Credit Repair Companies......................................................................................... 129 Credit Doctors ......................................................................................................... 129 Paper Tripping......................................................................................................... 130 Conclusion .................................................................................................................. 131 Glossary ...................................................................................................................... 133 APPENDIX – SAMPLE SETTLEMENT AGREEMENT ........................................... 138
Evaluation Copy – Not for Sale or Redistribution decision). Individuals who are having trouble with their finances find themselves suddenly in a dark forest of frightening shadows and spooky noises. They often have no clue about what to expect, what kind of time frames and deadlines they can expect, or who they will be dealing with. Some of the denizens of this world are more dangerous than others. It's hard to know who is who, or which noises must be taken seriously and which merely belong to phantoms of the past that have no teeth. They have few guides because they lack the money to pay for the advice they need, and those with the knowledge of how the forest ecosystem works will generally profit far more by working for the predators. I have been both predator and prey. I have sued hundreds of individuals for money damages, and I have myself been sued. I have also counseled hundreds of people for free on Internet message boards and my comments there have been read by thousands. Some individuals' problems are minor, but for a small minority the problems are in fact intractable and will be lifelong, although even they can often be mitigated. The situation is seldom as bad as it seems, and there are often simple solutions to the problems at hand. In some cases, there really isn't even a problem, or there is one that has a high likelihood of solving itself in a reasonable amount of time if the debtor can just be patient and avoid taking any action that would make matters worse. Mere uninformed inaction, however seldom leads to a good solution--there are always things that need to be known, there is usually something that can be done, and often something that must be done to improve the outcome. The trick is knowing whether, what, when, how, where and with whom the problem may be addressed. Over time I have learned who the players are and enough about how they operate and their respective strengths and vulnerabilities to help anyone lay out a game plan that will get them out of the credit breakdown lane and back into the mainstream, if not the fast lane. Those strategies may not always involve paying all the debt, or for that matter any of it. This book makes no attempt to judge you for having large debts or defaulted debts. Debts can come about through irresponsible behavior or through no fault of your own. There are debts that the bankruptcy laws of this country will wipe out for you, and those that will not be wiped out in bankruptcy. There are debts that have become too stale to pursue, and those that will never be stale. There are debts that can be adequately proven by the creditor and those that cannot. There are assets that a judgment creditor can take from you whether or not you file bankruptcy, and assets that cannot be taken from you even if you don't file bankruptcy. And bankruptcy is not the only way that individuals are relieved of debt--there is also the passage of time, the creditors' loss of key documents, and the debtors' ability to negotiate for reductions in principal and interest. Debt is a very personal matter, but you can expect that if you insist on your rights and you handle your debt problems intelligently, somebody you know who finds out about how your are doing things will find fault with your tactics or strategy--in fact you may have several somebodies telling you to do things that are all over the map, from paying everyone who sticks their hand out to trying to stiff everybody even in the face of strong evidence that the latter policy isn't quite working out. Don't be thin-skinned--they haven't walked a mile in your shoes--one of the best things you can do is spend some time on the
Evaluation Copy – Not for Sale or Redistribution Finally, I must include this disclaimer. Because I am not your attorney and you have not explained your situation to me, this book is not legal advice. In the event your financial predicament brings you into a circumstance involving a lawyer or a court, you are strongly urged to obtain competent legal counsel.
Mark S. Hankins
Evaluation Copy – Not for Sale or Redistribution First, it is important to understand that you do not have to actually be behind on your loan payments for bad things to happen. If you live in the “wrong” zip code, work in the “wrong” industry or otherwise seem to be a deteriorating credit risk (even if you've never missed a payment), your mortgage lender, auto lender or credit card company can sell your account to whomever they please, or just assign the servicing rights to another company. Often the sale or assignment is to a company whose methods are much less ethical than the one you have been doing business with. In 2002, the carmaker Mitsubishi brought in SST5 to service its leases and loans, and many consumers were surprised by SST's sharp practices. In other cases, mortgage lenders have sold their loans to companies like Ocwen or Fairbanks Capital, who seemed hell bent on driving the homeowner into foreclosure by "losing" payments and other tactics. In fact, in November 2003 the FTC made Fairbanks Capital disgorge $40 million it collected by failing to post consumers’ mortgage payments in a timely manner and charging consumers illegal late fees and other unauthorized fees.6 So in some cases your nonpayment is actually their game playing. When a consumer gets behind on his or her obligations, the creditor (or "original creditor"--"OC" for short) will turn first to its internal collections personnel. These are phone representatives who are trained to get the consumer to pay. Their phone training (what they do is called the "talk off"—which by law cannot begin until they reach the “right party”) is in overcoming consumers' objections and finding ways to encourage consumers to find untapped sources of funds so that the creditor is made whole, regardless of whether paying actually helps the consumer survive financially. The idea is to get the consumer's money before it's gone and in the hands of someone else. If the internal collections department is unsuccessful, the account will probably be passed to an outside collection agency (“CA”). The CA is a more specialized, more single-purpose business whose methods are tougher than that of the creditor itself. Remember, the creditor is at first just trying to get paid and potentially preserve the relationship. Once a collection agency is in the picture by name (many times the collection agency poses as the creditor--and the reverse can occur too if the creditor is too cheap to pay a CA's 20% fee and wants to try hardball collecting without continuing to use its own name), goodwill is out the window and the calls can come fast, furious and to anyone and everyone (creditors are allowed to call your neighbors, friends and relatives to try to get location information on you, but they are not allowed to tell them about the debt-however this provision of the law is highly abused). If collection efforts are unsuccessful, typically the original creditor must "charge off" the account within 180 days if it is a credit card, and 120 days if it is a closed-end loan secured by collateral (bank creditors are governed by Rule 5000,7 formally known as the "Uniform Retail Credit Classification And Account Management Policy"). Charging off is the act of making a pair of accounting entries that say the creditor no longer expects to
http://www.sst-mo.com/ http://www.ftc.gov/opa/2007/08/sps.shtm 7 http://www.fdic.gov/regulations/laws/rules/5000-1000.html 2
Evaluation Copy – Not for Sale or Redistribution along with other defaulted accounts and sell it to the next JDB. Ability to pay is gauged by what a debtor is paying other creditors (these figures appear monthly on a credit report), and by the employment and income figures reported by the debtor on credit applications. If the debtor were to apply for credit at potential creditors claiming to be unemployed with zero income (whether employed or not), making sure (by checking with online credit boards regarding which creditors pull from which CRAs) that the credit pulls would cover all three CRAs, that data would wind up on all 3 credit reports and collection activity would be minimized. Junk debt buyers are similar in some ways to original creditors, but in other more important ways they are very different. The key difference is that for the original creditor, a defaulted account is exceptional. The JDB is typically buying nothing but defaulted accounts (although in some circumstances, a creditor that is having money troubles of its own sells some or all of its accounts to multiple other firms and packages some weaker performing accounts with the defaulted ones rather than with the other performing accounts—in such cases the performing accounts grouped with the nonperforming ones are expected to default, and the consumers are often treated that way regardless of the fact that the account is in good standing). The JDB knows that no recovery will be had on most of the defaulted accounts purchased, and the discount on the debt is accordingly up to 98%. Accounts that have copious documentation and whose borrowers are otherwise high quality (say, homeowners with jobs) sometimes sell for only a 60% discount. In most cases JDBs look for a "liquidation rate" in the range of three times the face value of what they have bought. That means that their gross profit margin is in the range of 200%. If they bought the portfolio for 3%--they triple their money within a year or so by recovering 9%.8 Recently debt buyers have been holding off on buying portfolios because they expect the economy to remain soft and debt prices to drop.9 Once a creditor sells a charged off account to a JDB, the latter then steps into the shoes of the original creditor. The largest JDBs are multi-billion dollar operations, and although you may not have heard their names, they are well known in the industry. These names include LVNV Funding, Unifund, Asset Acceptance, Portfolio Recovery and Cavalry Portfolio. As we will discuss later, JDBs use a variety of strategies to collect debt, and they may act on their own or use a collection agency. Although many states subject JDBs to the same strictures as collection agents, some do not. In states where JDBs are not effectively regulated such as Arizona and Michigan, they often make use of abusive practices to collect. Many JDBs will also rotate the defaulted account through an endless list of collection agencies, each of which will have its own approach. If they do not receive payment, the JDBs have the aforementioned four choices: sit, sue, settle or sell. Only the option of suing remains to be discussed. The creditors' next stop may be a collections lawyer. Or at least it may look that way to a consumer. Unfortunately, there is a great deal of chicanery practiced by creditors in this regard. On the one hand, they may simply invent a letterhead that seems to be from a law office (without ever directly claiming to be a law office or a lawyer--although collectors
Evaluation Copy – Not for Sale or Redistribution (if at all) upon sale of the home (although in Florida the lien is not enforceable against the homestead even on sale and even the proceeds of the sale are exempt from attachment unless the creditor can show that the debtor does not intend to reinvest them in another Florida homestead).14 Liens can also be placed on personal property (anything other than real estate) in many states. That means that debtors cannot legally sell their art or coin collections, etc. without the creditor receiving payment. If the creditor is not paid, the purchaser may have to give up the item or pay its value to the creditor, and in addition the debtor may be further criminally liable for selling property that was subject to the lien. In some states such as Florida a personal property lien will not extend to vehicles, which must be levied on and seized by a separate process. Creditors may be able to levy on a vehicle if its value in excess of any loan balance on it exceeds the state's exemption amount (although they might also work from the federal bankruptcy exemption amount of $3,225 if they believe you will declare bankruptcy), and in some states they can pick up the vehicle at that point, while in other states the Department of Motor Vehicles will send the debtor a letter demanding that the debtor send in the title to the vehicle. In the latter case the debtor may be unable to continue to renew the car's registration (or in the case of New Jersey, may have to do so in person), while in a case where the creditor has a right to pick up the car, if the creditor can't find the car the debtor may be threatened with contempt if the debtor does not give it up. In states where personal property liens cover vehicles, a new lender can in some cases get burned by an old lien: if a debtor with an existing personal property lien buys a car on credit, the old lienholder has priority over the new and can seize it and sell the car, leaving the new auto lender with an unsecured debt owed by a pedestrian. Finally, to help the creditor find these assets, the debtor is subject to discovery in aid of execution. A creditor can send the debtor interrogatories and a request for production of records (including tax returns), often on a standard form promulgated by the court, and the debtor must tell the creditor what assets he or she has and where they are, as well as provide things like bank statements, canceled checks and the aforementioned tax returns. There is no right to privacy that will protect the debtor from divulging all. Although some property may be exempt from execution or levy and certain types of trusts may be entirely untouchable, the debtor still must make the disclosure--refusal to go under oath may be punished as contempt, and lying about material facts when questioned under oath is perjury, also unresponsiveness while under oath may also be subject to the court's contempt powers. If the creditor isn't satisfied with what the debtor provides, the debtor may be brought in for a deposition to further explain his or her financial picture. Although the debtor must be truthful, the debtor need not answer questions that are not asked and what the debtor does tomorrow with an asset not yet liened that is disclosed to the creditor today will typically not subject the debtor to consequences. Thus, the debtor may make his next stop after attending the deposition his bank, where he can withdraw his money and close his account.
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Chapter 2 -- Settlement Strategy
"When a man knows he is to be hanged in a fortnight it concentrates his mind wonderfully." - Samuel Johnson "I was only ruined twice. Once when I lost a lawsuit, and once when I won." – Voltaire “A bad settlement is better than a good lawsuit” – legal adage Action Items: Prioritize the debts that are showing on your credit report, and settle, backburner or omit them according to their characteristics.
Now that you understand who the players are and how the game works, you need to focus on the situation you face and what you might do about it. Your first task will be to focus on what is truly your debt and what isn't. One of the distressing trends of the last few years is identity theft. Whether it is something that started when you applied for an auto loan, or something your own family did to you, it's still your problem. One unfortunate result of having your debt in the hands of collectors is that many collectors hire anyone to work the phones, and in some cases those folks will steal your identity because your credit (damaged as it is) is better than theirs. The good news is that FACTA15 (the 2003 revision to the FCRA16) provides you tools to fight identity theft situations. But when you have problem debt of your own those bad marks on your credit that aren’t yours may actually be helping you, so you may want to save them until last. Step 1 - Assessment Identify each and every tradeline (TL) on your credit reports, and determine where it originated. In many cases, a CA will be on the report (but not currently reporting) even though they are no longer working the debt. For each defaulted debt, there should be an OC TL (either currently reporting or with a charge-off date unless the TL is more than 7.5 years past default), and perhaps also a TL for one or more JDBs who purchased the debt. Debts seldom report entirely properly, so although a single debt can appear legitimately a maximum of twice (once for the OC that charged it off, which should show a zero balance, and once for a CA or JDB that is collecting on the debt), it may appear again and again and again. Once credit repair becomes your goal (when all significant TLs are settled or SOL), you will want to review those TLs again for purposes of prioritizing the order in which you will be attempting to dispute them away. For right now, you are just going to learn what is what. One important clue will be the section of the report that discloses the hard and soft pulls. CAs and JDBs that are no longer associated with an account will not be pulling credit on you anymore once they have been taken off the case or have sold the account. You should try to determine which TL is associated with each and every pull that is not coded as a promotional pull. You may find one or more JDBs or CAs pulling hard and frequently. This is termed poisoning, and its intent is to suppress your credit score. While you still have defaulted debt, do not worry
http://en.wikipedia.org/wiki/Fair_and_Accurate_Credit_Transactions_Act http://en.wikipedia.org/wiki/Fair_Credit_Reporting_Act 8
Evaluation Copy – Not for Sale or Redistribution legitimate TLs (in cases where the relative applied for and received credit properly in their own name), and cases of outright mistaken identity where an individual has a similar name and/or birth date. If you do not have defaulted debt of your own, you can attack any and all of them as part of your credit repair process—and this is the wrong book for you. Since this book is about resolving serious debt problems, the safest thing to do is to leave any bad TLs that are not yours on your credit report. Conversely, good TLs that don't actually belong to you may complicate your settlement process (because creditors want you to take cash advances on other cards to pay the debts you owe them), so you want to remove yourself as an authorized user if necessary and dispute them away as soon as possible (and prior to entering into any negotiations). It may seem counterintuitive to dispute away good TLs, but try explaining to a collector that you do not have a visa card with a $10,000 limit and a zero balance to which you could balance transfer a debt when it says that right on your report! Step 3 – Remove Stale Accounts Put the accounts that are out of SOL into a stack that you will pursue aggressively when the time is right. While you still owe creditors who are within SOL the time is not right to try to dispute away those accounts. Allowing them to continue to appear on your credit reports makes you look more destitute, and will allow your negotiations to settle the accounts that are within the SOL to proceed toward more favorable results. If there is a filing fee to answer a complaint in your state (California for example), you will want to accumulate (and segregate) savings that will allow you to pay those filing fees (if necessary) for each SOL claim--prior to entering negotiations to pay anyone else. Nothing could be more tragic than defaulting on a case that could have been defended successfully for lack of a filing fee. Step 4 – Determine Ownership and Litigiousness Sort your TL's by who appears to own them: OC, or JDB. You will handle OCs who still own accounts more gingerly (remembering, for instance that they are not subject to the FDCPA's restrictions and that they can document their cases relatively easily in the event they decide to sue), and depending on what your research shows you will prioritize the ones whose suit threshold is exceeded by the amount owed and especially the ones who aggressively sue. You will research at your local court clerk's office each party who owns a debt of yours and attempt to determine whether they have a threshold amount locally and how aggressively (and successfully) they sue. In order to work out who sues frequently and who does not you will need to have an idea of the "market share" that each has of the credit card or installment loan market in the case of OCs, and the relative size of the JDBs. These are probably going to be very rough estimates on your part unless you live in a major metropolitan area where lawsuits are frequent enough to really get a good feel for what each creditor is doing. When you review cases brought by a particular OC or JDB, you may also notice patterns in how they bring cases. Some will file cases in batches when one case among the batch is close to the SOL date, others will seem to file cases one by one when the SOL on each is 30 days away. There are creditors who will allow single cases to go beyond SOL and either omit to file them or wait to file them until
Evaluation Copy – Not for Sale or Redistribution want to consider at least throwing the Accord and Satisfaction Hail Mary as described in the Chapter 5--Debtors' Secret Weapons unless your review of your state's case law indicates that there's absolutely no point in it. If your state's courts are reputedly friendly to JDBs (as with Virginia, which is said to accept affidavits of debt at face value regardless of the hearsay objection), you will want to do what you can to settle with the JDBs as well, keeping in mind the option to use the Accord and Satisfaction method with them as well. Creditors often balk at deleting TLs in return for payment, at least at the outset of negotiations. In the industry it is known as credit bartering, although consumers refer to it as pay-for-delete, or PFD. PFD is claimed by some creditors to be illegal under federal law. It is not.17 Where it can create a problem for a creditor is that it is a PFD is a violation of the creditor's contractual duty to furnish complete and accurate information of their experience with a consumer to the CRA. CRAs can and do audit creditors and collectors for compliance with their policies, and those found not to be in compliance could be sanctioned by the CRAs, including losing access to the ability to place TLs. Inability to place tradelines would be a serious inconvenience for an OC. For a CA or JDB the inability to place TLs would be a death knell. Nevertheless, such a small percentage of consumers insist on PFD and PFD is so simple to provide (creditors use an online system called e-Oscar18 ... they must simply delete the TL and furnish a reason for doing so by checking a box--unfortunately none of the choices include "the debtor paid us") that you can expect some creditors and collectors to eventually cave in and agree to PFD. Their contracts are their problem, not yours. Some creditors will more readily agree to not update the TL and to fail to respond to any disputes on your part. Because of the FCRA's requirements, such failure will automatically cause the TL to be deleted after 30 days. The failure to respond can be more easily explained as a software glitch or oversight on the creditors' part in the event the CRA questions it during an audit. It is difficult to research the "non-response" option on the credit-oriented Internet bulletin boards because it has not acquired a widely agreed upon name or acronym that makes it easy to search on. In determining which creditors will agree to it you are largely on your own. Keep in mind that it is actually a superior option to PFD because it leaves you in control of the timing of the TL's deletion, which may ease your negotiations with your other creditors by making them believe you are
While § 623 of the FCRA prohibits creditors from furnishing inaccurate information, there is no prohibition on omitting to furnish accurate information. Additionally, since the consumer is the only aggrieved party who could complain about the failure to furnish accurate information, this would be a case of volenti non fit injuria even if PFD somehow did harm a consumer. Regulations in this regard are on the way, and it is possible that when they take their final form creditors will be further deterred from PFD: Rebuilding America—One Credit Score at a Time http://www.cunalendingcouncil.org/news/2866.html Section 312 of the Fair and Accurate Credit Transactions Act; Proposed Rule http://www.ftc.gov/os/2007/11/R611017factafrn.pdf 18 http://www.e-oscar.org/ 12
Evaluation Copy – Not for Sale or Redistribution will seem like the world is crashing down around them. Nobody needs to tell you that a lot of emotions can go along with losing things that are important to you. One of the best things you can do for yourself is understand the potential scenarios as thoroughly as possible and appraise your situation realistically rather than allowing circumstances to sweep you along with no hand on the tiller. Often costs and credit damage can be minimized by selling or turning in that car before it is taken from you, or short-selling or deeding your home to the lender in lieu of foreclosure,19 or resigning a job you will not be able to keep because of your financial troubles before your employer would be forced to fire you. The ability and desire to control one's circumstances is one of the hallmarks that distinguishes humanity from animals, but so is the absence of the animals' natural surrender reflex--humans will fight on even when it doesn't make sense to do so. The latter can lead to damaging confrontations that could be profitably avoided by both parties. Reducing the costs that you might have to pay at the back end should be part of your settlement strategy at the front end. If that means you give up some property or engage a credit counseling service or file bankruptcy sooner rather than later, you had better focus on doing what needs to be done. What if I do get sued? A lawsuit in court is the last resort of the creditor. Creditors want to collect with a phone call or letter, they do not want to have to harass, cajole, etc. Of course they do those things too, and when those things fail, they have the same four choices: sit, sell, settle or sue. Considering settlement first: a creditor may be willing to accept less than is owed, and if a debtor fully understands the implications and negotiates the amount to be paid, the tax consequences, the credit reporting consequences and the finality of the settlement, it may benefit both sides to do that. Or the creditor may simply sell the debt to a JDB, who may take their crack at collecting in full before themselves being faced with the same choices. But most OCs and JDBs will either go to court in the appropriate case or they will sell accounts that seem lawsuit-worthy to a specialty JDB who makes it a practice to go to court—among first-placement JDBs names like LVNV Funding, Asset Acceptance and Portfolio Recovery are particularly frequent fliers in courtrooms across the nation. Of course, so long as the creditor is just sitting you are not necessarily going to do anything more than sit too. Since this is the section about lawsuits, we'll say your opponent is pursuing the option to sue. Once an attorney has received your file from a creditor, you will likely get a letter or two and perhaps a series of phone calls attempting to get you to pay the debt. The first thing that you must do is verify that you are dealing with the real thing. Collection agencies are well known for posing as attorneys when they think they can get away with it. Sometimes their calls and letters give the impression they are attorneys, other times
For instance, after a foreclosureou are locked out of getting a conforming mortgage for 5-7 years, but a short sale would only lock you out for 2 years. http://www.loansafe.org/how-long-after-foreclosure-can-ipurchase-a-home
Evaluation Copy – Not for Sale or Redistribution determine whether and on what basis you continue to negotiate. Assuming the lawyer does everything by the book, you will either receive a summons in the mail or hand delivered by a process server or perhaps even a sheriff's deputy or other official. Your receipt of that summons is the official moment when a clock begins to tick for you to respond to the lawsuit, either by sending both the court and the opposing attorney an answer and/or other motions and affirmative defenses, or by showing up in court on a particular date. Sometimes the filing you receive will lack a case number. That happens in states like Minnesota and Washington that have versions of what is termed "pocket service." Don't be fooled: if you fail to respond, you will find a default judgment entered against you. In other states a court filing isn't official until it gets a case number. The attorney should clearly indicate whether the complaint you receive is just a courtesy copy of something he expects to file, but that doesn't always happen. One way to double check is to use your local court's online docket system to verify that a case has begun. If there isn't a website you can go to, you should also call the court clerk's office and attempt to verify what the situation is. In New York, an Urban Justice Center study in 2006 found that in 99 percent of a sampling of default judgments that the evidence used to obtain the judgment did not meet the state's legal standards. Do not allow a default judgment to happen. At this early stage of the litigation, there are a couple of attorney dirty tricks you need to know about. One is to file in another county, perhaps one all the way across the state, and serve you in the county where you live. If that happens, you will need to try to have the case moved on the grounds of improper venue, or perhaps forum non conveniens, a weaker argument used when venue is technically proper that sometimes prevails in getting a court to transfer the case. Another dirty trick is sewer service. In short, sewer service is the use of a disreputable process server who will provide a false return of service and claim you were served when you weren't. Sometimes these process servers will even obtain a detail or two about the description of your home or a physical description of you that may or may not be accurate and may or may not have been obtained by actually observing you or your home. If sewer service is used, any default judgment that is obtained is presumptively valid, but is voidable by the court upon your proper showing that there was fraud. The problem is that you may not be believed, and in any case if the judgment creditor has already garnished your bank account or seized your vehicle (two easy and quick ways to target your assets without necessarily putting you under oath to reveal them) you may be lacking in the funds needed to hire an attorney to undo such a complication. In some states, such as Texas, creditors' lawyers also routinely attack bank accounts at the outset of cases, rather than attempting to do so after judgment has been obtained. The states where this happens are typically states where post-judgment remedies are weaker than usual, resulting in the state's case law evolving to allow for tactics that states with stronger post-judgment remedies would view as unfairly surprising. One way to avoid a sewer service situation is to keep a watch over the online plaintiff/defendant indexes of your own county and perhaps also any counties where you
Evaluation Copy – Not for Sale or Redistribution works for a little extra money handling these matters for the court. In practice, the mediator will hammer on the weaknesses of both sides' cases (assuming there are weaknesses in both you and your opponent's cases—and that’s a pretty good bet when there has been no dismissal or summary judgment) and attempt to cajole both into moving closer together in reaching a final figure for an agreed lump sum or installment settlement. If a settlement is not reached, the mediator will prepare a report, and that report will either detail why each side was reasonable in its positions (and potentially how the judge might resolve disputes on key factual or legal issues), or it will make clear to the judge that one side or the other was unreasonable. You should avoid being seen as the unreasonable party. Don't assume that mediation is your last chance to negotiate. If you don't reach a solution there, trial is still down the road and the creditor must continue to face the prospect that you will continue to be difficult to collect from, will declare bankruptcy, move out of state or even die--possibilities that are always on the table unless you either can't declare bankruptcy or won't be able to discharge the debt. Negotiations can occur at any time before trial, during trial or after trial, or even years down the road on a judgment the creditor has had trouble collecting on. At each stage you want to know as best you can where you stand and where the creditor stands from both a legal and a practical standpoint. Basics of Negotiation Whether you are negotiating with an OC, a CA, a JDB or an attorney or attorney's paralegal, there are key things to remember. One is that you are an amateur going up against professionals. You will be disadvantaged in terms of experience. Where you are not disadvantaged is in terms of motivation: dollars you pay will be leaving your pocket and you need the finality of quietus with respect to the matter. For your opponent the claim is one of a number they are working, and they might well just move along to the next one and leave this one for another day if agreement cannot be reached. Unless you are under oath, not everything you tell them needs to be the truth so long as it is not obvious to them from the information they have in hand that it is clearly a lie. Your job is to "poor mouth" yourself: you don't have money, someone other than you may be willing to give you a little money now (but not anytime down the road), but only if you are able to drive a hard bargain for not just the amount of money paid, but for the way the claim will report or not report on your credit, for the tax consequences, and for the finality you need. Your mysterious “rich uncle” has told you he wants to teach you to fix it, not just tamp it down while leaving loose ends—and he isn’t willing to pay for anything less. If you are going to negotiate in person you need to read up on body language because you will need to try to control your own verbal and nonverbal "tells" as well as discern your opponents' tells. It's a detailed subject that this book cannot hope to cover. Suffice it to say that your nervousness or apparent coolness may be misinterpreted by your opponent (to your advantage or disadvantage), but you should know about well-understood body language like posture, position of hands, eye contact, teeth clenching, picking imaginary lint from clothing, etc.
