This is a re-post of a diary I did nearly two years ago. Unfortunately, things have not changed for the better since I made my original post. Hopefully this will be useful for some people.
Full disclosure—I am an attorney who represents various creditors, mostly credit card companies. I am currently managing a portfolio of hundreds of cases in litigation seeking to collect unpaid debts from people who are unwilling or unable to pay. I’ve been doing this work for over 10 years. For several years, I could expect a pretty consistent breakdown of the types of defenses I would see. Things are different now.
In the past, about 50% of my defendants would simply deny liability for the debt I was collecting without articulating any specific defense. The goal of the majority of these people was usually simply to delay the process to allow the defendant additional time to work out some kind of settlement with me or to file bankruptcy. Approximately 30% of my defendants would advance a defense of financial hardship—not disputing the claim or the balance, but simply claiming that they had no ability to pay the bill. Another 10% of my defendants would offer some legitimate (or at least colorable) dispute regarding the merits of the claim or challenge to the balance due. The remaining 10% would offer some kind of crazy, nonsensical, quasi-legal gibberish that they had obtained from the internet in the hopes that there is some magic bullet to win lawsuits that is only available to a privileged few.
Over the last 6-12 months 2-3 years, things have changed dramatically. The vast majority of my cases (probably 75% 80-90%) now involve defendants who claim financial hardship. In a troubling number of these cases (maybe 40-50% 60-75% of them) the defendants have contracted the services of a "debt elimination" or "debt management" company. I say this is troubling because I have seen what happens in many of these cases.
I want to give everyone a heads-up on some of the things that are happening out there so you are armed with information in case you find yourself in a situation with a lot of bad debt. I will start at the beginning and explain how credit cards work and then explain default and collection practices. Hopefully this information will help people avoid some serious pitfalls out there. Keep in mind that while some of the tactics of creditors may seem egregious and unfair, they are all perfectly legal, at least in New Jersey, where I practice. Those of you who are already familiar with how credit cards work might want to skip to section 2, where I explain what happens when debts go bad.
I. How Credit Cards Work
You apply for a credit card. You may get the application through mail solicitation or through telephone or internet application or through an in store sign-up. At this time, you may or may not sign an actual application. In any event, the particular application you sign probably contains little information about the actual terms of the account. The most information these applications typically contain are the introductory interest rate, the credit limit, the annual fee and what picture you will have on your card. Often, the application will not even include that information.
Weeks later, your credit card arrives. With it, you receive a three or four page (sometimes more) single-spaced document in fine print which may be titled "Cardholder Agreement" or "Terms and Conditions". This is an important document explaining your rights and nobody ever reads them. I’ve read dozens of them for my job, but before I did this kind of work, I didn’t read them either. There is a significant amount of information in this document that you should be familiar with and it may help you avoid problems later.
Your Cardholder Agreement will explain to you that as the cardholder, you are responsible for repaying any charges you make on the card. That sounds pretty simple and fair, but it gets worse. In addition to those charges, you may be responsible for an annual fee, which they may actually bill on a monthly basis. You will also be required to pay interest on any outstanding balance that is not paid in full at the end of each month. You may be able to wrangle a low introductory annual percentage rate (APR) or even a 0% rate for a time. Typically, the standard credit card interest rate is around 20%. But even more serious than finance charges are fees that are assessed to the account. For example, if you miss a payment, or your payment arrives even one day late, you will be responsible for a late charge which is typically anywhere from $25 to $50. For most credit card accounts, fees add up much more quickly than finance charges because they are not limited by the outstanding balance—they are a flat fee regardless of the balance. It is not unusual to see a $40 late fee assessed to an account with an unpaid balance of $100 or less.
In addition to late fees, there is the overlimit fee, which is usually the same amount. Most credit card accounts will have what is known as a credit limit. It is important to understand that this credit limit does not cap the amount that you will owe on the account. If you actually read your Cardholder Agreement, you will probably come across language that says something like this:
We may honor transactions in excess of your credit limit and those transactions will be covered by this Agreement.
