Debt Collection

Question:  What do I need to know about creditors?

Often disasters can trigger financial crises as victims fall behind in their bills. Missed payments or collection actions can damage their credit ratings. Victims should notify creditors of the situation as soon as possible. Some creditors will agree to postpone payments for a period of time.

A)    Debt Collection Communicating and Negotiating with Creditors

If the debtor can afford to make small monthly payments, he or she should contact the creditor to ask if the payments are acceptable and reach an agreement on all of the following:

1)    Total amount owed on the bill, including the interest to be added each year
2)    Amount of monthly payments
3)    Due dates that payments must reach the creditor
4)    Address where payments must be mailed
5)    Whether the creditor will remove negative information about the bill from the debtor's credit report

B)    Documenting Communication between Debtor and Creditors

It is important for debtors to keep a record of phone calls from the creditor regarding the past due bill, including the full names of the individuals he or she speaks with and date, time and details about the conversations. If the debtor arranges a payment agreement, he or she should send a brief letter confirming the terms of the payment plan. The debtor should always keep copies of any letters and payments sent to the creditor. Letters to the creditor should be sent by certified mail when possible.

C)    Notifying the Creditor of Debtor's Inability to Pay

Some debtors who have relatively little employment income or prospects for such income might be considered "judgment proof." Such people often own no real estate other than their family home, no personal property of significant value, no more than one car, and no bank accounts or other investments with significant balances. Such debtors, who are unable to arrange a workable payment plan, should consider sending the creditor a letter informing the creditor of the debtor’s inability to pay and requesting that the creditor stop contacting the debtor about the debt. The debtor should include in the letter any special circumstances which help explain the inability to pay. The debtor should also inform the collector for the creditor of any collection practices by the collector that the debtor finds to be harassing. Sending such a letter will limit the collector's right to contact the debtor.

D)    Filing Bankruptcy

Bankruptcy may become a last-resort option for disaster victims who cannot satisfy their creditors. Filing bankruptcy will not necessarily cancel all debts. It is recommended that individuals wishing to pursue bankruptcy proceedings be referred to a State Bar- certified lawyer referral service where an experienced bankruptcy attorney can be identified. For lawyer referrals in Illinois, you may call Illinois Lawyer Finder at (217) 525-5297 or toll free (800) 922-8757 or search its web-site, www.illinoislawyerfinder.com. The Illinois State Bar Association operates Illinois Lawyer Finder.

E)    What Happens when Debtors Fail To Pay?

Debtors are not criminally liable for owing debts; however, creditors may file civil lawsuits against them to collect the debts, and a court judgment will give the creditor the right to collect any non-exempt assets. Also, the creditor has the right to report the unpaid debt to a credit reporting agency.

Auto loans (and other secured contracts) sometimes permit the creditor to repossess a car (or other collateral purchased with the proceeds of a loan) after a borrower's failure to make payments. The debtor may have to pay the full balance of the loan plus all costs of repossession in order to regain possession. If the debtor cannot pay, the creditor may sell the car and sue the debtor for the amount the debtor owes in excess of the sale price. If a past-due bill is for services a debtor continues to receive (e.g., utilities), the creditor may discontinue service or withhold re-connection, even if the debtor moves to another residence. The creditor may also sue to try to collect the unpaid balance.

F)    How To Decide Which Bills to Pay First?

Before deciding which bills to pay and which to ignore, debtors need to know the consequences. The 3 types of debts listed below could have immediate, harmful consequences if unpaid.

1)    Court-ordered payments, such as alimony or child support, must be paid on time or jail time could be sought for contempt of court. If clients are unable to pay, do not simply ignore it. Ask the court to modify the payment order. A court will usually lower or eliminate your payments to meet your new financial condition. (Additionally, if a client is on Social Security Disability, her/his children should be eligible for "dependents' benefits" which may entirely pay her/his support obligations. Check with your local Social Security office.)

2)    Ongoing services, such as utilities, telephone service, or health insurance coverage, must be paid or they will lose future service or coverage.

3)    Items purchased on credit or pledged as security on a loan can usually be taken if payments cannot be made. If extra time is needed to make payments, it is best to contact the lender in advance of any repossession attempt by the collector.

**But be aware: even after a creditor has repossessed its collateral, it may still have the right to recover money. For example, although a bank has repossessed a car, if its resale
value is less than what is owed, there may be liability for the difference.

G)    Property That is Protected

Under federal and Illinois law there are certain things that cannot be taken by a collector, regardless of how much is owed, regardless of whether the creditor obtains a judgment, and regardless of whether or not the debtor files for bankruptcy. Property that cannot be taken by collectors is often called "exempt property."

Some important examples of exempt property include:

1) The debtor's equity interest, not to exceed $4,000 in value, in any personal property as chosen by the debtor; 2) Social Security and SSI benefits; 3) public assistance benefits; 4) unemployment compensation benefits; 5) workers’ compensation benefits; 6) veterans benefits; 7) circuit breaker property tax relief benefits; 8) the debtor's equity interest, not to exceed $2,400 in value, in any one motor vehicle; and 9) the debtor's equity interest, not to exceed $1,500 in value, in any implements, professional books, or tools of the trade of the debtor.

Every person is entitled to an estate in homestead, when it is owned and occupied as a residence, to the extent in value of $15,000, which homestead is exempt from judgment.

The amount of wages that may be applied toward a judgment is limited to the lesser of (i) 15% of gross weekly wages or (ii) the amount by which disposable earnings for a week exceed the total of 45 times the federal minimum hourly wage or, under a wage deduction summons served on or after January 1, 2006, the Illinois minimum hourly wage, whichever is greater.

Under federal law, the amount of wages that may be applied toward a judgment is limited to the lesser of (i) 25% of disposable earnings for a week or (ii) the amount by which disposable earnings for a week exceed 30 times the federal minimum hourly wage.

Pension and retirement benefits and refunds may be claimed as exempt under Illinois law.

If all the property and income of the debtor is exempt property, then the debtor should notify the creditors or collectors that he or she is judgment-proof. Once the collector knows that there is nothing to take, it will often write off the debt or at least stop collection activity.

**A complete list of all personal property exemptions and limitations thereon can be found in 735 ILCS 5/12-1001 through 5/12-1005. If all the property and income of the debtor is “exempt property,” then the debtor should notify the creditors or collectors that he or she is judgment proof. Once the collector knows that there is nothing to take, they will often write off the debt or at least stop collection activity.

**Homestead Exemption - In addition to the personal property exemptions, every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot, a condominium, cooperative or personal property (owned or possessed as a lease), that he or she owns as a personal residence. That homestead and all right in and title to that homestead is exempt from attachment, judgment, levy, or judgment sale for the payment of his or her debts or other purposes (with some limitations). This exemption is not applicable between joint tenants or tenants in common, but it is applicable as to any creditors of those persons. If two or more individuals own property that is exempt as a homestead, the value of the exemption of each individual may not exceed his or her proportionate share of $30,000 based upon percentage of ownership. The rules governing the exemption of homestead can be found at 735 ILCS 5/12-901 through 5/12-912.

H)    Credit Reporting Legal Authority

This area is governed by the Federal Fair Credit Reporting Act, 15 U.S.C.A. Section 1681, which requires that credit reporting agencies furnish a free copy of a consumer's credit report upon request within 30 days after the consumer is notified of an adverse action. Credit reporting agencies also have a statutory obligation to investigate consumers' claims. If a debtor disputes the contents of her/his credit report, s/he should notify the credit reporting agency in writing.

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