Evaluation Copy – Not for Sale or Redistribution
Chapter 3 – Bankruptcy
Don't be afraid to take a big step if one is indicated. You can't cross a chasm in two small jumps. -- David Lloyd George, British prime minister Never complain and never explain. -- Benjamin Disraeli, British prime minister Morality is a private and costly luxury. -- Henry B. Adams Action Items: Understand the Right Times to File Bankruptcy; its Consequences, What else you might do, and Which Bankruptcy benefits are not what they used to be.
Since this is not a bankruptcy book I am not going to touch on every aspect of bankruptcy, just give a brief overview of what it can and cannot do, and why you might or might not want to use it at a particular time. The Bankruptcy20 process is an option for serious debt that should neither be underestimated nor rushed into without full understanding of its operation. In a large number of cases it will provide the debtor with the best alternative, but in other cases it will either not provide the best result or it will leave the debtor in a position that is not a major improvement while also depriving the debtor of the opportunity to use it again (at a time when it might be more needed) for many years in the future. When you file for bankruptcy, you invoke a federal law to protect you from your creditors. In return for that protection, you agree to make a full disclosure of what you own, and to turn over to a bankruptcy trustee whatever you own that is not exempt so that the non-exempt property can be sold and the proceeds distributed to creditors. The federal bankruptcy code contains a list of exemptions. State laws also have exemptions from creditors, which can be invoked without declaring bankruptcy. Some state laws also allow (or even mandate) that state law exemptions be used in place of the federal bankruptcy exemptions in bankruptcy court. If you make the proper disclosures and turn over the requisite property, the bankruptcy court will discharge (wipe out) some or all of your debt (some debts cannot be discharged in bankruptcy at all, other debts may or may not be discharged depending on certain factors, while discharge of some other types of debt such as credit card debt requires you to complete a Chapter 13 plan rather than a Chapter 7 liquidation). If the judge in bankruptcy court decides that you have not complied with your duties, you will be denied a discharge and your bankruptcy case will be dismissed, with the result that your creditors will come after you just as hard as before if not harder. Your bankruptcy discharge could also be revoked within the first year (this happens when you fail to comply with a post-discharge condition placed by the trustee-for instance, you might be required to turn over your tax refund). You could even be prosecuted for bankruptcy fraud (and this can happen even after a discharge has seasoned for a year—the laws were written with the understanding that fraud is a crime of hidden falsehood, and statutes of limitations on it don’t begin to run until it is discovered or should have been discovered). The debtor who goes through bankruptcy and re-emerges
Evaluation Copy – Not for Sale or Redistribution stage bankruptcy is advisable when your financial circumstances have drastically and suddenly changed for the worse even though you have always paid your bills on time and expect to be able to do so again for the foreseeable future once you shed some debt you did not anticipate. The financial challenge may be a sudden and very expensive illness from which you quickly recover, or a discovery of toxic waste you didn't put there on a piece of property you own, or the sudden collapse of a customer who was indispensable to your business. No matter what the circumstance, if you expect it to be crushing but temporary, early stage bankruptcy allows you to emerge with a reasonably good credit rating, and it should only be considered if it will be filed before your credit is seriously damaged. Freed of obligations you could not perform in any case, the idea is for you be able to pursue opportunities in the future without being concerned about specters of past issues returning to haunt you. The second circumstance in which bankruptcy is clearly advantageous is emergent stage bankruptcy. Bankruptcy in the emergent stage would be done as you are recovering from a long period of financial hardship. In fact, the timing and reason for the bankruptcy would be that growth of your nonexempt assets threatened to exceed the exemptions available for them in your state. Once assets exceed exemption amounts, creditors who sue you may recover those assets from you in state court, or if they already have judgments they can (in very rare cases) take you into involuntary bankruptcy23 and recover the assets in federal bankruptcy court. Emergent-stage bankruptcy forestalls that possibility. The third moment when bankruptcy may be appropriate is what I term the contingency bankruptcy. The contingency bankruptcy is undertaken when some event (such as a garnishment or an asset seizure) occurs that you either need to see undone, or that you simply feel will lead to an unjust result unless the proceeds of that asset or the amount you are paying on that garnishment instead were to be distributed instead among your creditors according to their priorities. If you learn that a rich relative is expected to die soon and leave you a substantial amount of money, you might also want to file bankruptcy sooner rather than after such an event occurs. You might also file a Chapter 13 to relieve a co-signer of having to pay for a debt that you were the primary obligor on, and that would be another example of a contingency filing. Leaving aside the moments when bankruptcy is clearly called for, you may want to consider bankruptcy on an optional basis as a matter of planning. For instance, if your employment or marriage prospects could hinge on you not having lingering debts, bankruptcy may be an option to pursue at some early point instead of continuing forward in life as things stand in the hope that the statute of limitations will expire on outstanding debts or judgments, or that such debts or judgments will not follow you from a state you move away from to a state you move into. Or perhaps the rich relative from the contingency scenario isn't dying but wants to make a large gift to you. You can ask them
http://en.wikipedia.org/wiki/Bankruptcy_in_the_United_States Voluntary_versus_involuntary_bankruptcy 22
Evaluation Copy – Not for Sale or Redistribution phone call) is required before filing bankruptcy. Although your bankruptcy attorney will likely steer you to a company that can do the job, you can also find a list of approved credit counselors on the Department of Justice’s website.26 If you are considering going bankrupt, beware the free initial consultation with an attorney. If the decision to go bankrupt or not is at all a close one, only a thorough analysis which includes a means test and a 22C disposable income analysis will tell the tale. Without that the only certain thing for an over median income earner without significant business debt is that you would be in a Chapter 13 at the minimum for 3 years but not more than 5 years. It is also important to repeat here that if you enter the bankruptcy process and do not complete it and obtain a discharge, your creditors will be free to pursue you as though there had never been a bankruptcy. Former bankrupts are also often discriminated against in the job market (although the bankruptcy code forbids it) by using a loophole: you are denied the job not because of the fact of your bankruptcy, but because of the accounts you included in it. It seems a distinction without a difference, but in a right-to-work state it is enough to deny you the job. Because bankruptcy stays on your record essentially forever27 (although it will be on your consumer credit reports for only ten years), you may want to instead enter credit counseling, tailor your own settlement program or duke it out with each creditor if and when necessary during the course of the seven and a half year CRA reporting period. If you can avoid judgments and problems caused by cascading defaults during that time, your credit can be clean at the end. One reason actually filing bankruptcy may not be necessary if you are truly destitute is the bankruptcy score. You see, your creditors have access to credit scoring on you because they hold your debt and have a right under the FCRA to check your credit reports. One type of score they can and do purchase is a score offered by the CRAs that predicts whether you will go bankrupt. If the score is poor enough, the creditors don't even prioritize their claim against you for active pursuit, they just back-burner it (becoming lurkers) and subscribe to a "collection triggers"28 type service in the hope that somewhere down the road you will get a new job and apply for credit, or otherwise resurface as an individual with "an improved ability to pay." In both the Chapter 4--Nasty Surprises and Chapter 5--Debtors' Secret Weapons I describe some ways to avoid raising your credit score (or providing other triggers) until the coast is clear to do so. Economists have a name for omitting to file bankruptcy when you could do so: "informal bankruptcy." The term was proposed by Amanda E. Dawsey and Lawrence M. Ausubel of the University of Maryland and the University of North Carolina in a paper by the same title they co-authored in 2004.29 They suggested that approximately half of the debtors who cannot pay their debts pursue an informal bankruptcy strategy rather than a formal bankruptcy strategy, based on their analysis of credit card charge-offs. They
http://www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm http://www.experian.com/products/collection_triggers.html http://www.ausubel.com/creditcard-papers/informal-bankruptcy.pdf 24
Bankruptcy will always show up on PRDs, including the government’s own PACER database (http://en.wikipedia.org/wiki/PACER_(law))
Evaluation Copy – Not for Sale or Redistribution they can collect. The collectors pursue traditional phone and mail strategies, credit reporting strategies or both--any of which are improper. The nub of the controversy is that once you have gone bankrupt, any of your creditors whose debts were discharged are legally required to list those debts as "included (discharged) in bankruptcy" ("IIB") when they report to the credit bureaus (if they continue to report at all). However, one of the hidden pitfalls for those who go bankrupt is the Junk Debt Buyer or Original Creditor who refuses to report correctly. For some debtors, the misreporting will motivate them to reaffirm debt in order to settle with the debt's new owner. That's exactly what the junk debt buyers want. As mentioned above, there is a ready market for the debt of individuals who have been discharged in bankruptcy. Keep in mind that this debt is theoretically worthless. Because the debt is no longer owned by the original creditor with whom the debtor might want to renew a relationship, the likelihood that a debtor would want to reaffirm the debt or otherwise pay a settlement should be practically nil. Maybe one debtor in a thousand would have a change in fortune for the better and feel some moral obligation to make good on the debt with a third party who had purchased the debt for a pittance knowing full well it was that of a bankrupt individual. So how do these buyers intend to get paid? It's a fair question, since the creditors have absolutely no legal leverage. The only possible answer is that these buyers intend improperly and illegally to use some practical tactic, such as false credit reporting to effect a circumvention of the protections that bankruptcy was intended to provide. The aforementioned article described how the most well known business that provides a marketplace for buying and selling defaulted debt promised that it would no longer facilitate such transactions. Presumably the low value of the portfolios involved and the inescapable inference that any value at all reflected only what could be obtained by improper means drove the market-maker's decision to break its association with that shadowy corner of the industry. Nonetheless, unless and until states (and/or the federal government) outlaw the practice, the disreputable JDBs and the major creditors looking to unload bankruptcy accounts will continue to find each other, and the collectors will continue to improperly pursue the former debtors. Former debtors facing such tactics can go back to bankruptcy court and ask the judge to stop the creditors from violating their discharge. The good news for the debtors is that courts will fine the creditors and award the debtors their attorneys' fees in the cases. Where the debtors have felt compelled to pay up by improper pressure (such as where a lurking strategy on the part of a JDB has allowed it to pounce and disrupt a home purchase), the court will also order the money paid by the former debtor to be returned. However, most former debtors don't understand their rights or fail to pursue them, and some overworked or unhelpful bankruptcy lawyers won't give their clients' postdischarge matters the attention they deserve, even where there is money to be made for the attorney. It is important to realize that the FDCPA provides debtors with some protections that are similar to the permanent injunction that bankruptcy gives, but the protections are not enforced in the no-nonsense atmosphere of bankruptcy court and statutory damages are
Evaluation Copy – Not for Sale or Redistribution creditor who filed an involuntary petition and then couldn’t locate the debtor to move the case forward. Although it can often be shown that an involuntary bankruptcy attack was improper, there is also an interesting though ultimately unavailing argument that has been made when creditors forced some individuals into involuntary bankruptcy. Under BAPCPA, the bankruptcy courts have been deprived of the jurisdiction to even hear the bankruptcy case of a debtor who has not completed the required financial counseling. Interestingly, the law contained a glitch inasmuch as it did not account for the case of an involuntarily bankrupt person, who conceivably could have used their unwillingness to obtain credit counseling as a means to deprive the bankruptcy court of jurisdiction over them. Commentators speculated that in the appropriate case bankruptcy courts would simply ignore the mandate (or would order the debtor to obtain the counseling and use their contempt powers to see that the mandate is carried out), and so far they have been right. What courts have done is refused to read the two statutory sections to reach what they considered to be an absurd result, instead excusing the counseling requirement.34 As I mentioned before, bankruptcy courts are no-nonsense places. Bankruptcy has its place, but so do other techniques of resolving debt problems, and bankruptcy is a card that the debtor does not need to play unless and until its strategic advantage is clear. The bottom line is that bankruptcy is a tool that is mostly for the direst of emergencies, and nobody should enter into it without a careful analysis of its potential consequences. In general if you understand your financial picture you will have certainty that you either need it or you don't. If you don't need it, you typically will know whether you want it or not, and you will know why you want it. If you do not feel certainty, it is not the time to move forward.
In Re Sims, 08-41668 (Bankr. D. Kan. Jan. 7, 2009) Doc. # 20 http://www.ksb.uscourts.gov/images/ksb_opinions/JMK_08-41668-20.pdf
Evaluation Copy – Not for Sale or Redistribution Re-aging Under the Fair Credit Reporting Act (FCRA), every delinquent credit account has a Date of Last Activity (DOLA). This date is 180 days after the last payment that brought the account current before the last default that was never caught up again (which is called the "Date of First Delinquency" or DOFD). Theoretically, the DOLA sets an absolute bar to the reporting of a particular tradeline past seven and one half years from the date it became a bad debt (although a separate public record tradeline may appear if the debt has been successfully sued upon). However as a practical matter, the DOLA is often shifted by original creditors without justification, and likewise collection agencies and junk debt buyers (JDBs) seem to have no qualms about improperly setting it to the date they received the account from another party, or in fact to any date they please.35 Your key defense to re-aging is to keep meticulous records, even when things you would rather not be reminded of come into play. If you can prove what the DOLA should be listed as, you can compel the CRAs (in court if necessary) to correct or remove any negative tradeline with an erroneous DOLA. If you can prove that a creditor manipulated the DOLA to keep the tradeline appearing on your reports past the point of obsolescence, you have them on an FDCPA violation; and you are entitled to sue them for money. Re-aging in the context that it was just used is actually a secondary meaning of the term, but it is the most common term used for this particular collector abuse. The other re-aging is actually a good thing, and it refers to a creditor’s decision to return a defaulted account to good standing under the FDIC’s Rule 5000 regarding debt classification when the defaulting debtor has again been making regular payments. It is similar to rehabilitation36 for student loans, however the key difference is that while student loans can always be rehabilitated no matter how many prior rehabilitation attempts have failed,37 there are limits on how many times and how often a bank can reage other types of defaulted debt. Renumbering Accounts appear on credit reports with account numbers. Once an account has become obsolete, the CRAs won’t report an account with that number from that creditor. Does that stop every creditor from reporting? Of course not, because all the unscrupulous creditor needs to do is change the account number and the account can be placed on your reports again. Is there a way to stop this? There is, but only if you have kept good records.
‘Zombie’ Debt is Hard to Kill http://articles.moneycentral.msn.com/SavingandDebt/ManageDebt/ZombieDebtCollectorsDigUpYourOld Mistakes.aspx
Caveat: Student loan rehabilitation depends on the availability of a market for the rehabilitated loan, and the financial crisis has dried up that market for the moment.
Evaluation Copy – Not for Sale or Redistribution tradelines will appear to other creditors, and what those other creditors might do. In a situation where there is a debt that is close to the statute of limitations that is not being paid off, the debtor might want to either hold off on settling any other account that is within the statute of limitations until the account that is not being settled reaches expiry, or settle the non-expiring account only if it can be deleted from the credit reports rather than being reported as settled (or if the creditor agrees not to update the TL and that it will not respond to any CRA disputes it receives--such an agreement leaves you effectively in control of the TL's eventual disappearance, but in the meantime you can leave it there to discourage other creditors). If it is necessary for the account to report as settled, the debtor may be safer foregoing negotiating for the best possible notation, preferring instead to have the account show clearly on the report that it was settled for less than was owed. An account settled for full payment that reflects such a fact on the tradeline acts as a dinner bell for other creditors (the concept is similar to the schoolteacher who asks a child caught chewing gum whether he brought enough for everyone—if you don’t have enough money for everyone, it isn’t safe to be spied settling with anyone—especially at 100 cents on the dollar). Deletion of a tradeline is not such a dinner bell, although if the consumer’s score is substantially improved by the deletion the consumer may cross a threshold that leads to increased collection activity by one or more other creditors. And for the debtor who still has other debt problems, the ideal would be to have the TL not update, but with an agreement with the creditor that they would not respond to any disputes you might make with the CRAs—which leaves the timing of the TL’s deletion in your hands. Think of it this way: say you see five people standing by the rail on a fishing pier and you are trying to decide whether to drop your hook into the water. If one of the people is hauling in a fish, you may conclude the fish are biting, but if suddenly one goes away and there are only four people standing there any motivation that you had to go fishing would be by virtue of the rail being less crowded, not the fact that the fish are biting--and if the fifth one was just a realistic dummy still standing there but the real fisherman was gone (along with his fish), you might never notice that there would now be room at the rail for you. Celebrities, major corporations and wealthy people keep the details of cases they settle secret,38 and you should try to do so as well--at least until all of your problems have been tackled. The second scenario for lurking occurs when the debtor intends to buy a home. Since the passage of the FCRA in 1970, creditors no longer have the advantage of having tradelines that are over seven years old showing up on reports, and they typically don’t have the right to go to court on those accounts (or rather, their right is easily defeated by the statute of limitations defense), but that doesn’t stop them. They order lists of hot prospects for mortgages (which are typically generated based on drawing from a list of those individuals who have had their credit pulled by a potential mortgage lender) from the CRAs and match them against their lists of debtors. When they make a match, whatever moldy old accounts they have get spanking new account numbers and phony, reaged DOLAs and they’re dropped onto the debtor’s reports.
The Confidential Settlement http://www.attorneys-usa.com/settlement/confidential.html
Evaluation Copy – Not for Sale or Redistribution debts and judgments. In short, Choicepoint has a solution in mind that it would like to sell to lenders, and the study was produced as a tool to sell it. What Choicepoint wants lenders to do is vet you using their public record reports in addition to the usual tri-merge, either during the application process or perhaps on a spot-check basis with respect to particular mortgage brokers as a way to make sure the brokers are making adequate efforts to ferret out the things that might not show up on credit reports and might not be put on applications by homebuyers. The fact is that title companies will only be looking for liens that could keep a mortgage lender from being the first lien holder on a borrower's home. The ordinary credit report (not the RMCR, or "full factual", which is available for mortgages over $150,000 but customarily has not been used often) will only go back seven years. For any particular borrower there could easily be debts and judgments not showing up that the lender won't know about without more detailed and searching reports. While the FBI currently lacks the resources to pursue "fraud for land"41 cases (where the mortgage applicant is simply hiding the fact that they are unqualified) and can only pursue "fraud for money" cases (where the fraudsters are acting in an organized way to exploit weaknesses in the system and leave banks holding properties worth much less than was apparent), state prosecutors can and will pursue these cases where appropriate, and the lender also has the right to make the loan immediately due and payable ("accelerate" the loan) so that you can be foreclosed on if you can't come up with all the cash right away. The bottom line is that anything you owe that for some reason isn't appearing in the usual places that lenders look does not give license to omit that item from a form 1003 mortgage application (except for out-of-statute debts incurred in Wisconsin and Mississippi). In one case, a new homeowner had somehow even managed to get a mortgage with an unexpired judgment hanging over his head. The judgment should have appeared on the credit report but did not, and the title company did not pick it up. What happened next? A major creditors' law firm in his state suddenly sent an information subpoena to the mortgage lender, evidently looking for the asset disclosure on the mortgage application so that the judgment creditor could attach a bank or brokerage account. Not only was the creditor able to look into an asset declaration that wasn't made under threat of seizure (which meant that it was much more likely to be fully accurate, if not optimistic), but also the mortgage lender was essentially on notice at that point that the borrower had defrauded it during the underwriting process, perhaps leading to the use of the aforementioned acceleration clause. Although large JDBs have spent millions on their own internal data mining42 capabilities, now even the smaller fry have access to the same kind of processing power on a pay-as-you-go basis. Experian markets a service called "Collection Triggers" to collectors, and TransUnion calls theirs "Triggers for Collection." Essentially when
http://articles.latimes.com/2008/aug/25/business/fi-mortgagefraud25 http://en.wikipedia.org/wiki/Data_mining 34
Evaluation Copy – Not for Sale or Redistribution Local Lawsuits, Sewer Service, Affirmative Defenses and Presuit or Prejudgment Attachment Lawsuits are treated more fully in Chapter 6--Court, however a few of the more surprising issues and issues that require you to pay strict attention to what you are doing are also covered here. Creditors who have exhausted all other collection possibilities can sue you for their money. You need to understand what it means to be sued, and what you can do to fight back. A lawsuit begins when a complaint is filed with the court (exception: states like Minnesota and Washington have pocket service,44 which permits an attorney to serve a complaint on a debtor but pay no filing fee and get no case number--regardless of that, if the debtor does not answer the attorney can then file the case and get a default judgment). Once the lawsuit is filed, you must either appear at a pretrial hearing (for small claims cases) or file a formal answer (which may need to be sworn in some cases) and affirmative defenses unless you are filing instead a motion to dismiss or another type of motion that comes before the answer. Affirmative defenses45 are claims on your part that say "yes but" to their case, even assuming it is provable on their part. The most frequently used affirmative defense with respect to consumer debt is the Statute of Limitations defense, which takes advantage of state law that limits the number of years the creditor can wait before filing the case. Other affirmative defenses include unconscionability46 (a legal doctrine that will invalidate certain provisions of an agreement or even the entire agreement if it shocks the conscience of the court in its one-sidedness), accord and satisfaction, waiver, violation of public policy and dozens of others. If you do not plead an affirmative defense even though it is available to you, you lose it automatically—courts only occasionally will notice on their own that one could have been plead and then rule in favor of you sua sponte (Latin for “on its own”). Creditors' attorneys often win default judgments because of sewer service, which is simply a term for a fraudulent return of service by a process server. Process servers are supposed to find the defendant and personally serve him or her (or someone in the defendant's household over a certain age) with the lawsuit. In some cases, states permit methods of service that are not guaranteed to provide actual notice of the lawsuit to the debtor. These kinds of service are often termed nail and mail, meaning the process server needs to affix a copy of the complaint to the defendant's door and mail a copy as well. In small claims, service can often be effected by certified mail, return receipt requested. Sewer service is surprisingly common. In July, 2009 the New York Attorney General filed a lawsuit seeking to have the New York court system statewide throw out an
http://caveatemptorblog.com/pocket-service-and-pre-judgment-garnishment/ http://en.wikipedia.org/wiki/Affirmative_defense 46 http://en.wikipedia.org/wiki/Unconscionability 36
Evaluation Copy – Not for Sale or Redistribution Arbitration Many credit card accounts now contain an arbitration49 clause. This clause basically allows the creditor to bypass the court system for purposes of assigning liability and damages, returning to it only for purposes of enforcing the findings of an arbitrator. This system favors the creditor at the expense of the debtor. In most cases, the debtor will be denied the opportunity to mount a meaningful defense in an arbitration proceeding, and in some states the arbitrators may not even have to recognize the statute of limitations defense. If an arbitrator enters an arbitration award, a debtor typically has ninety days to file a lawsuit against the creditor in order to overturn the arbitration award.50 If the debtor fails to do this and the arbitration award is confirmed by a court, the creditor then has the ability to quickly get a real, enforceable court judgment and may pursue all post-judgment remedies in order to get paid. In the event you are haled into arbitration, you may choose to file a written response, and the arbitration may take place based on the documentation that you provided without a hearing, or there may be a hearing held which you are permitted to attend telephonically. Some states restrict the use of arbitration, and if you are a resident of a state that has done so it may make sense for you to file a refusal to arbitrate with the arbitrators. In many cases this will trigger a lawsuit, so don’t assume that refusing to arbitrate will end the dispute. If a credit card agreement contains an arbitration clause, it typically allows either party to invoke it when a dispute arises. In the event you are sued by a creditor and you determine that the attorney is a very effective one and the court is one where you do not anticipate achieving success in your defense, you may want to consider invoking the arbitration clause at the outset of the litigation in order to shunt the proceedings into a forum where you may have a better chance of a successful defense. Because arbitration proceedings typically are very quick from start to finish, you probably do not want to do this if delaying the case is your goal. Any delay you achieve will only be momentary, and will probably be less delay than if you left the lawsuit on track. Despite this, there are anecdotal reports from Wisconsin that demanding arbitration will stop a debt case cold due to the fact that existing case law in the state makes it almost impossible to confirm an arbitration award because arbitration does not conform to the unwaivable Wisconsin Consumer Act. You may want to look into whether your state has similar protections and precedent. Additionally, there is little agreement nationwide with respect to whether the statute of limitations must be respected in arbitration. In a case that you can fight in court on statute of limitations grounds you may want to stay out of arbitration for that reason alone.
http://en.wikipedia.org/wiki/Arbitration http://www.law.upenn.edu/bll/archives/ulc/uarba/arbitrat1213.htm 38
Evaluation Copy – Not for Sale or Redistribution court and seek to vacate an improperly entered default judgment. Bear in mind that in cases of improper service, that time limit doesn't begin to tick, if it ticks at all, until you find out (or reasonably should have found out) that you have a judgment against you. If a distant judgment is obtained, or if you move out of state after a judgment is rendered against you, the creditor must use additional legal measures to enforce that judgment in the state where you now reside. That enforcement mechanism is typically the Uniform Enforcement of Foreign Judgments Act (UEFJA).54 Versions of the act are on the books in all states except California, Indiana, Massachusetts, and Vermont. In California foreign judgments are subject to the Uniform Foreign Money-Judgments Recognition Act. In New York the procedure is to file a "Motion in Lieu of Complaint" based on the foreign judgment. In all states a creditor may instead choose to file a domestication action, which is an older, less streamlined procedure that will nevertheless result in the foreign judgment having validity in your state. Because the UEFJA was designed primarily to aid in collecting child support, collection attorneys in consumer cases were somewhat behind the times in focusing on what it could do for them. They also make less use of it than they could because when a case crosses state lines it typically means that another attorney will have to work it. Attorneys can be reluctant to make choices that will result in splitting their fees with another attorney even where the result of failing to do so is that both attorneys collect nothing. Note that this is not the case where law firms have grown into (or acquired) firms in other states (or are enthusiastic members of multi-state networks). A multi-state, regional, or nationwide law firm can be very dangerous to you. Thankfully there are not many of them, and they can afford to be very selective in pursuing only the larger cases with the best chance of collection. The UEFJA provides safeguards against invalid foreign judgments being domesticated to your state. A judgment debtor has a defense against a foreign judgment in situations where the distant court was not impartial, did not provide due process, lacked personal jurisdiction or subject matter jurisdiction, did not provide sufficient advance notice for the debtor to appear and defend, was fraudulent, was against the public policy of the debtor's state, where the judgment conflicts with another judgment, where the judgment is contrary to an existing settlement agreement, where the distant court was a seriously inconvenient place to appear and defend, or where the judgment is an attempt to enforce the tax laws of the foreign state. It is also possible that the foreign judgment is too old to enforce in your current state of residence, either under the laws of the foreign state or the laws of your current state. But if you receive notice that a judgment is being domesticated to your state under the UEFJA, it is up to you to file opposing papers and make your case that the terms of the UEFJA do not allow the domestication. A key misuse of the UEFJA is to take a judgment rendered in a state where wages cannot be garnished against a resident of that state and file it in a distant state where the debtor has never set foot. Why would a creditor do such a thing? Because the debtor works for an employer who also has a presence in that distant state, and that distant
Evaluation Copy – Not for Sale or Redistribution In some states a simple acknowledgement of the debt will overcome the SOL defense, and in those states (and other states too), consumer unfriendly judges often browbeat debtors into making that acknowledgement and giving up their rights by glowering at them while asking: "This is your debt, isn't it?" You don't have a Fifth Amendment right to refuse to answer because that right would only apply if your liberty were at stake. It would be perjury to say "no" while knowing the true answer would be "yes." Even if you believe the correct answer is "no" you might want to avoid saying so in a direct manner because you might not be believed or you might in fact be mistaken A strong "no" may simply not be enough, and you want to avoid a back-and-forth with the judge if possible. He is the "trier of fact" just as a jury would be, and he doesn't have to believe you. A more nuanced answer would be something similar to "I'm not willing to swear that something that was defaulted on X number of years ago is or isn't mine, but I do maintain that even if it were mine it would be beyond the statute of limitations." It's long-winded, and a snappish judge might cut you off, but it's your best option. Judges, however, aren't your only worry when using the statute of limitations. Creditors react to the statutes of limitations the same way a running back reacts to a defensive player between him and the goal line. They are going to try to run over the obstacle or around it because it's between them and getting paid. Seldom will you find a collector just giving up when the debtor says the account is too old or a creditor's attorney bringing an out-of-statute case to court without at least some colorable fact or argument to try to make the debtor believe they can convince the court of something that will defeat the debtor's potential statute of limitations affirmative defense. What can defeat the debtor's claim? That is a matter for statutes and for case law to determine. One of the most popular limitations-busting tools is the "courtesy payment" or "phantom payment." The first type of payment is a payment actually made by the debtor. The creditor calls up the debtor and in the course of the conversation cadges a small "good faith" payment, say between $5 and $50. In many states this sort of payment can temporarily toll--or better yet for the creditor--restart the statute of limitations clock. In other cases, the creditor has no contact with the debtor, so the creditor must put a phantom payment on the books. This can be as simple as a fraudulent accounting entry, or it may take the form of a more elaborate ruse: one collection agent was found to have been trotting down to the corner convenience store for small money orders and mailing them to his own business in debtors’ names. In an effort to head off activities like these, some states’ case law specifically requires that payments be made or ratified by the debtor.58 Other state laws do not toll the statute unless a payment goes toward principal or interest on the debt ... and for debts with plenty of penalties as part of their balances, a payment would need to be quite large in order to zero out the fee and penalty category and reach interest, let alone principal--
The Law Of Contracts", by William Herbert Page Sec 1692 By Whom Part Payment May Be Made http://chestofbooks.com/business/law/Law-Of-Contracts-4-3/Sec-1692-By-Whom-Part-Payment-May-BeMade.html
Evaluation Copy – Not for Sale or Redistribution courtrooms. And even if the judge is open-minded and accepts the SOL defense, victory on that issue can be pyhrric because of the potential tax consequences. Due to the application of federal tax laws, using the statute of limitations is not a good choice to defeat a claim if there are other choices (mainly failure of documentation) available to because it's likely to be costly in federal taxes. In 2006 the JDBs fought having to issue IRS forms 1099-c and lost to the IRS in a case called Debt Buyers Association v. Snow.60 This matters to you because the IRS now expects that anytime a JDB (or an OC) abandons pursuit of a debt they will be required to send a 1099-c form forgiving the debt to the debtor within 36 months of their last collection efforts. The form will require the debtor to take the amount of the debt (as stated by the JDB, accurate or not) into the debtor's income and pay income tax on it at the debtor's marginal rate. The debtor will not be able to avoid the imputed income unless a form 982 calculation reduces or eliminates it. Form 982 basically requires the debtor to be qualified to file a Chapter 7 bankruptcy. If a debtor fights a debt with a JDB on the grounds that the JDB cannot document the debt rather than on statute of limitations grounds, the JDB may be deterred from filing a form 1099-c because of the doubt over the validity of the debt. If a form 1099-c is filed, the debtor can attach evidence of attempts to obtain validation of the debts along with an explanatory letter disputing the validity to the debtor’s 1040 form as grounds for refusing to take the item into income. It may seem odd that an old, burned-out debt can cause you to have to recognize income and pay tax in some future year (and if the debt changes hands four times, that future year could be as much as 12 years from the charge-off date). However, it is a time-honored tax law principle that money you receive as a loan is not income and that in the event you somehow successfully omit to pay it back it becomes income the moment you clearly are not going to pay it back. That event might never happen in your mind, so the IRS uses a more objective standard for when you must recognize the income: the creditors' issuance of a form 1099-c. And the IRS requires that form to be issued when any of a number of specified events happen, such as a win by the debtor on SOL grounds--or in fact on any grounds, but victory on the SOL essentially admits the existence of the debt, while fighting on documentation does not necessarily indicate such an admission, and that fact might well be enough to allow you to avoid the imputation of income. Some JDBs, particularly the smaller ones, do not routinely issue forms 1099-c despite the IRS requirement that they do so. Larger JDBs are well equipped to shoulder the administrative burden of printing and mailing the forms, and since they hold large blocks of debt, they are a focus for the IRS in gaining compliance; while the small fry to whom debts typically ultimately devolve are not so important to the IRS. That means that it is possible that you will never get a form 1099-c unless you inadvertently ask for it. Smaller JDBs sometimes chatter to one another on the Internet about sending forms 1099-c on a retaliatory basis when a debtor responds to their dunning by claiming the statute of limitations defense. Your best choice may be to make no response at all if you
DEBT BUYERS' ASSOCIATION v. SNOW [Civil Action No. 06-101 (CKK) January 30, 2006] http://www.ltclg.com/images/dba-opinion.pdf
Evaluation Copy – Not for Sale or Redistribution states. The statute of limitations for a contract under seal can be 10, 12, 16 even 20 years. Delaware has no statute of limitations at all for certain documents under seal. A debtor needs to know whether the contract was signed under the laws of a state where contracts under seal are a concept that extends the Statute of Limitations, and needs to know whether the contract was indeed signed under seal. But even if a very old debt is under seal, there is a concept in the law that may help even where the claim is technically still within the statute of limitations, and that concept is called laches. Laches is an equitable principle in the law that says that the plaintiff waited too long. In certain cases, it can apply even when the statute of limitations has not run because the debtor was induced by the creditor’s laxity to fail to address the debt. If you haven’t heard from a creditor in years and years before they sue you (or even try to enforce an old judgment that is still technically valid), laches may apply. Trojan Checks Creditors with judgments (or those contemplating suing) typically would like to know where the debtor banks. Often they already have this information because they were paid from that account. But sometimes it has been years since they were last paid, or the debtor has moved. In either case, the debtor’s banking relationship has likely changed during the interim. There are a number of ways to find out where someone banks. One of the easiest is the “Trojan Check.”63 The Trojan check is a small check the collector causes to be sent to the debtor. It could be as much as $50, but other collectors boast of having habitually used checks as small as $1.55. The check may say it’s a refund of an overpayment, or it might say it’s a settlement in a class action, or it might purport to be a rebate on some merchandise. Sometimes the collector sends the check directly from its own accounts, but more often the check is either from the account of an innocuously-named shell corporation formed by the collector just for the purpose of issuing such checks, or it is from a third-party investigative service that the collector has hired to send Trojan checks to a few hundred or a few thousand debtors. Arguably the use of such checks violates the Gramm-Leach-Bliley Act. Unfortunately, the Act doesn't provide the consumer with any easy way to enforce it against the violator. The bottom line is that it is a bad practice to deposit any check from a questionable source. It is also a bad practice to pay anyone with a check unless there is certainty who they are and what they’re all about—your check is even better than their check in telling them where you bank. Pretexting and Tattletale Insiders Also relevant to issues regarding bank accounts, but really a problem that can come up in many different situations is that of pretexting. One of the simplest means of finding something out is to ask. Investigators have asked questions for as long as there have
Statement by Robert Douglas before the Committee on Banking and Financial Services United States House of Representatives Hearing On Identity Theft and Related Financial Privacy Issues September 13, 2000 http://financialservices.house.gov/banking/91300dou.htm
Evaluation Copy – Not for Sale or Redistribution take the bait, particularly if the survey is related to banking and credit habits. Investigators posing as survey-takers have been known to show up at the door of the target of the investigation with a bouquet of flowers and a valentine's day teddy bear to ask how and when a couple got together because it was material to an investigation.65 A policy of not dealing with survey takers and solicitors is the safest, whether you are a debtor or not. Friends, neighbors and relatives who were entrusted with information that could be damaging should also be alerted to the possibility that they might be rused. As distressing as the threat of pretexting can be, the thought that a trusted business would sell a customer out is even more distressing. But it's true. Insiders at banks have been caught selling information about the banks' customers to collectors and have gone to jail over it.66 This happens more with larger banks since their insiders can provide larger lists and that makes their crimes profitable to commit when compared to what a small-bank insider could expect to receive. It also happens with telephone companies and even the government. When the money involved gets large enough, the investigators’ behavior gets really outrageous. The "Private Investigator to the Stars” Anthony Pellicano67 was tried for having corrupt insiders working for him not just at businesses but at the police department as well. Conducting his own defense, he painted himself as a "problem solver" for his clients, but federal agents had found explosives and illegal wiretapping evidence in his safe, and his computer passwords included the word "omerta,” a mafioso term for their code of silence sworn on pain of death. The case against him began when a reporter tracking a controversial story involving actor Steven Seagall found a rose, a dead fish and a note that said, "Stop" on the windshield of her parked car. Investigators may have moved from the seedy offices seen in 1930s detective movies into gleaming towers in suburban office parks, but they haven't changed how far they will go to satisfy a client, and for most of them that's well beyond what the law allows. Pretexting is often the most benign abuse they commit. Accidentally Becoming a “Ghost” This topic is a shift of gears because I’m describing a nasty surprise you cause to yourself. Although this book is not about credit repair (and credit repair should not be undertaken until all serious defaulted debt issues have been disposed of), a brief note on a potential nasty surprise that can result from the settlement process is appropriate here. Consumers intent on repairing their credit need to be aware that one of the dangers of overdoing PFD or confidentiality agreements is “ghosthood.” It is possible that if the consumer successfully eliminates negative tradelines, he will be left with no tradelines at all. While some creditors will lend to people with bad credit, there are many who will not extend any credit whatsoever to those over a certain age who have no tradelines at all showing. And even if a ghost can find a creditor who will lend, the ghost will be
65 66 67
http://www.sptimes.com/2007/02/14/Tampabay/Tell_tale_heart_unrav.shtml Massive bank security breach uncovered in N.J. http://www.msnbc.msn.com/id/7670774/
Evaluation Copy – Not for Sale or Redistribution avoided because they can lower the credit score severely and lead to account actions. Try to apply no more frequently than every 90 days unless there is a compelling need to do so. Zombie Collections and Repeated Collections on the Same Debt The only safe assumption one can make about any debt that one hasn’t paid is that one will see it again at some time in the future. Unpaid delinquent debt never dies, and even paid debt can take on a bizarre life of its own, returning time and time again despite the fact that it was paid long ago. That means that a consumer can be dunned for debt that is twenty years old or more, even if it was never, ever delinquent. It is vital that consumers keep good records of what is owed and to whom it is owed, and that in any instance where one settles a debt or closes an account the documentation that it was fully and finally settled be kept along with the (original if possible) canceled check by which it was settled. One may find oneself defending that settlement in court at any time (on the other hand, overly aggressive collection efforts by someone standing in the shoes of someone who has already collected may afford you damages under the FDCPA, FCRA and other legal theories such as defamation and harassment, so the consumer may be the one suing—no matter how a suit starts, it’s best to have good records so that it ends in a win). One very frustrating scenario for someone with past bad debt is the reappearance of a debt that was already paid. Sometimes it's just a dunning letter, other times people see collections tradelines reappear on their reports, or even get sued--sometimes a second time after they’ve already won (or even lost) the first time. Why? Collectors keep lousy records, and when they sell accounts they don't send all the records they do keep accurately. That is why it's vital to keep good records, and that the records clearly reflect the achievement of quietus (a legal concept meaning “Dead, Done and Gone”) on any accounts that have been settled. Once a debt is considered bad debt (and even in many cases where a credit card account has been closed in good standing), there is no telling who will receive a record of the account as being an unpaid debt still owed by a debtor. If you are dunned on a debt you have already paid, you should respond and ask for validation of the debt, and include as exhibits to the validation letter your evidence (settlement agreement or letter, copy of canceled check) indicating that the collector's position is not valid. If they persist, you can follow the complain to the FTC, the Better Business Bureau, the American Collection Association (if the collector is a member) and your state’s attorney general, and of course sue them or mount a defense in court if necessary. Whether and when to ask for validation on unpaid debt is a matter you must be strategic about because it can trigger a lawsuit. Before asking for validation on an unpaid debt you must do a certain amount of due diligence regarding the debt and the creditor to make sure it is not one that sues in response to validation requests.
Evaluation Copy – Not for Sale or Redistribution has personal knowledge of the records of the OC that sold to the JDB,72 or may improperly claim that the records of the OC that the JDB has purchased specifically for purposes of litigation are records the JDB keeps in the ordinary course of business.73 Improper affidavits are addressed by moving to strike them for being in violation of one or more rules of evidence (typically the information the JDB is seeking to establish falls under the hearsay rule and does not fall under an established exception to the hearsay rule such as the business records exception). The creditor has every right to produce a witness at trial with the requisite personal knowledge or position with the original creditor to give testimony regarding the debt, and you have every right to demand that they do so instead of relying on inadmissible hearsay evidence. The problem for them is that it is usually prohibitively expensive (or even impossible) for them to do so. Tough luck for them, lucky break for you--usually. The "demand a witness" approach is not always availing, however. A hostile judge can derail it. One judge’s approach was simply to deny the debtor’s legal demand for live testimony by claiming he was doing the debtor a favor in that when (not if) the creditor obtained its judgment the debtor would also be on the hook for the creditor's costs in flying in the witness from a distant city. The judge pointedly ignored the probability that the creditor would not be willing to go that far and would have either settled the case low or simply allowed it to be dismissed. The Perils of Being Unbanked This discussion is about another nasty surprise that you cause to yourself rather than the creditor causing it. Whether it is because they are in Checksystems, or because they have a fear that a creditor will seize their accounts, or because they simply don't trust banks or the government, many consumers choose to keep a large part of their wealth somewhere other than banks and brokerage accounts. Such an approach has many risks, some of which are not obvious. On December 18, 2007, the Lima News of Lima, Ohio reported that Luther Ricks Sr., a robbery victim, had $400,000 of his cash seized by the Lima Police Department and turned over to the FBI.74 Because marijuana was found in his home, in order to get the money back he would need to prove that he had lawfully earned it. A situation like this illustrates that keeping your money under the mattress (in this case Mr. Ricks had a wall safe, which the thieves had been unable to break into--but police with a warrant made him open it) is no solution to difficulty banking due to money troubles. In short, the government has gone well beyond seizing money from people's cars and from their
Debt Collection under cloud: Sandusky woman’s case raises questions nationwide
See generally the excellent treatise on defending consumers against Debt Buyers prepared by the Daniel Edelman of the Edelman, Combs law firm: http://www.edcombs.com/CM/News/collection
defense debt buyer.pdf
Conflicting Tales Behind Cash Seized by FBI http://abcnews.go.com/TheLaw/FedCrimes/story?id=4656671&page=1
Evaluation Copy – Not for Sale or Redistribution Suppose you do decide to keep cash on hand. Anyone who is going to hoard cash should staple all the stored bills to their corresponding ATM receipts or bank envelopes, and should not obtain cash anywhere else but at an ATM or a bank. Spend the cash in a "First In-First Out" manner so that the oldest withdrawal is always used first and the hoard's average age is rising as little as possible. Cash needs to have a demonstrable legitimate source, so you don't want those ATM receipts to be too faded. Keep in mind that cash depreciates rapidly in an inflationary environment, and has no value if the government itself has failed. It is simply not a lasting store of value (ever tried to spend a Confederate dollar?). It will also become more suspicious the longer it is stored--as recent years have shown, the treasury must now change the bills on a more or less regular basis to deal with the Iranian and North Korean ability to make counterfeit "supernotes."78 In hoarding cash you will need to cope with the aforementioned question of how easy will it be to spend (or deposit) large bills from two or three revisions ago without attracting undue attention. And if your home burns, cash will burn with it. Gold can at least be recovered from the ashes. If you have decided not to hoard cash, or you receive cash that you do not feel safe storing, you should buy gold coins or even gold jewelry (as mentioned before, small 14k gold rings are ideal). And if you store your money as gold coins, the coins should have numismatic value rather than just intrinsic gold value. The reason for that is that after the Patriot Act79 federal regulations now distinguish between bullion gold and "antique numismatic gold" having a value of at least twice the value of the gold alone.80 In the 1930s private the U.S. confiscated bullion gold government (with compensation paid in paper currency)81 and it was not until the 1970s that the public was again allowed to legally own gold. If economic times should become desperate enough this could happen again. The key difference will be that this time the dollars received by those who surrender their gold will no longer be backed by gold as dollars were in the Depression era. The government's re-codification of the distinction indicates that it is laying the legal groundwork necessary to declare another confiscation. Even if you do not comply with the confiscation your gold will be unmarketable due to the stiff legal penalties that will be imposed on the buyer if he or she is caught. Therefore it makes little sense to hold bullion gold, but there is every reason to hold gold jewelry or coins having numismatic value. Be sure to permanently retain receipts for any gold purchases you make. The downside to holding numismatic coins and jewelry is that you will want to insure them, and insurance records will be available to any judgment creditor who wants to subpoena them. And once the judgment creditor knows what you have, the creditor is in a position to ask a court to make you give it all up.
http://en.wikipedia.org/wiki/Superdollar http://en.wikipedia.org/wiki/USA_PATRIOT_Act 80 http://edocket.access.gpo.gov/cfr_2006/julqtr/pdf/31cfr103.140.pdf 81 http://en.wikipedia.org/wiki/Executive_Order_6102 54
Evaluation Copy – Not for Sale or Redistribution aggregate balance in the bank probably exceeds the applicable FDIC insurance protection limit, meaning it is exposed to loss in the event of a bank failure. There is also the risk that the operator of a warehouse bank wills some day claim to have never heard of you when you go to get your money out of their bank. Because warehouse banks are so illegal, they are also difficult to find in the first place. Don’t go looking, and be sure to turn away any such offers that find their way to you. The Perils of Ordering Checks from Checksystems Affiliates If you are in Checksystems but you open a bank account at a bank that is not a Checksystems user, you may think you are safe from further problems with Checksystems. Unfortunately, if you order checks from Current, Deluxe, Designer Checks or Checks Unlimited they share their data with Checksystems, and Checksystems will advise your bank that you are on their list, potentially resulting in your account being closed. This is only good business as far as Checksystems is concerned, since even if your current bank isn’t paying to be able to put their bad accountholders into Checksystems, the value of Checksystems to the banks that do use it is enhanced when the former customer finds doors closed unless and until he or she makes things right with the former bank where the account was held. Where can you get your checks printed? Harland Clarke84 is believed to be a “safe” option, and if you ask around on the Internet bulletin boards you may discover others. The Perils of Banking Out of the Country Although for most debtors the amounts involved and their financial positions frankly mean it won't make sense, here is a brief description of the foreign banking option and why it has nasty surprises of its own. Debtors can and do move their money offshore. In times past, countries such as Switzerland had bank secrecy laws on the books that allowed individuals to hide their money there, and even after Switzerland was persuaded to open itself to international disclosure of the identities of its banks depositors (formerly only for non-routine investigations—until recently Swiss banking secrecy was still in place in most cases), methods still existed to use third jurisdictions like Gibraltar or Hong Kong to obscure the identities of depositors.85 Other nations such as the Cayman Islands also became well known as havens for the funds of U.S. persons who didn't want the federal government, a creditor, or an ex-spouse to know what they had or where they had it. Although those days are not entirely gone, it is a fact that for most depositors of significant funds into foreign accounts the monies will either be traceable or there will be a violation of any number of customs, anti-money laundering or tax laws, including a requirement to check box on Schedule B of your 1040 form and the requirement to file a Report of Foreign Bank and Financial Authority (more commonly called an “FBAR") every June 30 if you have signature authority over any accounts that have over $10,000 total in them at any time during the prior year.86
84 85 86
Swiss Aren’t So Secret Anymore http://online.wsj.com/article/SB125019858099730281.html
Evaluation Copy – Not for Sale or Redistribution to set up withholding that will give you a refund), but keep in mind that you may be liable for interest or penalties in the event you have underpaid taxes in an amount greater than $500, so it pays to be conservative with those exemptions. Wage Garnishment Wage garnishment89 should never come as a surprise, but all too often it does. A creditor with a judgment against you may get an order garnishing your wages at any time and without prior notice to you, although there may be notice and an opportunity to go before a judge before your employer is actually required to begin deducting monies from your paycheck. In other cases you simply notice that your paycheck is suddenly missing a substantial amount of money due to a new line item appearing on the pay stub. There is a federal limit on the amount of wages that can be deducted from your pay, and often states are even more restrictive—but you may have to go to court to enforce that limit. To reduce the amount taken, you must appear before the court with a disclosure of your particular income and financial circumstances and establish your right to obtain a further reduction in the amount taken out every pay period. If you have enough dependents, you can potentially even zero out the amount the creditor can obtain. Keep in mind that if you close off this opportunity for the creditor, the next step may be for the creditor to attack your bank account, your personal property, your car, or your home—so if you still have substantial assets your best bet may be to negotiate a payoff with that creditor or evaluate whether bankruptcy is an appropriate option. Arrest and Jailing This is another item that should never come as a surprise but sometimes does. An oftenstated myth is that there is no debtor's prison in the U.S. And it's true; there is no debtor's prison in the traditional sense.90 In other countries a debtor may be held in prison at the behest of a creditor, which is not true in this country. However, in those countries it's typically also true that the creditor must pay for the room and board of the debtor. What happens in this country is that the debtor is picked up and held because of a failure to satisfy a disclosure requirement or turnover order of the court, not specifically because a debt has not been paid.91 Typically this will occur because the debtor failed to provide information requested by the creditor regarding the debtor's financial circumstances, either by failing to respond to written interrogatories or failure to appear at a debtor's exam, which is a sworn deposition under oath. Typically also, requests for these kinds of disclosures are only made once or twice per year. However, in some jurisdictions, creditors’ attorneys have been known to schedule them monthly, sometimes even at two-week intervals. Debtors
http://en.wikipedia.org/wiki/Garnishment http://en.wikipedia.org/wiki/Debtors'_prison - United_States 91 Example: http://www.usmarshals.gov/process/body-attachment.htm 58
Evaluation Copy – Not for Sale or Redistribution being recorded, and they will get the police involved if you make any threats (in a recent case that appeared in the press a telemarketer did just that to someone who was tired of calls trying to sell him an extended warranty for his car and who had threatened to burn down the telemarketer’s offices)94. Stay home and use your mail, e-mail or your fax machine. Badges on a Percentage It may seem odd that public functionaries would have an incentive to collect from you beyond the fulfillment of their statutory duties, but New York City and New Jersey both have unique governmental functionaries with vested financial incentives to collect on a judgment against you. In New York City they are referred to as New York City Marshals,95 and in New Jersey they are Officers of the Special Civil Part.96 If you have been sued in Special Civil Court in New Jersey, the officer who is sent to collect from you receives 10% of the first $5,000 collected and 5% of any amount collected in excess of $5,000, and the commissions are paid by you, not deducted from what the judgment creditor receives.97 New York City Marshals likewise have a financial incentive to collect from you--a "poundage" fee of five percent of whatever they collect. If they collect enough to satisfy the judgment, then their poundage is additional on top of what is owed to the creditor, but if they collect less then it comes out of the amount the creditor receives.98 Massachusetts also has poundage, as do Illinois and Ohio. In most other places the sheriff receives flat fees for collecting from you, and even in other parts of New York and other states where the same incentives are available to sheriffs, their other duties mean that they are not as keen on collecting as the Marshals, whose only other duties are overseeing evictions and the impounding of cars for unpaid parking tickets. New Jersey attorneys filing in Special Civil also receive an extra 5% fee on the first $500 and an extra 2% on any monies collected above that, over and above any attorneys’ fees they receive based on the contract sued upon. Debtors in both places often face practical challenges that debtors in other jurisdictions do not. For instance, because the Marshals are so motivated and empowered, New York City dwellers often find that their bank accounts in the city have been found and seized. Judgment Revival Judgments typically have long statutes of limitations, but once they have expired they are dead, done and gone. However in some states judgments that have expired can be
94 95 96
Ohio Man Jailed for Threatening Telemarketer http://law.rightpundits.com/?p=636
http://en.wikipedia.org/wiki/New_York_City_Marshal http://en.wikipedia.org/wiki/New_Jersey_Superior_Court - Special_Civil_Part 97 http://www.judiciary.state.nj.us/prose-1.htm 98 http://www.nyc.gov/html/doi/html/marshals/marshal_judgments.html - faq24 60
Evaluation Copy – Not for Sale or Redistribution Washington, Virginia and Wyoming however, allow judgments to accrue interest at the contract rate, as does the State of Florida (with the exception that in Florida the judgment is subject to an 18% usury cap). For credit card holders who have been ratejacked into the 37.99% stratosphere, the result is devastating. For those debtors the only hope is likely Chapter 13 bankruptcy or waiting for the judgment to expire. However, the debtor who has moved out of state could possibly also attempt to prevent the judgment from following into a new state by opposing any UEFJA filing of the outof-state judgment. Although judgments are supposed to receive full faith and credit in other states according to the U.S. Constitution, there is room for courts to modify or undo results that shock their consciences. If your new state isn’t among the minority that let interest run wild, the court in your new state should be unwilling to continue with the interest on the first state’s judgment as applied by the first state’s judgment statute, and should instead substitute the capped interest rate in your new state going forward—potentially even retroactively to the date you established residence in the new state. Harassment The section on zombie collections describes CAMCO. There are more CAMCOs out there, but most of them are smaller operations that operate beneath the radars of the FTC and the states unless and until enough complaints come in.100 For historic reasons,101 many of these collectors are either based in Buffalo, New York or are operated by individuals who got their start in Buffalo or with a collector who learned his trade there. The Buffalo-style collectors still operate the way debt collectors did before there was a Fair Debt Collection Practices Act (FDCPA)102, and you can expect them to violate it in every possible way. These collectors will call relatives and neighbors and tell them you are a deadbeat. If they sense that a relative is at all concerned about your well-being or may be concealing information from them, they will make threats to the relative. They will call themselves attorneys, police officers, private investigators, fraud investigators, and any other position they can think of that they believe will give them a shred of authority to frighten you or someone else. They will contact your employer's payroll department or human resources department by fax or phone in circumstances when they have no right to do so (when they do not yet have a judgment), they will harass your boss and your co-workers and whoever answers the phone where you work. They will send paperwork that appears to be from a court even when they haven’t filed a case and don’t intend to. To get you on the phone they will call your work pretending to be from your child’s
KHOU News, Mark Greenblatt, Nov 3, 2009 Consumers say credit wrongfully ruined by reckless debt collectors http://www.khou.com/news/local/stories/khou091102_mh_debt-collectors_.27b7d7e16.html?npc 101 Marine Midland Bank, one of the founding members of the Interbank Association that evolved into Mastercard, was headquartered in Buffalo prior to its merger into HSBC, and a collections culture sprang up to service those banks that pioneered credit cards.
http://en.wikipedia.org/wiki/Marine_Midland_Bank 102 http://en.wikipedia.org/wiki/Fair_Debt_Collection_Practices_Act 62
Evaluation Copy – Not for Sale or Redistribution players in this rotten corner of the industry are adept at using shell corporations and straw men (sometimes even duping attorneys into renting out their licenses) to conceal who they are and what they are doing. Some have even exploited incentives offered by cities that needed to have jobs brought to or kept in the area, collected hundreds of thousands or even millions of dollars from them and then closed up shop the moment the heat was on. Most individual collectors also use aliases known as “desk names” and conceal their true identities in order to protect themselves from being stalked. If you sue a CAMCOtype collection agency it can be difficult to determine who actually committed a particular act of harassment, although some states such as Oregon do require that collectors’ desk names be registered with the state. In most cases, reputable collectors will have a centralized registry of desk names and will be able to identify a particular collector who uses a particular desk name. Desk names are not per se illegal, and courts have on many occasions denied debtors’ allegations that use of a desk name was a deceptive practice.106 Courts understand that desk names serve a legitimate protective function. Another form of harassment is to show up at your house and loudly demand payment of the debt, perhaps in full view of your neighbors. Again, these forms of collection are forbidden to third party debt collectors under the FDCPA, but for original creditors you may need to fall back on state law claims. Debtors who owe large sums have also reported being followed by men in cars, sometimes in an obvious way. Tactics like these are known as rough shadowing, or lockstep surveillance and they are almost always things that you can sue for. In times past, tactics have even included bumping into the debtor, tripping the debtor, spilling the debtor’s food on him in a restaurant and in extreme circumstances debtors have even been beaten up. Inspection of Property Creditors who have judgments will sometimes send a sheriff's deputy to inventory the contents of your home. This is often just an intimidation tactic: unless you are wealthy and have antiques and collectibles there really isn't much point in a creditor trying to sell that couch of yours with the ketchup stain on it. In many states you can refuse to allow the sheriff's deputy to enter your home--some sheriff's deputies will even straightforwardly tell you that (remember, if they're not on a percentage basis, there's really no additional money in it if you let them in, just a lot more time filling out paperwork). In most states the creditor would need to go back to court and get an order authorizing the deputy to break and enter if necessary. At that point you do have to let the deputy in. If you live with a spouse or a roommate who is not also a debtor, it may be necessary to point out to the deputy what you own and what is owned by the nondebtor. It is also possible that a non-debtor could assert a privacy right in court that would prevent the inspection from taking place.
Example: Kleczy v. First Fed. Credit Control Inc. 486 NE2d 204 (Ohio App 1984)
http://oh.findacase.com/research/wfrmDocViewer.aspx/xq/fac.%5COH%5COH2%5C19 84%5C19841116_0040908.OH.htm/qx 64
Evaluation Copy – Not for Sale or Redistribution debtor can sue for if the creditor fails to do its part), while others leave it to the good sense of the debtor both to insist on getting one and to decide whether, where and when it gets recorded. In some instances, the debtor might want to omit to record the satisfaction, particularly if a judgment or lien is near expiration and the debtor doesn’t want to see “paid judgment” lingering on his or her credit reports for another seven years. As the debtor you want to obtain enough originals of the satisfaction to record them everywhere they might need to be recorded, as well as a few extras that can be stored in safe places in case of fire or flood. If at some time in the future the debtor needs to prove the debt was paid, the satisfaction is proof positive that the debt was paid. If you live in a state where the creditor is required to record the satisfaction but you want to control its recording, you may be able to negotiate with the creditor’s attorney to sign a waiver of your rights that will allow you to take custody of the satisfaction(s) and responsibility for the recording process instead of leaving it to the other party. It’s something they would just as soon not have to do, so the waiver should not be much of a problem. For most creditors, the judgment was obtained in the ordinary course of business and the satisfaction is likewise just another piece of business. There are, however, smaller creditors who take things personally. There have been situations where creditors have refused to provide a satisfaction purely out of spite (one even told the debtor she wanted to make her life a “living hell”), even though garnishments had returned to the creditor every dollar that was due. Your best defense is to keep meticulous track of every dollar paid to a judgment creditor by any means, and to document (and recording record) every contact you have with the creditor, especially as it relates to obtaining satisfaction documents. In the event your reasonable efforts to obtain satisfaction paperwork are unavailing, most judges will slap the judgment creditor with an order to show cause and potentially also some sanctions that will put money in your pocket for your time, trouble, and the damages done to you by having an unpaid judgment on your record for longer than was absolutely necessary. Creditors who can’t be found Sometimes a debt will appear on a credit report that a debtor needs to pay, and for one reason or another the creditor simply can’t be found. Although this often occurs with older judgments, it also happens sometimes with regular tradelines too. In the case of a judgment, it may be possible to pay the registry of the court the full amount of the judgment plus interest and obtain the court’s own satisfaction (the court will hold the money until the creditor claims it).108 If that is not possible, you may need to bring a court action to close out the judgment in the event the judgment creditor or their successors or heirs cannot be found. Unfortunately in the event you have to pay the court, there will be no opportunity to negotiate any sort of discount—the court will make an exact calculation and expect you to pay it.
Evaluation Copy – Not for Sale or Redistribution address at the time). If you have your own old bills, the changes may jump out at you. If not, going to an Internet bulletin board that is focused on credit or debt may help you find someone who has an old bill to compare. It can be well worth the effort. Countrywide Mortgage was caught in bankruptcy court reconstructing some of their paperwork, and the bankruptcy court sanctioned them severely.109 In other cases, creditors have been shown to be relying on affidavits of debt signed by individuals with no real connection to the company on whose behalf they are signing, or who were signing any affidavit that was put in front of them, or whose review of the accounts they were signing affidavits with respect to consisted only of the briefest glance at information shown on a computer screen. Reconstructed paperwork is often an effort to sidestep the requirements that a creditor must meet when attempting to re-establish lost or destroyed paperwork. If you can show a court that a creditor was using the former to dodge statutory or court-created rules regarding the latter, the court will be much more likely to throw out the case. The Sneaky Novation Credit Card As I mentioned above, one of the nasty surprises is the revival of an out-of-statute claim or the restarting of the statute of limitations due to a small payment. But a creditor can get a new claim without a payment—if you mistakenly agree to it. The act of turning an old debt into a new debt is called novation, and the creditor is perfectly entitled to ask you to do it. Sometimes, however, the request comes deceptively dressed in sheep’s clothing. Sometimes a debt buyer will team up with a credit card issuer and offer you a brand new credit card with the old debt already on it. Some folks think this is a good deal and will jump at the chance. What they don’t realize is that (a) the new credit card represents a novation that restarts the statute of limitations; and (b) the credit card lender probably won’t leave a reasonably high limit on the card or will even cancel it once the debt is paid. At one time a bank called Bank of Hoven teamed with a sleazy outfit called The Money Store to offer these sorts of cards, Midland Credit Management and LVNV Funding have done it and Capital One has been known to do so from time to time. American Express’s OASIS program should not be lumped in with the bad actors that play the novation game. In years past, American Express offered defaulted card members the opportunity to repay what they owed and by so doing earn an Optima card (if they otherwise qualified—this was not a program for people with horrible credit to get an Optima just because they repaid American Express). This was not a deceptive program, and a great many debtors successfully rehabilitated their standing with American Express—including re-establishing a valuable credit history with Amex reaching all the way back to the date the original card was issued. Because during the credit crisis of 2008-2009 American Express became a bank and now must follow Rule 5000, the OASIS program may no longer be as attractive as it was before.
Evaluation Copy – Not for Sale or Redistribution $5,000. I can think of only one reason to do the latter type of deal, and a debtor who is a pushover is just that reason. Short Sales With Continuing Liability Because of the mortgage crisis, many homeowners have concluded that their best option is the short sale. Short sales are taught to real estate investors in seminars, and they are fanning out across the country to relieve both homeowners and banks of troubled mortgages. That’s the good news. The bad news is that unless you negotiate a short sale correctly, you will face a lingering debt problem after your house is sold.112 Depending on the laws of your state and the type of mortgage on your property, the lender will still have a right to collect from you on the note even after having agreed to a short sale—unless you specifically negotiate that the lender gives up any further claim against you. Sometimes you can get that deal, sometimes you can’t (more frequently, debtors are asked to sign a novation promissory note for part or all of the deficiency— do not do so without legal advice!). If you can’t get the release, it may still make sense to do the deal, you simply will need to realize that you may have a battle in your future. Keep in mind that the lender or JDB who comes after you for the deficiency should be made to come up with the original note (which may be an impossibility) because lack of the note exposes you to the potential for double recovery (being sued again when someone else finds the original note), and to prove its chain of title to the note if it is a JDB. There are very strict requirements for re-establishing a lost note in most states, and you or your attorney should hold the creditor’s feet to the fire (in court if necessary) regarding every element that must be shown in court in order to do so. Collectors who kill you This last one will seem silly, but it isn’t silly to the people it has happened to. A creditor with access to the credit bureaus has the power to kill you. Maybe not for real, but in the CRAs’ computers being dead will assure that you never get credit anywhere, from anyone who checks the CRAs before granting credit. This tactic is seldom used and is almost always used on a retaliatory basis in an effort to force a debtor who will not engage with the creditor to come to the creditor. The creditor will then claim that it was all a mistake—but you’ll need to pay us or we won’t make it right. In any case, while calling someone dead may violate the FDCPA, it is not actionable as libel or slander. One large southern department store chain’s credit department has been known to pull this stunt on more than one occasion. The Coming Tsunami of Parental Care Costs This is one almost no one sees coming yet, and even your friends who seem to be in great financial shape may be living in blissful ignorance. The fact is when your parents
Evaluation Copy – Not for Sale or Redistribution Just because neither you nor your parent lives in a state with a filial responsibility statute does not mean that you can breathe entirely easy. There have been calls for a federal filial responsibility statute that would apply evenhandedly to everyone throughout the country. And frankly, because most nursing homes operate on a 1% profit margin, any nursing home that provides more than a level of care that barely meets standards is likely to ask all the elderly person’s children to voluntarily obligate themselves to pay significant sums of money over and above what Medicaid pays. Conclusion: Can You Be Surprise-Proof? Nobody will ever be surprise-proof, but if you take steps to protect your privacy and you treat your financial recovery with the seriousness it demands, you can avoid the vast bulk of abusive situations. It may not have taken much time to get into financial trouble, but it definitely takes time to get out, along with effort and forethought too. A policy of trying to constantly keep track of what you owe, who you owe it to and what they might do in order to collect will usually keep you at least a jump or two ahead of them. And that may be enough.
Evaluation Copy – Not for Sale or Redistribution loans and unpaid taxes) hold the weakest type of unsecured debt. They know this. Unless they can come to an agreement with you that allows them to collect something they will either have to sit there with nothing as the debt grows older and approaches the Statute of Limitations (discussed in detail below), or they will have to sue in court in the hope that they will win a judgment that will ultimately prove collectable. For the OC, this is an ugly picture since the loss they take will be substantial. For the JDB, it is a numbers game: a great many accounts they pay 3 cents on the dollar for will wind up having either no value or being sold for 2 cents on the dollar, while others will yield a full recovery or something less than full recovery that nevertheless represents a substantial profit. For you as the debtor the downsides of not settling are continued uncertainty as to your financial position, ongoing (but time-limited) damage to your credit rating and the possibility of suffering a judgment against you with its attendant loss of financial privacy, asset seizure and wage garnishment. If you are able to scrape together some funds, you may be able to settle a claim on a negotiated basis for 30%-50% of the inflated amount the creditor is now claiming. Negotiated settlements are not necessarily preferable or inferior to take-it-or leave it satisfaction attempts (described below). However, they will typically have the advantage of providing certainty that you have obtained quietus with respect to the account as well as documentation that you can use in the event a subsequent holder of the debt claims that it has purchased the debt from the business you are paying. In addition, in the rare circumstance that the business you negotiate the settlement with does not actually own (or have authority to settle) the debt you are paying, you will have dead-bang evidence that the business has defrauded you in obtaining money from you. A successful fraud case typically pays you back three times what you lost and also covers your attorney’s fees, so the business that defrauded you is usually ready to hand you back what you paid them without a lot of objection, provided you have the evidence. Negotiated settlements will seldom be effected for less than 20% of the balance claimed, and typically the lowest acceptable figure will be closer to 33%. OCs demand a greater percentage in settlement than JDBs (for instance prior to the financial crisis Citibank reportedly wouldn't go below 55%), but the latter will have inflated the balance further, so the dollar figures may not be too far apart. That means you're not necessarily getting a terrible deal paying an OC 50% or a fantastic deal paying a JDB 33%. The recent financial crisis has greatly increased the junk debt buyers’ willingness to entertain settlements.115 When you negotiate a settlement, you want to get from the creditor a settlement agreement. At a minimum, the settlement agreement should recite the following: 1. That the creditor is the owner of the debt; 2. That the creditor is agreeing to a full and final settlement;
Settlements, Payment Arrangements Becoming the Norm in ARM Industry
Evaluation Copy – Not for Sale or Redistribution "Accord and Satisfaction" typically requires a separate writing) as potential satisfiers of debt under § 3-311, which was a 1992 modification116 that has been enacted (in some cases with revisions) in nearly every state. It is therefore important to distinguish between Accord and Satisfaction as a longstanding principle of law that has on occasion been statutorily adopted in particular states, and "Accord and Satisfaction by Use of Instrument" under the UCC which is a recent innovation that affects a significant subgroup of satisfaction scenarios, all of which involve use of a check or money order. In each state there will be separate lines of case law that will address them separately, although some cases will turn on facts that require a court to analyze both as potentially decisive factors. In many states you will find post-1992 cases that seem to discuss one or another as though the other does not exist, and in some such cases it will seem obvious that the other should have at least been mentioned. Judges usually decide on (and write about) only what is put in front of them, and if one or both side(s) in a case argue that the case turns solely on issues related to one line of authority or the other, a judge who accepts the argument can properly neglect to discuss what he regards as extraneous. Some legal authors have described the accord and satisfaction process as a form of "exquisite torture."117 Any time you see those words applied to something that you can do to your opponents, you should sit up and take notice. A check sent in satisfaction of a claim is a tempting poison apple that will put the creditor to sleep forever--if it works. As with any method of resolving a problem, it doesn't always work for everyone in every circumstance. And hucksters (notably an outfit called Briggs and Baker118) have even abused it to the point where some people may tell you that it's a flat out scam. It is not a scam; it is a tool that used correctly and carefully has a good chance of succeeding. Even used incorrectly and carelessly it can provide a debtor with additional time to resolve debt situations and in some cases even allow for victory or at least a large discount on the creditor's part for a further settlement payment rather than having them choose to risk the vagaries of court. Essentially what happens in a satisfaction scenario is that the debtor's check includes written or typed (not pre-printed) language either on the front of the check or at the top of the back where the endorsement goes that reads more or less "In Full and Final Settlement." Your state's statutes or case law may prefer one place or the other, and may approve some phrases and not others. Make sure you have a copy of the front (and back, if that's where the restriction is) of the check before you send it out, and be sure to obtain a copy of the front and back of the check after your bank pays it. From state to state, the Accord and Satisfaction process is subject to many, many legal quirks. For instance in Florida the courts have approved a check that lacked any accord
Justia’s Link to the Ohio version includes the valuable official commentary to the model act: UCC §1-207’s Modernization of Accord and Satisfaction Law
http://www.lowenstein.com/files/Publication/8686f78d-158f-405d-9fb66f93142cedd0/Presentation/PublicationAttachment/3ff38f26-e96f-4d9e-bee37610c9777d2b/NYLJ - SMH - 06-14-04.pdf 118 http://www.ftc.gov/os/caselist/0323006/040213comp0323006.pdf 76
Evaluation Copy – Not for Sale or Redistribution UCC "Accord and Satisfaction by Use of Instrument" The UCC introduces several novel twists into the law of accord and satisfaction, essentially eliminating the accord requirement in many situations (despite retaining the term) and substituting a complex test that measures the intent of the debtor and the precautions taken by the creditor to avoid an inadvertent satisfaction--but only when a negotiable instrument (almost always a check or money order) is involved. The statute was designed to deal with the business innovation of high-volume check processing either outsourced to a bank or done by extremely low-level employees aided by automation to the point where they do not pay any attention to language written on the checks. Florida's version of the statute is typical, and instructive here:
673.3111 Accord and satisfaction by use of instrument.-(1) If a person against whom a claim is asserted proves that that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, that the amount of the claim was unliquidated or subject to a bona fide dispute, and that the claimant obtained payment of the instrument, the following subsections apply. (2) Unless subsection (3) applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim. (3) Subject to subsection (4), a claim is not discharged under subsection (2) if either paragraph (a) or paragraph (b) applies: (a) The claimant, if an organization, proves that: 1. Within a reasonable time before the tender, the claimant sent a conspicuous statement to the person against whom the claim is asserted that communications concerning disputed debts, including an instrument tendered as full satisfaction of a debt, are to be sent to a designated person, office, or place; (emphasis added) and 2. The instrument or accompanying communication was not received by that designated person, office, or place. (b) The claimant, whether or not an organization, proves that, within 90 days after payment of the instrument, the claimant tendered repayment of the amount of the instrument to the person against whom the claim is asserted. This paragraph does not apply if the claimant is an organization that sent a statement complying with subparagraph (a)1. (4) A claim is discharged if the person against whom the claim is asserted proves that within a reasonable time before collection of the instrument was initiated, the claimant, or an agent of the claimant having direct responsibility with respect to the disputed obligation, knew that the instrument was tendered in full satisfaction of the claim .
You will notice the term "unliquidated" in subsection (1) above. It is virtually never significant in a debt context, applying only in situations where the party paying and the party paid do not know exactly what the claim is worth. If you are in a fender bender and 78
Evaluation Copy – Not for Sale or Redistribution the transaction. The UCC provides that its provisions can be varied by contract.120 It does not provide that they can be vitiated. UCC § 3-311 provides several different ways that a creditor may modify the application of the general rule regarding accord and satisfaction checks, including the provision of a separate address and the return of the money within 90 days. Courts should be encouraged to read those variations as an exclusive list, after all Article 3 of the UCC governs negotiable instruments (checks and money orders) and defines what they mean, not what the contracts they may (on occasion) supersede and replace mean. In other words, creditors cannot declare in their agreements that another agreement can never be made, particularly by a means that the UCC expressly approves. Because the UCC and the case law typically requires any statement appearing on the check to be "conspicuous," I have had my check printer add special language to my checks just over my where my signature goes, in a place that is usually reserved for "Jesus Loves You!" or "Have a Nice Day!" They did it for $2.95 extra, and my added language reads "Recipient Negotiating Agrees to Any Terms Stated." The language serves to reduce the possibility that a creditor could successfully claim they were not on notice of settlement language appearing in the memo field, and thereby serves to give me a better shot at victory under non-UCC case law. One thing you should not do (because it is specifically mentioned in the official commentary to UCC § 3-311 as a reason to disregard the settlement language on a check that is portrayed as being a satisfaction check) is to have the check printer include "In Full And Final Settlement" in that space so that all your checks become ostensible satisfaction checks. Doing so negates the specific intent that you might have with any particular check. Conversely, the printed language that I include makes clearer that whatever I write on that check absolutely means what it says. I don't send a lot of satisfaction checks--perhaps one or two a year. If you are using them more often, it is likely you are misusing them and sooner or later you will either run out of people who will deal with you or you will have trouble in court. The "good faith" requirement is described by the official commentary to the UCC as being defined in § 3-103(a)(4) as not only honesty in fact, but the observance of reasonable commercial standards of fair dealing. The meaning of "fair dealing" will depend upon the facts in the particular case. It is difficult to imagine a situation where the conspicuous language on the check could be "dishonest" as to its nature and intent, so we must move to "reasonable commercial standards of fair dealing." It's a nebulous concept that is basically there to give courts an “out” in a case where they see that allowing a satisfaction check to be effective would work an injustice. The requirement is also mutual, so what may be fair to do to a creditor who never jacked your rate to 38% and who was always willing to work with you the two previous times you were in money trouble may be quite different than what is fair for you to do to a creditor who behaved just the opposite. What may be reasonable in the instance where you have been paying for three years without charging a thing on a card that had a high interest rate may be different from what is reasonable where you have run a credit union’s low-interest card up to its limit and never paid a bill.
See UCC § 1-302 http://www.law.cornell.edu/ucc/1/article1.htm
Evaluation Copy – Not for Sale or Redistribution credit card company except that he was merely seeking a discount and there was no dispute that appeared in the record of the case on appeal. 123 For a defaulted credit card debt still owned by the OC, the ideal time to send a satisfaction check is just shy of the 90-day delinquency mark. This gives you time to have the UCC § 3-311 90-day period expire while the creditor still holds the debt. The creditor will then quite likely purport to sell the debt to a JDB. If the JDB should sue you, there is a strong argument in your favor that the JDB bought nothing. From the JDB's perspective, they will likely have certain provisions in their purchase from the OC that trigger repurchase requirements in circumstances where the purported debt is nonexistent or is in bankruptcy or differs in certain other material ways from what the OC claims it is: debt that a debtor has defaulted on with no claims or defenses. To trigger the repurchase agreement it may be necessary for the JDB to lose their court case. You should strive for a decision that is "on the merits" (a judgment in your favor) or that operates as a decision on the merits (a dismissal with prejudice). If you win your lawsuit and the OC later comes after you (having been obligated to buy back the claim from the JDB) or sells the claim again to a different JDB, it will be important to be able to have a court decision in your hand that gives you claim preclusion, a legal concept that means the matter is res judicata and that no court should consider it again. The concept is not as strong as the criminal-law concept of double jeopardy because your freedom is not at stake, but it is a similar notion. Another tactic you might consider employing if a JDB enters the picture after you have used an Accord and Satisfaction with an OC is to send the JDB the same sort of accord and satisfaction check shortly before you send them separate notification that you believe you reached an Accord and Satisfaction with the OC (being sure you wait nearly the 90 days before sending them anything discussing the check you wrote to the JDB, just as you did with the OC). Yes, it will cost you more money, but it will also muddy the waters so thoroughly that you can quite likely successfully defend a lawsuit brought by either of them or by a JDB down the line: "Your honor, I've settled this claim twice, I'm out X dollars and I still have people taking me to court trying to collect!" If the OC has repurchased the claim from the JDB, you can argue that the OC got nothing and the JDB defrauded them. If the JDB hangs on to the debt and later sues you, you can ask them in court why they didn't take advantage of their repurchase rights and refund your accord and satisfaction check. In short, you are in court with evidence that you have paid two businesses that claimed to own the debt no less than 14% or so in settlement, and in the case of the JDB you can argue that it recovered what it put into purchasing the claim on top of having the right to send the claim back to the OC that it failed to exercise. In short, you're going to show the court that the JDB had other options than suing you if the JDB comes after you, and if the OC is the plaintiff, you're going to show that you paid the JDB while the JDB owned the debt, hence the JDB had nothing to sell back to the OC and the OC has been defrauded by the JDB when the JDB claimed to be
Petty v. Citibank (South Dakota) N.A., 218 S.W.3d. 242, (Tex. App.--Eastland, 2007)
Evaluation Copy – Not for Sale or Redistribution you expect your hands might appear to a court somewhere down the road if the OC, the current JDB, or some JDB down the line takes you there. In short, the question is whether you should inform the creditor during the 90-day period that you have sent the creditor a satisfaction check or wait and allow the check to "season" so that the creditor will be beyond the 90 days and cannot avail itself of the opportunity to send the money you paid back to you. Section 3-311 provides no guidance on this issue, nor does its official commentary. However, the UCC generally requires "good faith" and that requirement is a strong shove in the direction of providing them additional notification within the 90 days rather than withholding such a notification. Any letter you send should briefly describe a dispute that you have with their billing, such as an excessive interest rate or how high the late fees or other charges are. You can then touch on the financial difficulties that brought you to the point where you needed to send them an amount that was less than their claim and how you believe that amount is reasonable in light of the amount that some other source of funds (such as Medicare in the medical context, or a Junk Debt Buyer in a credit card debt context) would provide. If you are feeling particularly frisky you might also specifically refer to the approaching 90day deadline from the date they credited the funds to your account and request that they refund your payment if they intend to abrogate the settlement at attempt to sue you for the entire balance. There are calculators online that will give you an exact day count if you want to explicitly identify for them deadline date by which they will need to cut you a check. If you have paid them in preference to other creditors or have paid on the account for several years at a high interest rate without making any charges on it, you should state that as well. If you are concerned that they will send the money back but are not terribly concerned with them continuing to dun you and report to the credit bureau as an increasinglydelinquent unpaid claim, you may want to delay communicating with them until the latter part of the 90-day period, although I would make sure the timing of any written communication would allow it to be received and read no later than 10 days before the period expires. From the point of view of a court, ten days should be a reasonable amount of time to send a check back. However, from the point of view of a business that is as bureaucratic and incapable of handling exceptional situations as most businesses are, an opportunity that expires in 10 days is one they will have extreme difficulty responding to in a timely manner. If you get a check back that was cut after the 90-day period expires, return it to the creditor with a polite letter advising that it simply came too late. If you know the creditor has money troubles and is about to go out of business in one way or another, you should time the letter so that it will be received ten days or more before that happens. Once a creditor enters bankruptcy or is shotgun-wedded to another bank by the FDIC, its accounts will be gone over by bank examiners or professional bankruptcy trustees looking for opportunities to collect more money, but they will not want to send a check back to you in order to put themselves in a position to do so. In the case of bankruptcy, the paying out of funds for such a purpose would need to go through a judge or special master for approval, and that just isn't likely to happen. If a letter is in the file that informed the creditor of a satisfaction check, the potential new owner of that
Evaluation Copy – Not for Sale or Redistribution experts who oversell the ease with which it can be used by the debtor to avoid debt, the fact remains that for many debtors it will put an end to a painful episode. In short, the Statute of Limitations defense, properly plead in response to a creditors' lawsuit, will dispose of the lawsuit if you are able to prove that it has indeed expired. Yes there are plenty of ifs, ands and buts, however the Statute of Limitations remains one of the most powerful secret weapons in a debtor's arsenal. To use it properly though you need to understand it fully. If possible you should understand it better than the lawyer who is suing you and even better than the judge who is working the case. It's that important. Unfortunately it can also be very murky. You will find some books on debt that will include tables of statutes of limitations for every state in the union. Even if these tables have been meticulously researched and are correct to the best of the writers' understandings, they still fall woefully short of accounting for all the real-world variations in both fact patterns and in the case law that can develop around the statutes themselves. For courts, the so-called "black letter" law is hardly ever the be-all and endall. For that reason you will not find such tables in this book. You need to do the homework. The first step in using the statute of limitations defense is identifying the operant statute. An Internet search for "statute of limitations" and the name of your state will often yield a table of state names with headings like "open account" and "written contract" and periods of years listed. This information is almost worthless. In most states there are simply too many things that can affect the running of the statute for you to give the table heavy credence. It will typically merely be a starting point that is potentially applicable to the most plain-vanilla scenarios. To really know what limitations period applies and whether it has run or not, you will need to know a lot about your debt and you will also need to know how courts view debts like yours. That information may be easily assembled, or it may require a lot of sleuthing. The arrangement of your state's statutes in the statute books and the presence or absence of "case law" will determine whether your search is easy or difficult. Ideally, your state statutes group all of the statutes of limitations together, perhaps under a heading such as "Limitation of Actions" under the "Civil Procedure" chapter. In a less-than-ideal circumstance the statutes of limitations will be scattered through the sections that cover individual reasons that one person or business might sue another. In researching the statute of limitations in your state you also want to check your state’s consumer protection statutes for provisions that make it illegal to sue on a debt that is time-barred. North Carolina’s legislature recently enacted one such statute, and it awaits the governor’s signature to make it effective as of October 1, 2009.126 If you are sued on a time-barred debt in a state where doing so is illegal, the statute may allow you to assert a counterclaim and collect statutory damages. A consumer debtor is likely to have five basic types of debt: mortgages, installment accounts, medical accounts, credit cards and utilities. Each type of debt will have its own statute of limitations, though that statute may be shared with other types of debt. Keep in
Evaluation Copy – Not for Sale or Redistribution (locus sigili) will appear on the signature line, and the statute of limitations will be an extremely long one. Ten years and twenty years are not uncommon, but there are even states such as Delaware where documents under seal have no statute of limitations, and any staleness defense to an old contract like that will have to depend on the principle of laches.128 If the limitations periods are scattered in the statutes, you may catch a break with respect to particular types of accounts that are covered by the Uniform Commercial Code, such as installment sales like auto loans. In those instances, the UCC is written in such a way as to place the statute of limitations last in the sections that form a particular Article of the UCC. They do this for the convenience of state legislatures, who can simply lop off the last provision if it conflicts with one that is already part of their statutory scheme. If your state isn't fastidious about keeping all the limitations provisions in one place, they've probably left the limitations provisions on the relevant UCC Articles. The UCC statute of limitations with respect to car sales financing is, for instance, four years. In some cases a federal statute will override the state statute of limitations for a particular type of debt. That is the case for cell phones and landlines, which have a two-year statute by federal law.129 There may be other specific instances where federal statutes curtail the statute of limitations period. In cases where a surviving spouse may be held liable for the debts of a deceased spouse, some states (such as California) have a special, shortened statute of limitations of one year for say a hospital to bring suit for unpaid medical bills from the deceased's final illness. 130 Finding the time period will be the easy part. Now for the hard part: Just knowing where the correct statutory language can be found only gets you part of the way to knowing whether the statute of limitations has passed for a claim against you. The only way to know with certainty how a court will treat your particular debt vis-à-vis the state's statute of limitations scheme is to find a court case that directly addresses the question. The court cases will be found in the reporter series that covers your state, and a blurb that cites that court case (if it exists) will be found in the annotated version of your state's statutes or code under the section where that particular limitations period is established. Once you have the court case in hand, you will be able to know (and prove to a judge and to the creditor's attorney) that your debt is covered by a particular time limit, and you will be able to determine whether your case is outside that time limit before you answer the complaint or talk to the judge. Before citing any court case to a court, you need to learn to shepardize (the act of using a citator service such as Shepard's131 to assess the ongoing viability of the case as precedent in the court you are appearing before). Some cases have been frequently brushed aside ("distinguished") by other courts for one reason or another,
http://en.wikipedia.org/wiki/Laches_(equity) http://www.law.cornell.edu/uscode/html/uscode47/usc_sec_47_00000415----000-.html 130 Collection Bureau of San Jose v. Rumsey http://www.precydent.com/citation/24/Cal.+4th/301 131 http://en.wikipedia.org/wiki/Shepard%27s_Citations 88
Evaluation Copy – Not for Sale or Redistribution Your state's statute of limitations may be lengthened or shortened by borrowing statutes that adopt the statute of limitations law of the state where the claim arose, or by a statute that allows a court to lengthen or shorten the limitations period of another state if the application of it in a particular case would be seen to work an injustice. The contract may contain a legal situs provision that in a choice-of-law134 state will determine which state's substantive laws will apply to the claim. Your state may come down on one side or the other of the steadily shifting consensus with respect to whether a statute of limitations is substantive or procedural law. In matters of procedural law state courts invariably apply their own states' laws, while in matters of substantive law the courts apply other states' laws when circumstances call for it. If your state is a choice of law state, one such circumstance would be the legal situs (state) whose law the contract adopts. The interplay between the two state's laws may be irreconcilable, or it may create a circular "Catch 22," and in those instances your court must apply conflict of law135 principles to choose one or the other. If you lived for some period of time in a state that you were living in when its statute of limitations with respect to one of your debts expired, you can often successfully argue that the claim was not revived when you moved to a state with a longer statute of limitations—especially if the state where you live has a borrowing statute that adopts the statute of limitations of another state if that state’s statute expired before you moved away. But you must beware state law provisions that can keep a statute of limitations from running at all so long as you are not in a state where a claim arose. A particularly nasty situation is one where that state's court might have made a ruling that the permanent tolling of the running of the statute with respect to people outside the state applies even to people who have never, ever set foot in the state (New Hampshire).136 In my view such a ruling unconstitutionally denies equal protection137 under the law to U.S. citizens who happen to reside in another state, however it will stay on the books and be good law unless and until some person goes to court to challenge it. And unfortunately, debt situations seldom give rise to constitutional claims that courts will bother hearing. One benefit of all this confusion is that I view legal situs contract provisions as actually creating debtor's choice with respect to statutes of limitation by virtue of being an ambiguity in the contract that must be resolved against the drafter according to longstanding legal principles that require that. Although the trend is to treat statutes of limitation as substantive rather than procedural law, this distinction is one that a consumer cannot be expected to know or understand, so a consumer can assume that the SOL of the state where he lives applies. Or the consumer can assume that he could take advantage of a shorter SOL in the state where the creditor claims situs. Either way unless the legal situs provision is specific in stating that it does or does not apply to statutes of limitations, the consumer has a couple of good arguments that the shorter statute applies.
134 135 136
Avery v. First Resolution. Note also that in this case the consumer was suing for FDCPA violations and the case boomeranged to her detriment. http://www.websupp.org/data/DOR/3:06-cv-01812-47-
DOR.pdf 137 http://en.wikipedia.org/wiki/Equal_Protection_Clause 90
Evaluation Copy – Not for Sale or Redistribution terms--harsh terms alone (if adequately spelled out in large enough print) would not allow for relief. Ownership Quandaries One key element of the tangled fiasco that has been the mortgage crisis has been securitization.140 Essentially, loans were sold to investors not as a whole, but sliced up into “tranches” that were supposed to have been predictable streams of income and predictable levels of risk. Often the loans themselves were held in trusts that were formed for the benefit of the holders of the various securities. The trustees of the trusts had duties to the owners of the securities to preserve the value of their investments, but because those investments had differing characteristics, an action by the trustee that would benefit the holder of one type of security would likely hurt another. This built-in conflict of interest inevitably deprived the trustees of the ability to deal creatively with debtors in default: all the trustees could safely do was foreclose. Some courts have been extremely skeptical of these arrangements, and have refused to allow foreclosures to go forward without someone having authority to represent the ownership of the mortgages step forward and declare themselves amenable to a workout. Congress and the president have also stepped in with their efforts to add a bankruptcy cramdown provision to allow for mortgages to be written down to the value of the homes, but as this book goes to press, cramdown has not yet passed in Congress. Mortgage problems are not something to take on yourself, and not something where the help of dubious businesses advertising on radio, television or with snipe signs are going to really help you. You need a lawyer, period. Where you may not need a lawyer is in the area of credit card debt. Because securitization also took place with respect to credit cards, when such securitization has been used (you can find this out from press reports) courts cannot be certain whether a card issuer or JDB that is suing you is the actual owner of the debt. An issuer known to securitize its cardholders’ debt (for instance, Advanta Bank141 or Bank of America), should be required to bring in a history of when and to or from whom it sold or repurchased the account in question, along with documentation of those sales and repurchases. Without a complete and unbroken chain of title to the debt and live testimony on the witness stand to establish the validity of that chain of title, the degree of certainty necessary for a court to render a judgment against you is missing and should not be glossed over by the court. Although the debt buying industry is not rife with fraud, it does happen that a debt buyer will on occasion fraudulently sell a portfolio it doesn’t own.142
140 141 142
Former Debt Buyer Sentenced to Six Years in Prison for Fraud
Evaluation Copy – Not for Sale or Redistribution often treat the latter with disdain when any real opposition shows up (and sometimes even when it doesn't).144 For the larger players in the food chain there will be significant amounts of information available on the Internet, often including their financial health as reported by news organizations, their actual SEC filings145 if they are publicly traded, experiences written up by disgruntled employees, debtors' descriptions of their phone tactics, other debtors describing what percentage settlements they were able to negotiate and whether the creditor would agree to PFD or to withhold the issuance of a 1099-C form, and any enforcement actions against them taken by state or federal regulators. For the small fry, you can also use tools like Google's street view146 to get a look at their business premises (keep in mind that if you see a gleaming office building it doesn't necessarily mean that the business you are dealing with is not simply using mail service or a tiny office at an office-suite business in that building provided by Regus147 or one of its smaller competitors). Smaller players will often get themselves in trouble by pretending to be a law firm or a law enforcement agent. A favorite gambit is to form a shell entity or even just create a phony business name and sometimes even a "tombstone" style single-page website with a few lines about the nonexistent business so that when you search on it you will think it is real. Fortunately, they're not always that creative in how they do it and there will often be clues that something isn't right. One of my favorites was the essentially nonexistent investigative firm whose made-up name was clearly a division of an Olympic swimming-medallist and Tarzan actor's last name into two separate names. Assuming your claim never lands in the hands of a JDB who offers an attractive settlement opportunity and you find at some point you are dealing with a lawyer then it is time to take a much closer look at the legalities of whether collection is possible, as well as the negotiation option and the disclosure option. If you find instead that you are dealing with a cowboy from Buffalo, it's time to break out the recording equipment and prepare letters to regulatory authorities and perhaps the attorneys general of your own state and the one where your opponent is located. Conditions Precedent Many types of legal claims cannot be brought unless certain things have happened or have been done by the party attempting to enforce the contract according to its terms. These requirements often fall into the category of conditions precedent.148 A condition precedent is simply something that sets up the ability of a party to claim the benefit of a law on the books or a clause in a contract. Without the condition precedent there can be no claim. In a real-life, out-of-court example, a football sitting on a tee is a condition
144 145 146
LVNV Funding v. Moehrlin http://www.consumerlaw.org/unreported/content/Moehrlin.pdf
http://www.sec.gov/edgar.shtml http://en.wikipedia.org/wiki/Google_Street_View 147 http://www.regus.com/ 148 http://en.wikipedia.org/wiki/Condition_precedent 94
Evaluation Copy – Not for Sale or Redistribution done, but it is a much stronger claim where the debt was business debt properly incurred for business purposes and the guarantor did not personally benefit. Statutorily Weak Claims In the run-of-the-mill contract case, the court has a certain amount of discretion in allowing or disallowing certain evidence, but if the creditor proves its case the court does not have discretion not to award the creditor a judgment for the amount of its damages (although if there is no court reporter present, judges often do almost as they please). That is not always the case, however. For certain claims, state statutes may give the judge discretion with respect to whether to grant a judgment at all. One example is mortgage deficiencies in the State of Florida. The Florida Statute on foreclosures puts the granting of a deficiency judgment in the "sound discretion" of the trial judge.155 Case law has put a further gloss on the subject, and it provides that the judge must put down a reason for not granting a deficiency judgment.156 The requirement that the judge put down a reason merely gives an appellate court something to look at in deciding whether the trial judge has committed an abuse of discretion, so that "my lunch isn't agreeing with me and I want to go home early and not waste time determining how much damages this mortgage holder gets so I'm giving them nothing" isn't going to hold up. But a sympathetic judge will almost always be able to write down something that will help the debtor while satisfying any concerns an appellate court might have. What the judge cannot do is overcome evidence in the form of paperwork and photos. Which means that if you are foreclosed on, you want to leave your former home in as good condition as possible, as though you were a renter leaving it "broom clean" in the hope of getting your deposit back. You do not want to spray paint parting invective on the walls, or let your ferret redecorate the carpets for several weeks prior to moving out. If a potential claim against you is going to be discretionary with the court, you also want to do everything possible to look like the good guy when the court gets a chance to look at the case. That means that you do not only do you not do unnecessary damage; you don’t leave a paper trail of profanity-laced letters directed to your creditor. As a practical matter, you may want to consider every potential claim against you as discretionary with the court. Unless there is a court reporter at all of the key hearings and there is case law that flat out says the judge can’t do what the judge did, and the creditor is willing to appeal, any break the judge gives you is unlikely to be undone.
§ 702.06, Florida Statutes
http://www.flsenate.gov/statutes/index.cfm?App_mode=Display_Statute&Search_String =&URL=Ch0702/SEC06.HTM&Title=-%3E2009-%3ECh0702-%3ESection%2006 0702.06
Galloway v. Musgrave, 154 So.2d 846, 851 (Fla.App.1963)
http://fl.findacase.com/research/wfrmDocViewer.aspx/xq/fac.%5CFL%5CFL3%5C1963 %5C19630619_0040976.FL.htm/qx 96
Evaluation Copy – Not for Sale or Redistribution some creditors do not provide media to firms with whom they do not have a contractual relationship, which means that buyers at the second, third and fourth placement levels are unable to purchase the media directly from the creditor even if they want to. They may be able to buy or obtain it from a JDB further up the food chain, however. And for older accounts, some or all of the media is often simply unavailable because of corporate record retention (destruction) policies. In other cases, the media will be impermissibly reconstructed (as discussed in the Chapter 4--Nasty Surprises), and should never be admitted in court as evidence to be relied upon. Discover Card and Countrywide Mortgage have on occasion been caught reconstructing their media. Because they are playing a numbers game, most JDBs are largely undaunted by media problems, they go right on buying “tapes” with only lists of names, account numbers, social security numbers, addresses and defaulted balances from creditors, and when they receive a validation request they make a decision whether to sue immediately, put the claim aside, sell the claim to the next buyer in the food chain or pony up to order the media. The decision is made based on the JDB's historical effectiveness in suing in your locality, your credit score, what it can sell the debt for and the cost (and quality) of the media it needs to buy. JDBs do adjust the prices they are willing to pay for debt based on their experiences with the quality and availability of cooperation from the OCs, including the OCs' media. In some cases where a JDB decides to sue, the media its attorney attaches to the lawsuit papers will be comically faulty. In one case I know of from a western state, the caption of the lawsuit was the only part that correctly named the debtor. The body of the allegations had the debtor's name wrong and named a creditor that the JDB had not purchased the debtor's debt from. The contract referenced yet a third debtor and the statements reflected the name of a fourth debtor and yet another creditor. The debtor I was corresponding with researched the claims filed at her local courthouse by the particular attorney representing the particular creditor and found that 97% of them were faulty in one way or another. The attorney dismissed the action against her after being confronted with these facts in mediation. Likewise in New York, an Urban Justice Center study in 2006 found that in a sampling of debt actions in 99 percent of cases where default judgments had been rendered that the evidence used to obtain the judgment did not meet the state's legal standards.157 That does not necessarily mean that if the debtor had defended the case he or she would have won, but it does mean that the debtors were foolish not to show up and engage in the process. In some cases the creditor's attorney will be unable to correct the flaw in a timely way, while in other cases an impatient judge will have seen enough of faulty cases and their claim will be dismissed, perhaps with prejudice. In New York, as of January 1, 2008 court clerks were no longer permitted to enter default judgments unless they were accompanied by an affidavit that asserts the attorney pursuing the judgment has reviewed the original records concerning the debt.158
Debt Weight: The Consumer Credit Crisis in New York. City and its Impact on the Working Poor
Evaluation Copy – Not for Sale or Redistribution Limiting Database Entries As the world grows more computerized, Internet-connected, bar coded and RFIDembedded, we are all more and more naked to the invisible eye. No piece of your personal information is safe, and creditors can sometimes look at your buying habits down to the register-tape level if you are a member of a discount club at a grocery store or pharmacy chain. Every time you do something that generates a public record or make or miss a credit card payment, that information becomes available to your creditors by virtue of Choicepoint, Lexis/Nexis and the CRAs. Any movement on any database that indicates an increased ability to pay on your part may be reason for them to wake up and perhaps even to pounce. Creditors also use scores like Equifax's Bankruptcy Navigator Index or BNI.159 BNIs range from 1 to 300--higher scores predict lower risk of a bankruptcy filing. If a collector reasonably believes you'll go bankrupt then your file may not even get worked. If there is little chance of triggering bankruptcy, they'll be clamoring to get paid. The bankruptcy score cannot improve much without data points that indicate things like going back to work (many debtors foolishly start applying for credit again the moment they have a job) or paying off creditors (a good reason to keep settlements confidential, as mentioned below). You can fight back against being tracked by living an all-cash (or even barter) lifestyle that denies creditors a peek at your personal information. You can have any cars that you drive titled in relatives' names; you can avoid turning on electricity or signing a lease in your own name. At work, you can ask the human resources department to double-check with you before responding to any inquiries about your employment or pay status. You can opt out of marketing lists and you can avoid buying electronics and appliances new at big-box retailers. These choices become more and more onerous the harder you work to avoid leaving footprints. And at some point a lack of paper and electronic footprints becomes a failure to live openly and notoriously that can trigger tolling in some states’ statutes of limitations. As discussed in the Chapter 4--Nasty Surprises, if overused these methods can at some point also cause you difficulty down the road by turning you into a ghost. Ghosts are individuals whose credit files have become exceedingly thin or have even emptied out entirely. It can be difficult for a ghost to ever get credit again. Less difficult and often more effective than keeping new entries from showing up on your credit and public record reports, you can avoid updating existing entries on those reports, as was discussed in the Chapter 4--Nasty Surprises. Having creditors you have settled with omit to show the settlement on your CRA reports, and delaying or avoiding recording judgment satisfactions depresses your credit score and keeps other creditors from knowing that you have an increased ability to pay.
Evaluation Copy – Not for Sale or Redistribution Asset Protection, Asset Hiding, Asset Evasion Asset protection is the term given the legal planning opportunities that every individual has to put money or move money or other assets from categories that are nonexempt and can be reached by creditors to categories or places where creditors cannot legally reach. It does not involve any failure to disclose or any impropriety. Methods of asset protection include putting money in retirement accounts, moving to states where state-law exemptions from creditors remedies are generous (such as Texas and Florida), the formation of asset protection trusts inside or outside the U.S., and dispersal of assets into many entities and many legal jurisdictions. All of this is perfectly legal. Asset hiding is the use of less proper means to attempt to keep creditors from learning what assets you have and where they are. Asset hiding techniques would mostly come under the heading of moving assets physically away from your home or putting them somewhere within the home where they could not be found during an inspection. Asset hiding is not particularly effective where records of your purchase of the asset exist and are in the hands of the creditor, such as where you bought a flat screen TV from a bigbox retailer on your credit card, or where the asset appears in public records of registered vehicles, vessels or aircraft. Asset evasion techniques can include the use of false names, retitling assets into the names of friends or family members, and many others. Asset hiding and asset evasion are both improper, and in the appropriate case courts (especially bankruptcy courts) will sanction those who engage in it, sometimes even with criminal law sanctions, including imprisonment without trial (asset hiding and asset evasion can be viewed as contempt, and courts get to deal with that in summary fashion-no trial, just punishment). One of the all-time losers in the asset hiding and asset evasion game was Richard D. Schultz, himself a collector. He owned the collection agency National Revenue Corporation, and his business practices with respect to his horse farm got him sued for $5 million in 1994. He sold his company and created an elaborate scheme to make it look as though he lost the proceeds of the sale in various failed investments, meanwhile the money actually went overseas to the Bahamas, the Cayman Islands and to Guernsey Island in the English Channel, Canada and the tiny nation Luxembourg. Mr. Shultz,162 his brother, as well a Canadian accountant,163 a London attorney, Florida attorneys, a Florida accountant and others were also convicted or plead guilty in the scheme to defraud both the IRS and Schultz's creditors. One of the Florida attorneys committed suicide the day after he was indicted.164 While living in a trailer park after his release, Richard D. Schultz committed suicide in March of 2009.165 In general, any asset hiding and asset evasion that leaves a paper (or electronic) trail is courting disaster.
http://www.creditcollectionsworld.com/article.html?id=20061016C941SSVR http://www.usdoj.gov/tax/usaopress/2003/txdv03ohs30627_2.html 164 http://www.creditcollectionsworld.com/article.html?id=200610163UKY31QU
Evaluation Copy – Not for Sale or Redistribution Consumer Attorneys and Legal Aid If your income is low enough, you can often get help from your local legal aid office. If the misconduct of the creditor is bad enough, you can often turn to consumer law attorneys in your area (check NACA.net)167 on a contingency basis (meaning they don't get paid unless they win a judgment or settlement from the collector). In addition, states attorneys general168 are often quite interested in collector misconduct, as is the Federal Trade Commission.169 Don't expect the latter two to necessarily help you out as an individual, but in many cases they will go after and fine or shut down abusive collectors such as CAMCO. One thing that is important to realize though when a collector is shut down is that the assets (which include the junk debts) of the collector may go into bankruptcy proceedings and wind up being bought by another collector who will start the cycle all over again. Just because one collector is made to stop collecting a debt does not mean that the debt is dead. Conclusion Debtors are often unaware of the powerful tools they can wield against the creditor. Even tools that are arguably improper can often improve the debtor's position, if the debtor is careful and willing to back away from them if they reveal themselves to be liabilities. When it comes to taking care of your family or paying some creditor who long-ago wrote off your debt and got a tax break from Uncle Sam for it, you will need to judge who is more deserving, your loved ones or a JDB and its attorney.
http://www.naca.net/ http://www.naag.org/ 169 http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre18.shtm 104
Evaluation Copy – Not for Sale or Redistribution utterly defeated, but because that is the way to illustrate what can happen—and show that even defeat isn’t necessarily all that bad). Along the way, I’ll mention each and every point where the case could be thrown off the rails or potentially settled. A creditor with a claim will typically pull your credit report to see how much debt you owe and to obtain a bankruptcy score that it can use in order to calculate how much it might recover from a case against you. In many cases a public record report will also be pulled to try to ascertain what you own. Anything that you own in your own name that has to be registered with the state or on file at a county courthouse is going to show up, along with any businesses you are associated with, etc. These assets will be considered by the creditor to be available to it to the extent they are nonexempt or that their value exceeds bankruptcy exemption amounts. However, the creditor will deduct the value of any liens on the property. Because mortgages are public record and on your credit report and car loans are likewise typically on your credit report (along with most if not all of your credit cards and other loans), the creditor can make reasonably accurate estimates of what you own and owe to the extent that you have not taken steps to obscure ownership and the resolution of any other defaulted debt. If the asset and liability picture makes you suitworthy, the creditor will send its file over to an attorney with direction to contact you in an effort to get you to pay up. Typically at this stage the attorney’s office will attempt to increase the claim against you by charging you some threshold amount for its charges just to take the case. The attorney’s office will also have a pre-determined settlement authority, and the ideal settlement from their point of view is 100% of what the creditor is claiming plus the attorney’s fee. They will more likely agree to full payment over time (at an ongoing interest rate) than to a lump sum reduced settlement. Keep in mind that if they can get you to agree to a settlement that you pay over time, that will constitute a novation and will start the statute of limitations clock running again from day zero—regardless of whether the case was out of statute when they contacted you. Attorneys are very careful to attempt to calculate the statute of limitations accurately and begin lawsuits prior to its expiration, but even they can make a mistake on occasion— especially in situations that involve your having moved from one state to another while owing a defaulted debt. However, you can be sure that if the statute of limitations is rapidly approaching they either have a strong argument for why the date you’re considering as the deadline does not apply or they intend to sue within that date. Although it is possible that a deteriorating financial picture on your part may dissuade the attorney from pursuing the case and the statute date may pass because the attorney and the creditor made a mutual decision to allow it to do so, such a circumstance is rare once a genuine attorney’s office (not a rent-a-letterhead hollow-shell firm) has your file. Some attorneys’ offices ignore the statute of limitations on the belief that they can get default judgments and collect even on older cases. In some instances, the attorneys are extremely unethical and they string together several misdeeds in an effort to collect: if the case is out of statute, they file it anyway and make sewer service on the defendant, then they get a default and they let it “season” for a year to make it harder to reopen on a
Evaluation Copy – Not for Sale or Redistribution the law that are quite technical and that will require more knowledge than you may be able to acquire in the time that you have available. The greater the amount at stake, the greater the number of statutes or acts involved in the case, the greater the number of witnesses and the likelier the case is to actually go to trial, the more you need an attorney. As mentioned in Chapter 4--Nasty Surprises, a lawsuit begins when a complaint is filed with the court (exception: states like Minnesota and Washington have pocket service, and much of the case may be in process before the court ever becomes aware it even exists). Once the lawsuit is filed, you must either appear at a pretrial hearing (for small claims cases) or file a formal answer (which may need to be sworn in some cases) and file your affirmative defenses unless you are filing instead a motion to dismiss or another type of motion that is proper to file before the answer. But first there must be service of process on you. Service of process means that a copy of the complaint and any supporting documents are attached to a summons, which is a legal document identifying the court in which the case will be tried and how, when and where to respond to the complaint. The summons in small claims actions will typically direct you to a pretrial hearing on a certain date, while the summons in a court with jurisdiction over larger amounts must be responded to in writing (not with a mere letter, but with a legal document called a pleading, that either seeks to dismiss their case, or an answer that mirrors their complaint and responds to it point by point). Do not send a letter to the court or the attorney. You must send a responsive pleading (which looks like the complaint they sent you), and it must go to both the court and the attorney. Creditors' attorneys often win default judgments because of sewer service, which is simply a term for a fraudulent return of service by a process server. Process servers are supposed to find the defendant and personally serve him or her (or someone in the defendant's household over a certain age) with the lawsuit. In some cases, states permit methods of service that are not guaranteed to provide actual notice of the lawsuit to the debtor. These kinds of service are often termed nail and mail, meaning the process server needs to affix a copy of the complaint to the defendant's door and mail a copy as well. The lawyers who are filing the lawsuits are supposed to use reasonable diligence to ascertain where the defendant lives and they are supposed to have their process servers make reasonable efforts to make good service. The problem comes when the defendant has moved and either did not make his move "open and notorious" (by, say, filing a change of address notice with the post office), or when the lawyer filing the case either chooses to serve an invalid address or the process server does not follow the appropriate procedure. A lawsuit that is never served on you but which has a false return of service will still result in a default judgment, however that default judgment is voidable and can typically be vacated easily, regardless of whether you had a meritorious defense, provided you address it within a reasonable time after you learn of it.
Evaluation Copy – Not for Sale or Redistribution fully document the initial contract that established the credit card account and the charges and payments. They may have every piece of paper they need, but without someone from the original creditor to testify to their validity and correctness, their paperwork should not come into evidence because it does not qualify for the business records exception to the hearsay rule. For creditors that are out of business or operating from a distant state, the need to put on live testimony should be fatal (although sometimes the creditor will attempt to rely on phoned-in testimony, which you should object strenuously to). Another problem that JDBs often face is the inability to “prove up” the chain of title for the debt. If the debt has moved through several JDBs, they need to prove that the OC sold it to JDB1, that JDB1 sold it to JDB2, that JDB2 sold it to JDB3, and each of these sales needs solid paperwork to back it (the sale documents are called assignments and bills of sale)—paperwork that must be able to satisfy the business records exception to the hearsay rule (meaning more witnesses—a different one for each document). Barbara Sinsley, Counsel for DBA International and partner at Barron, Newburger, Sinsley & Weir, has been quoted in Collections & Credit Risk magazine’s February 2008 issue lamenting the situation: "The judiciary is just not familiar enough with debt buying. Evidentiary standards, for example, shouldn't be higher for buyers than for any creditor. My role is to help the courts answer: 'How can buyers provide information the courts need without needing to provide detailed documents from creditors that judges often want but don't really need?'"171 Never mind the documents Barbara, what about the witnesses to support the admissibility of the documents? The fact is though that evidentiary standards are not higher for JDBs, the evidentiary standards are simply much, much more difficult to meet because the JDBs have purchased claims they cannot (profitably) prove under the standard of proof that courts rightly require. Without making efforts that are out of proportion to the size of the dispute, JDBs typically can’t adequately prove they own the debt, they can’t adequately prove the chain of custody of the debt from one buyer to another, they can’t adequately prove the details of the account or that there even was an account. And if any of those proofs proves flawed the court should toss the case. Once cases get past the stage where the debtor ordinarily defaults, JDBs prosper in court only to the extent that they are able to hornswoggle courts into winking at the requirements of the laws that are on the books in every state in the nation—unless they really do produce those witnesses at trial (which seldom if ever happens). For the debtor, solid motions to strike affidavits along with requests for admissions and interrogatory questions designed to expose weaknesses in the creditor’s documentation will go a long way to resolving the claim favorably. Shifting gears, let’s take a look at the players in the court drama. Knowing who you’re dealing with and what their motivations are can mean the difference between frustration and a good result.
Collections & Credit Risk, February 2008, p. 25
Evaluation Copy – Not for Sale or Redistribution Attorneys may also want to attend hearings telephonically. Even though it is more convenient for the opposing attorney (and your first reflex might be to oppose allowing them to attend telephonically), there are few circumstances where you would want to object to an attorney attending a hearing telephonically because the attorney is giving up a key advantage. An attorney who is talking to a judge on a speakerphone is at a distinct disadvantage compared to a party to the case who is in the courtroom or judge’s chambers. The judge can see you, and you are clearly showing that the case has importance for you by actually making the trip. The attorney who is “phoning it in” is weakening his position, and has no opportunity to assess the judge’s (or your) facial expressions and body language. Judges Judges are the key players in the court game. Judges determine the facts, analyze the law and apply the law to the facts to reach a decision that almost always sticks. It really hardly matters what their attorney does, what you do, what the clerk does, etc. if the judge wants to do something that isn’t in line with what they’re doing the judge’s choice will prevail. Judges answer to the chief judge of their court, the board that disciplines judges, the appellate court above them and perhaps (but in many states not) the voters. Most of what judges do in their courtrooms is at their discretion and higher courts are only going to undo what they have already done in a very exceptional case. The appellate courts that review judges’ decisions carefully throttle the number of cases they are called upon to review and perhaps change. The key mechanism the appellate courts use to weed out the cases they will look at is the standard of review. The standard of review can be thought of as a yardstick for whether the appellate court will fix mistakes. Small mistakes are seldom if ever addressed by appellate courts. In situations where lower court judges have discretion (mainly those regarding the establishment and interpretations of facts), the standard of review is abuse of discretion, which means that to get the judge overturned the party to the case who didn’t like the result has to prove that the judge made a decision so bad that it can be called abusive. If a judge lets in a piece of evidence that he shouldn’t have, that may not be an abuse of discretion. If a judge doesn’t let one side speak at all, that would definitely be an abuse of discretion. Situations in between are often hard to guess, though there will be a lot of case law on what is or is not an abuse of discretion because it is often all that parties who want to appeal cases have to go on. The standard of review is different for matters of law. If a judge’s decision gets the law wrong, the losing party can often appeal on that basis if the losing party wasn’t the one who urged the judge to get the law wrong and if the losing party properly preserved the point for appeal by pointing out to the judge that the judge was getting the law wrong at the time the judge in fact got the law wrong. There is another doctrine in the law that prevents cases from being overturned where the error didn’t affect the outcome, however. It is known as harmless error. The bottom line is that you need to get the trial right; appeal is seldom a real option for the debtor in a debt case.
Evaluation Copy – Not for Sale or Redistribution Judicial Assistants Judicial assistants are the judges’ secretaries. They cannot give you legal advice. They keep the judges’ calendars, type their letters, answer their phones and otherwise serve as a buffer between the judges and the public. Judicial assistants cannot advise you regarding the law, but they can help with scheduling hearings, which is the key reason to deal with them. If you file a motion, you will need to schedule a hearing on it in order to get a ruling and change the course of the case (or potentially bring it to a screeching halt). The judicial assistant is the gatekeeper who will give you that hearing date. Once you have a hearing date (actually she will give you a set of hearing dates), you will contact the other side’s legal assistant and obtain their agreement to one of the dates. Then you will prepare a notice of hearing and send it to the other side and the court. Clerks The court clerk presides over the office that keeps track of all the papers that come in. The clerk’s employees clock in the papers so that the official date and time they were received is tracked, then they route those papers to the appropriate file jackets. They see that the file jackets get to judges’ offices when they are needed and are refiled in the right places when they are not in use. The assistant clerks who man the desks at the courthouse are there to make sure that the papers you present are in good order and that they go with the appropriate files and that the correct fees (if any) are collected. They cannot give you any legal advice. Their roles are strictly defined, and that’s all they can do. Court Reporters Court reporters are trained stenographers who take down every word of testimony in court proceedings and also in depositions. They charge for this service. The party requesting that the court reporter attend a session pays the court reporter to do so, and any party that orders a transcript also pays for the transcript. Unless a court reporter is present for a court hearing, most of what the judge says and does in the hearing will not be grounds for appeal. You always want to know whether the other side will have a court reporter in attendance, and if they are not planning to hire one, you may want to hire one yourself. Attacking a Debt Case In court, a debt case typically stands on four legs: standing, liability, damages, and being filed within the limitations period. If they’re not the creditor (or they can’t prove it), they don’t have standing. If you’re not the debtor (or they can’t prove it), you have no liability. If you don’t owe money (or they can’t prove you do), they have no damages. And if the case is filed past the applicable limitations period, it should be dismissed on that basis. There is an invisible fifth leg that is an out-of-court consideration: collectability. If you’re too flat broke to pay and have no prospects of coming up with money in the future, their suit is pointless and it doesn’t make sense for them to bring it.
Evaluation Copy – Not for Sale or Redistribution It’s the same with a written contract versus all those COAs that are “something less.” And because the creditor will almost always choose to allege the contract, you are in a position to make the creditor drop those claims that are something else. If possible, you want to leave the creditor with a claim that cannot be proven, but if that isn’t possible you want to leave the creditor with the claim that minimizes the damages. Damages and standing are proven by an account history. The account history is established by one or more written documents that must be admitted into evidence in order for the court to rely upon them. In order to be admitted into evidence, they must meet an exception to the hearsay rule (the court rule that says that things not directly experienced by the witness are not evidence—secondhand statements are not testimony). They key exception to the hearsay rule for documents such as the ones needed by the creditor is the “business records exception.” The business records exception applies when a records custodian from the business that generated the records testifies that they are authentic. In order for that person’s testimony to be accepted, they must know the record keeping operations of the business inside and out. The records must also have been generated at the times they purport to represent—later reconstructions should not be admitted into evidence. Finally, if applicable, the statute of limitations defense is the fourth prong of attack against a typical debt case. The defense is part of the answer, but is not plead in direct response to any of the allegations (you answer each and every allegation of the complaint just as though the affirmative defense was not in the mix). Instead you add a separate section to your complaint entitled “Affirmative Defenses” and you place your statute of limitations defense there, along with any other affirmative defenses you may want to plead. The precise language to plead an affirmative defense in your state is beyond the scope of this book, but in many states a simple statement such as: “The plaintiff’s cause of action accrued prior to the September 22, 2006 (X years prior to the filing date), and was filed on September 22, 2009, hence it is barred by Y state’s (the state chosen in the agreement) applicable three year statute of limitations.” Usually you’re in small claims court, and there won’t be a discovery process. The judge will ask the other side to come up with evidence of a more recent payment or an explicit new agreement on your part to pay (a novation). In a court with jurisdiction over greater dollar figures where the discovery process is in play, it is up to you to prove your defense, so you will need to request the necessary documents and answers from the other side. That means Discovery. Discovery In the old Perry Mason TV show, the trials were “trials by ambush” with Perry Mason always pulling out some surprise witness to unravel the hapless prosecutor’s case. You have probably heard countless times that court isn’t really like that. On Boston Legal cases seem to get filed one day and tried the next … again, they’re on TV, not in the real world. In real life, court cases are tried months, sometimes years after they are filed, and the small percentage that are tried get to trial after a long process designed to wring out those cases that are not real, substantial candidates for trial. A major part of that process
Evaluation Copy – Not for Sale or Redistribution 2. Cause your opponent to commit to using witnesses identified to you early and allow you the opportunity to depose the witnesses prior to trial; and 3. Provide you with every piece of paper that they intend to rely on at trial to prove their case. The details of discovery are not something that is within the scope of this book. In most cases you can find detailed help on credit and debt related bulletin boards. Creditors attorneys are not shy about asking for information that they are not yet entitled to. One key line of questioning that you should object to in a debt case would be any questions about your assets and liabilities. Unless and until they have a judgment, it is premature to ask you information about your financial circumstances. You should object to making any such answers. Legal Issues At some point in the case, certain legal issues may emerge and the other side may submit a memorandum, or the court may ask you to submit a memorandum. For someone who is not a lawyer, this is a difficult situation. Nonetheless, non-lawyers can and do write legal memoranda. After all, law school students do it even though they are not yet lawyers. Teaching you everything you need to know about writing legal memoranda is beyond the scope of this book, but here are the general principles you need to know. Legal principles flow first from the English Common Law,178 a body of laws that arose in the courts of England prior to 1776. After 1776, the common law of the U.S. diverged from England, and each state in the union began codifying statutes, which override the common law. Fleshing out the statutory skeleton that stands on the common law foundation is case law. Case law is the record of decisions of appellate courts in your state. A decision of a court that the court you are in answers to is binding precedent, while a decision of a court in another part of your state or in a different state is merely persuasive. Each decision that you will rely on in preparing your memorandum must be Shepardized (looked up in Shepard’s citator179) to assure its continuing validity. If other cases routinely follow it then it is a leading case and your court should follow it too. If other cases have questioned it, your court may not give it as much weight as it does other cases. If it has been overturned, its precedent value is largely destroyed. Legal issues can be substantive or procedural. The former will typically be the laws of contract, debt, and accord and satisfaction. The latter will be governed by a different set of rules typically known as the Rules of Civil Procedure.180 The statute of limitations often straddles the fence between substantive and procedural law, although the modern
http://en.wikipedia.org/wiki/Common_law http://en.wikipedia.org/wiki/Shepard%27s_Citations 180 http://en.wikipedia.org/wiki/Civil_procedure 118
Evaluation Copy – Not for Sale or Redistribution do is to hear the direct testimony of witnesses on issues of fact that are still in dispute, and the cross-examination of those witnesses, as well as to admit the evidence that is admissible. In some cases, one side or the other will want to disqualify certain documents or even witnesses from testifying, and this is accomplished using a motion in limine (to eliminate) those items that are undesired by one side or the other. The court rules evidence admissible or not according to the rules of evidence, which provide clear-cut answers in some cases, and in others require a court to determine whether evidence is more prejudicial than it is probative. In cases tried without a jury, courts are much more likely to just decide what to pay attention to on the spot rather than go through evidentiary motions. Juries need to be shielded from inadmissible evidence, while judges presumably know what to give weight to and what to ignore in their own courtrooms. Mediation After discovery, most cases go to some form of mediation.183 This is a meeting between you and the opposing party’s attorney, with a mediator also in attendance. Mediators are typically retired businesspeople. The mediator hears both side’s cases (without witnesses) and attempts to convince each side to settle the case. If the case settles, that’s the end of the matter; however if it does not settle, the mediator sends a report to the judge regarding the mediation. That report may call one side or the other unreasonable. You don’t want that to happen to you. Trial Trial is the process of addressing and hearing evidence about any issues in the case that are not agreed upon (stipulated to) by the parties. Each side will call their witnesses, establish the witness’s qualifications to testify, and question them about the facts of the case and about the certainty with which they know those facts. The court will hear all the testimony, and then the jury (if any) will reach a verdict and the court will make its judgment. In general, you should know your case better than the other side, and you should be ready to question each witness who is favorable to you and to cross-examine each witness who is not favorable to you in such as way a to call into question their credibility on the key issues. Or you should hire an attorney, even at the last minute, to come in and do that for you. Realistically, it is unlikely that you will take a case to trial unless it is a small claims case. And as a nonlawyer it is also unlikely that you will be able to successfully handle a trial in anything other than small claims court. But if you cannot get a case dismissed near the outset, you can often put a case in a position where the other side will not receive a summary judgment, and less frequently you will be able to ask for a summary judgment of your own. In the meanwhile, you can plan for a way to resolve the case for the fewest possible dollars.
Evaluation Copy – Not for Sale or Redistribution But if nothing much happens do not make the mistake of believing that the creditor is necessarily abandoning further pursuit. The creditor may be following a lurking strategy, and may even sit on the judgment for a number of months (if not years) before reevaluating it for wage garnishment, asset seizure, etc. If the creditor does require you to produce financial records, you need to review Chapter 5--Debtors’ Secret Weapons for the concrete steps you might take to make the creditor’s life more difficult and your negotiations to settle the claim potentially more favorable to you. Collections attorneys often refuse to take less than 100 cents on the dollar, at least at the outset; however months or years of frustration on their part can change their minds, or cause them to sell the debt to another junk debt buyer--and the next owner may be more amenable to negotiation because they paid less for the debt. Judgments can also be entirely forgotten by the creditor. Before you have a judgment against you, you should know what your state’s exemptions from levy are. If you are facing wage garnishment, you should know your state’s exemptions from garnishment. Some states exempt heads of household while other states have family and hardship exemptions that can reduce garnishments, often to zero. You will have to go back to court to assert these protections if they become necessary. Conclusion Court does not need to be a completely bewildering process. Although many people don’t take the time to understand how court works and they consequently allow themselves to be intimidated from participating in the court process, if you arm yourself with knowledge and are willing to show up and state your piece to the judge you can usually improve your position. Do not ever make the mistake of just rolling over by ignoring papers from the court. Always show up; always make the other side prove their case. And even if you lose, do not give up hope. I personally know of a couple that suffered a crushing judgment that almost reached six figures, but it was only chief among a lot of other financial blows. They lost their home, but found a nice rental nearby. They had to go to a single deposition in aid of execution—the creditor never collected a dime and never troubled them again. They did not declare bankruptcy, and never received a form 1099-c. Within 7 years their credit was clear and they did things like trade in cars for newer used ones bought on credit. The breadwinner had to work on past retirement age, but within a couple of years after the spouse died the breadwinner retired on a pension and bought a house in the exurbs, a single county away from their former home—even though the judgment had technically not yet expired and with interest was worth well into six figures. The judgment wasn’t on the CRA reports and wasn’t picked up in the underwriting process, and within months it finally expired without ever having been renewed. The creditor simply didn’t have the will to continue to sink money into trying to recover on that judgment, even though he could have garnished the breadwinner’s wages after the death of the spouse and potentially also attacked the breadwinner’s bank accounts and even taken a paid off car with considerable value over and above the exemptions.
Evaluation Copy – Not for Sale or Redistribution
Chapter 7 -- Bogus Solutions and other Pitfalls
"The easiest way to be cheated is to believe yourself to be more cunning than others." -- Pierre Charron, French philosopher Action Items: Learn what doesn’t help and why you should stay away from it
Debt Termination The Internet is rife with hucksters peddling bogus solutions to your debts, or things that simply do not produce the best results. One of the most prevalent among the bogus ones is the “no money lent” debt termination scam.185 The fraudsters take $2,500 or so of your money and claim to teach you the secret that banks do not actually lend real money and thus they cannot recover from you in court. This is blatantly untrue and courts do not accept it. Other scammers attempt to convince you that your debt can be transferred by you to some irresponsible third party who will then be the only one the creditors can go after. Again, this isn’t true (although the creditor can sell the debt to another buyer—they can transfer, you can’t). In another dodge they would have you claim that the name they sued in isn’t you because it is printed in all capital letters and somehow refers to a “straw man” who doesn’t really exist and isn’t the debtor.186 In general, the Fifth Amendment to the U.S. Constitution requires that every court in the land uphold contract law even when the government itself improperly tries to impair it, and those few artful dodges that sidestep that requirement (and their limitations as well) are explained in this book. Still other hucksters may claim that once a creditor charges off an account it is no longer enforceable against you by them (or by a third party who buys the debt from them). That is simply not the case … nearly all loans can be sold or otherwise transferred (the nearly universal clause that allows it is termed an assignability clause) and the new owner simply steps into the shoes of the old. The sole caveat is that the assignment must be properly documented and if necessary witnesses need to be produced in court to qualify that documentation to be admitted under the business records exception to the hearsay rule. Volenti Non Fit Injuria This is another bogus legal argument. In tort law (the law you use when a negligent driver injures you, for example), if you consented to the other party’s act you have no right to sue.187 If you’re in a boxing match and get hit in the stomach, the doctrine means you can’t sue your opponent because your appendix burst. Some folks will try to
http://www.debtjurisprudence.org/invalidation.html IRS Revenue Bulletin 2005-14 on the “Straw Man” http://www.irs.gov/irb/200514_IRB/ar13.html - d0e756 187 http://en.wikipedia.org/wiki/Volenti_non_fit_injuria 124
Evaluation Copy – Not for Sale or Redistribution solution for someone with smaller balances and the prospect of better days ahead economically, it is usually not as good a solution as a debtor might obtain in formal or even informal bankruptcy. The credit counselors are basically working for the creditors as a kinder, gentler form of collection agent (the creditor kicks back to them a small percentage of what the debtor pays, which is called the “fair share” payment). They simply will not negotiate your balances down, though they may eliminate some interest and penalties. Many credit counseling services were fly-by-night, and the IRS began taking a very hard look at their nonprofit statuses several years ago.188 That does not mean that there are not legitimate, ethically unblemished credit counseling services out there. It just means that you may need to put in some effort to find a good one. A good starting place is the website http://www.nfcc.org/. 189 If you do choose credit counseling, it is best to withdraw each account from credit counseling one or two payments before it is paid off. When you do this, the notation for the account will not show credit counseling. Paid off TLs that do not have a credit counseling notation are rated better than those that show credit counseling. Debt Settlement Companies Debt settlement companies charge you money up front, and then they take money from you periodically with no guarantee that it is actually making it to creditors and reducing your debt. Debt settlement companies keeping the money they paid in and leaving them no better off have burned many people.190 They are almost never nonprofit businesses, and their methods are hit and miss. Some creditors flat out refuse to work with debt settlement firms. A major drawback to debt settlement firms is that they do not negotiate for the creditor not to issue a 1099-c form, which can leave you owing thousands in taxes you didn’t expect (this is something you need to negotiate for on your own if you negotiate settlements to your debts). Debt settlement firms also will not typically negotiate the notation on the TL. In order of preference, you would want the notation to be paid in full, paid, settled, settled for less than amount owed (provided you do not have other debts you will need to pay, in which case the order is reversed)—if you accept any notation at all rather than insisting on a pay-for-delete or an agreement not to update the account and not to respond to your disputes. Typically a debt negotiation firm’s work will stick you with the last, worst notation on the foregoing list. They also will not negotiate the timing of the reporting of the payments or the creditors’ non-responsiveness to future disputes. In other words, they leave the creditors’ credit reporting entirely to the creditors’ usual method of operation— a result that you often could modify in your favor if you negotiated on your own behalf.
IRS Revokes Tax Exempt Status of Dozens of Credit Counselors http://chronicle.com/article/IRS-
Revokes-Tax-Exempt-Status/37036/ 189 http://www.nfcc.org/
An Inquiry Into Firms That Offer To Cut Debt
Evaluation Copy – Not for Sale or Redistribution assets, you need an attorney (Chapter 7 “no assets” cases are more amenable to “do it yourself” bankruptcy). If you are an impoverished provider for your children and your wages are being garnished, local legal aid or a law school legal clinic should be able to help you reduce or even eliminate the garnishment. Many attorneys will give you a free consultation, and it often makes sense to organize all your documents and go in, just to get a read on how much an attorney can really help you. Attorneys who do (or may) work for you are not a pitfall. In this chapter we’re focusing on the other side’s attorney. A key thing you should never do is trust the word of an attorney who is trying to collect a debt from you. Do not trust that person is actually an attorney. Do not trust that they are actually admitted to practice or authorized to collect in your state. Do not trust that anything they propose is the best alternative for you. Do not trust any statement that you do not need to answer any court document or attend any court hearing. There are far too many tales of woe from individuals who signed paperwork that revived expired debts, or who skipped a hearing the attorney told them they didn’t need to show up for, or who were told they had no possible defense to a debt case that could have been defended on any number of grounds. Don’t take anything they say at face value. Assume there is always a better solution than what they propose. As an attorney, I find creditors’ attorneys who trick debtors to be the most unethical creatures walking the face of the Earth. The rules of professional conduct for attorneys are very detailed and specific regarding how they must deal with unrepresented persons, and in every other area of the law attorneys are scrupulous in this regard. Somehow it goes out the window for a significant part of the creditors’ bar, and they are rarely held to account.192 “Helpful” Collectors Every collector just wants to get your money and be done with you. A great many will tell you that up front, but others take a different approach. Starting in the late 1980s and reaching its zenith in the mid-1990s before going spectacularly bust in 1998, Bill Bartmann’s Commercial Financial Services, Inc. pioneered a new approach in working with defaulting debtors: they were nice.193 The collectors took a “cooperative” rather than a confrontational tone with debtors. As a result, CFS appeared to prosper. Today many collectors attempt to emulate CFS’s approach. The problem for the debtor is that these firms really still just want one thing: money. And they have committed themselves to using every analytical tool and every psychological trick in the book to get it. Dealing with this sort of collector on the phone is like cozying up with a seduction specialist from the CIA. You need to constantly keep in mind that no collector ever wants to help you more than they want to help themselves. In dealing with them, you still follow the same rules and get the same assurances in writing before
Ethical Considerations Particular to the Collection Attorney http://www.dudleyandsmith.com/mktethics.html 193 http://en.wikipedia.org/wiki/Bill_Bartmann 128
Evaluation Copy – Not for Sale or Redistribution back.195 CRAs have internal auditing software and procedures that they do not tell their employees about (or perhaps they do tell them, a few just don’t get it). Another credit doctor “trick” is to have you register for an EIN (employer identification number) with the IRS and attempt to pass it off as an SSN (social security number). At one time, this gambit (known as file segregation) actually could succeed in getting you some credit.196 Now it’s just likely to get you investigated for fraud. Paper Tripping Once upon a time young men who wanted to avoid the Vietnam War bought a book called The Paper Trip197 and obtained the birth certificates of children who had died in infancy in order to assume their identities and avoid the draft. Others who had bad credit would do the same thing. It’s fraud, and it’s a lot harder than it once was, especially in a post-9/11, Patriot Act and RealID world. In short, if you try to do this you will get caught and you will be looked at as some sort of terror suspect and you will have a lot more trouble than if you had just lived with whatever credit or debt problems you have.
Fraud At Credit Bureaus Alleged, Los Angeles Times, August 31, 2004 ‘File Segregation’: New ID Is a Bad IDea
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre23.shtm 197 http://www.edenpress.com/category.asp?index=15 130
Evaluation Copy – Not for Sale or Redistribution acceptable terms, and leaving the others to twist in the wind or sell the debt to someone you can negotiate with or conquer if need be. Different ways of dealing with debt have either time-honored names or newly minted catchy names: Bankruptcy, Credit Counseling, Debt Settlement, and Debt Elimination. Thousands are already using the methods suggested in this book, but the methods have no catchy name. The closest I can come is the term Debt Navigation, which gives some hints as to what you need to be doing: charting a course, knowing where the hazards lie, but being cognizant that there are forces at work over which you have little control and that you may have to respond to when they suddenly arise. Whether you choose to think of the environment in which you are working toward solving your debt problems as a mountain climb, or a trip down a hazardous river or along a rocky archipelago, or making your way across a battlefield or a minefield, the notion of removing the effort from dayto-day monotony of your life and placing it into a context where strategy and tactics are necessary should give you the intensity of focus you will need if you are going to achieve success. Ultimately, it is more your determination, persistence, and willingness to roll up your sleeves and do the work to battle your opponents that will determine your results more than the amounts you owe and who you owe them to. Once you have picked your way through the debt minefield, there will be time to go back and improve your credit rating. Because it would be such a costly mistake to try to do that while under the debt cloud, I have for the most part left the techniques of improving your credit out of this book—referring to them mainly in the context of what not to do yet. Look for those in my next book: “Credit Hope: Cosmetic Surgery for a Battle-Scarred Credit Report.”
Evaluation Copy – Not for Sale or Redistribution CHARGEOFF– the creditor’s decision that an account is not performing and must be declared a loss for tax purposes. CHECKSYSTEMS – A reporting agency that solely tracks consumers’ performance under the agreements governing their checking accounts. A negative entry on Checksystems (commonly known as Chex) can prevent the opening of bank accounts at any banks that participate, and can lead to closure of accounts at nonparticipant banks if the consumer uses a check printing company that reports to Checksystems. CLAIM – a creditor’s demand or legal proceeding. COLLATERAL – property pledged by a borrower to protect the interest of the lender, such as the home or car that secures a mortgage or auto loan, respectively. CONSUMER – person(s) or entity obligated to repay a debt or loan, which is taken for personal or household purposes. CONSUMER LOAN – a loan or credit, secured or unsecured, which is granted to an individual or individuals for the purpose of financing the purchase of consumer goods or to defray personal expenses. CONTACT – an actual written or verbal response to a creditor or collector from the debtor or the debtor’s legal representative. CREDIT BARTERING – A creditor’s deletion of a negative tradeline in return for payment by the debtor. Often said to be illegal, it is actually only a violation of the creditor’s contractual duties to the CRAs. CREDIT (DEBT) MESSAGE BOARD – A website where users share their knowledge of credit and debt situations in message forums. At present some of the best known are creditboards.com, creditinfocenter.com, creditnet.com and debtorboards.com. CREDITOR – One to whom a debt is owed. DATE OF FIRST DELINQUENCY – The date that the debt first became delinquent and was never again brought current. DATE OF LAST ACTIVITY – 180 days from the DOFD. DEBTOR – one who owes a debt. DEFICIENCY BALANCE –the difference between the balance on the loan and the net recovery from the auction or sale of the collateral for the loan. DOCUMENT –a paper that tends to prove or support a debt.
Evaluation Copy – Not for Sale or Redistribution PAY FOR DELETE (PFD) – The consumers’ term for credit bartering. POCKET SERVICE – A procedure available to plaintiffs in a few states which allows them to begin a lawsuit without actually filing the case with the court. Because no case number appears on the documents, some defendants are confused and consequently allow themselves to be defaulted because they are unable to confirm the case filing with the court and therefore believe there is no “real” case. POISONING – Repeated hard pulls in an effort to drive down a consumer’s credit scores and prevent others from granting the consumer credit. PRIMARY PLACEMENT (sometimes also termed “Prime”) – an account defined as a New Chargeoff or Fresh Chargeoff account at the time of purchase by the original creditor selling the account. PRINCIPAL BALANCE – the amount owed on a loan without regard to accrued interest, fees or other charges. PRD – Public Record Database (Choicepoint and Lexis/Nexis). A bureau that reports on the public records of each state, county and city with respect to any particular individual. QUIETUS – A Latin term that means something is dead, done and gone and will never be heard from again. RATEJACK – term to describe what a creditor does when it suddenly raises a consumer’s interest rate by a large increment. REAGED ACCOUNT – an account that is brought to a current status, even through the total past due amount has not been paid. This is the “good” type of reaging. RE-AGING – The improper act of reporting an incorrect DOLA to the CRAs in order to put or keep a TL on the debtor’s reports. RIGHT PARTY – The debtor. In the event a creditor is calling, the FDCPA requires creditors to be assured they are speaking to the right party before discussing the debt because discussing the debt with third parties is prohibited. RMCR – Residential Mortgage Credit Report (a/k/a “Full Factual”), this report can be generated on a mortgage for over $150,000 and unlike a consumer credit report it will also show tradelines older than 7 years. SECONDARY PLACEMENT – an account that was defined as a Primary Placement Chargeoff account at the time of purchase by the debt buyer selling the account. SETTLEMENT – payment that achieves quietus with respect to an account; (b) written settlement documentation evidencing a settlement.
Evaluation Copy – Not for Sale or Redistribution
APPENDIX – SAMPLE SETTLEMENT AGREEMENT
IN THE CIRCUIT COURT FOR NONESUCH COUNTY, FLORIDA BUSINESS LITIGATION DIVISION BIG BAD JDB, INC., a Delaware Corporation, Plaintiff, v. LIL OL BUSINESS, L.L.C., a Florida Limited Liability Company, d/b/a LIL OL BUSINESS, JOHN SMITH, and MARY SMITH, Defendants. UCN: REF:
This Settlement Agreement is made as of this day of November, 2007, by and among the undersigned, and is intended to settle and resolve with finality all civil claims against all parties to this litigation and their predecessors and successors relating to the subject matter of this litigation, which have been or could have been asserted by any of the Parties hereto. WHEREAS, BIG BAD JDB, INC. (“Plaintiff”) commenced this action in March 2006, asserting various claims for monetary relief against LIL OL BUSINESS, L.L.C., JOHN SMITH and MARY SMITH, (collectively, the “Defendants”); WHEREAS, Defendants have contested the claims in the complaint and Plaintiff has contested Defendants’ counter-claims; and WHEREAS, the undersigned Parties have agreed to settle their litigation pursuant to financial terms acceptable to all Parties. NOW THEREFORE, it is hereby agreed as follows:
Evaluation Copy – Not for Sale or Redistribution "Released Parties"), from any and all manner of civil claims, demands, actions, suits, and causes of action, damages whenever incurred, liabilities of any nature whatsoever, including costs, expenses, penalties and attorneys’ fees ("Claims"), known or unknown, suspected or unsuspected, accrued or unaccrued, whether legal, equitable or statutory, both past and present, as to any claims that were or could have been made in this action, and as to the future, as to all Claims directly or indirectly based on, arising out of or in any way related to, in whole or in part, whether directly, indirectly, representatively, derivatively or in any other capacity, ever had, now has, or hereafter can, or may have (hereinafter, collectively, the "Released Claims"). Excepted from this release are any insurance or indemnity obligations regarding claims for personal injury or property damage to third parties that accrue prior to the date of this Settlement Agreement, but that are not asserted until after the date of this Settlement Agreement. The Parties hereby covenant and agree that they shall not, hereafter, sue or seek to establish civil liability against any Released Party based, in whole or in part, upon any of the Released Claims. The Parties agree that this covenant and agreement shall be a complete defense to any such civil action or proceeding. The claims herein being doubtful and disputed, the Plaintiff herein shall not file a form 1099-c or any similar document with the Internal Revenue Service. The Plaintiff herein shall delete any tradeline that has been placed with any creditreporting agency with respect to any of the Defendants. The Plaintiff herein shall refrain from obtaining an interest in any outstanding debt with respect to any Defendant herein except as may be acquired in a bulk transaction. IV. COSTS AND FEES The Parties shall bear their own costs and attorneys’ fees. In the event litigation is necessary for the interpretation and/or enforcement of this Settlement Agreement, the prevailing party shall be entitled to its reasonable costs and attorneys’ fees in securing such relief. Any and all disputes relating to or arising under this Settlement Agreement (including any action to enforce this Settlement Agreement) shall be brought in and resolved by the Nonesuch County Circuit Court in Tampa, Nonesuch County, Florida. V. MISCELLANEOUS A. HEADINGS. The headings of the paragraphs and sections of this Settlement Agreement are not binding and are for reference only and do not limit, expand, or otherwise affect the contents of this Settlement Agreement. B. NO ADMISSION. This Settlement Agreement and any proceedings taken hereunder are not intended and shall not in any event be construed as, or deemed to be, an admission or concession or evidence of any liability or any wrongdoing or the forgiveness of debt whatsoever on the part of any party or any Released Party. The
Evaluation Copy – Not for Sale or Redistribution any of these terms to any third party other than their attorneys, accountants and tax professionals or as may be required by law. The Parties and their respective attorneys, if they have one, agree that they will not in any way publicize or cause to be publicized in any news or communications media, including but not limited to, newspapers, magazines, journals, radio or television, the terms or conditions of this settlement. Upon inquiry by third parties other than Credit Reporting Agencies about the status of the dispute between the parties or of the Lawsuit, the Parties may indicate only that the dispute has been resolved and that all claims in the lawsuit have been dismissed with prejudice. With respect to Credit Reporting Agencies, the Plaintiff shall not respond to any dispute the Defendant(s) may lodge with same. L. LIQUIDATED DAMAGES – In the event the Plaintiff shall fail to fulfill any of its duties under this agreement, the Defendant(s) shall be entitled to $2,000 for each such failure as liquidated damages, or to actual damages as the case may be. BIG BAD JDB, INC. a Delaware limited liability company
By: _________________________________________________ Bob Jones, Senior Vice President & Assistant Secretary
LIL OL BUSINESS, L.L.C.
By: _______________________________________ JOHN SMITH, Managing Member
_______________________________________ JOHN SMITH, Individually and as Guarantor
_______________________________________ MARY SMITH, Individually and as Guarantor
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