What that means is that while your card may have a credit limit of $1,000, if you go and charge $2,000 on it, they can approve those charges and you are bound to pay them back just the same as the first $1,000 you charged. But the consequence to you is that each month while your account carries a balance over that limit you will be tagged with an overlimit fee in addition to your finance charges and any other fees for which you might be responsible (late fees, bounced check fees, etc.) Another thing to keep in mind is that while you may only charge up to your limit, finance charges and fees can easily push you over, resulting in additional charges. I’ve seen balances of $300 balloon to nearly $2,000 in a little over a year.
Your Agreement will probably have additional language that permits the creditor to increase your interest rate if they receive any payments late. You may have a credit card with a low introductory APR and suddenly you’re paying 29.99% because one of your payments showed up a few days late. Some creditors employ the tactic of "universal default". What this means is that they monitor your credit and if you are late with any payments to other creditors, they can increase your interest rate to the higher default rate. Again, these tactics may seem egregious, and as a consumer, I dislike them intensely; but they are legal.
Your Agreement will probably also contain language that if you default, you will be responsible for paying costs of collection, including court costs and attorney’s fees, assuming that the creditor refers the case to outside counsel for collection.
Finally, there may be a term in your Agreement that states that all disputes under the Agreement will be governed by binding arbitration upon election by either party; certain arbitration companies will be identified in the agreement. These companies are typically creditor friendly. The reason is simple—the vast majority of their work comes from consumer collection cases. If creditors couldn’t expect favorable rulings, they would direct their business elsewhere.
II. Bad debt
Once an account goes into default for non-payment, the credit card company will begin their in-house collection. This includes telephone calls at all hours of the day or night, weekdays, weekends, holidays, and often directed to the consumer’s place of business. While there is a federal law that protects consumers against unfair or abusive debt collection practices (the Fair Debt Collection Practices Act) this act does not apply to creditors collecting debts on their own behalf. In-house collection usually lasts for approximately six months, during which time the creditor will try desperately to get the debtor to maintain payments on the account so that it may be kept open. As long as the account is open, the creditor can continue charging the fees that add up so quickly. After six months of non-payment, the account will be charged-off. This is pursuant to federal law which requires that credit card lenders charge-off bad debts the next billing cycle after 180 days of non-payment.
This is important to understand: just because a debt is charged-off does not mean that it goes away. Charge-off is merely a bookkeeping term; it only means that the creditor has written the debt off as a loss for tax purposes. They will still continue efforts to collect the debt, sometimes with in-house collectors and sometimes by sending them out to collection agencies or law firms. And this is especially important—interest continues to accrue on the debt as long as it remains unpaid. That interest will likely accrue at the default APR, which may be as high as 30% (or even higher in some cases). It is therefore not uncommon for a debt that was only around $500 at the time a consumer stopped paying to be as high as two or three thousand dollars by the time the claim gets into litigation years later.
Frequently, after a debt is charged-off, many creditors will sell the bad debt to third-party debt acquisition companies that will begin attempting to collect the debt in their own name. This is perfectly legal. Also, while the new creditor may have only paid pennies on the dollar to acquire the debt, they are entitled to collect the entire unpaid balance, plus interest. The amount that this new creditor paid for the debt is completely irrelevant in the context of collection and in most cases, there is actually no way to determine the exact amount paid for any one particular debt because they are usually sold in bulk transfers including thousands or tens of thousands of accounts with varying balances and in varying stages of default. The law in most states recognizes that a debt acquisition company stands in the same shoes as the original creditor and as such, they are entitled to the same rights and subject to the same defenses as the assignor of the debt.
III. Collection
There are essentially three different kinds of collection. There is in-house collection, which means that the lender is using its own employees in an attempt to recover the debt; there are collection agencies, which is simply the same practice outsourced to another company; and there are law firms that specialize in collection.
Collection activity by creditors and collection agencies take basically two forms: telephone calls and dunning letters. Letters are easy for most consumers to ignore; the majority of collection takes place via telephone call. However the law allows consumers to demand that all collection calls cease—this usually must be done in writing to be effective—which leaves the creditor or collection agency with no real avenue for collection. As a result, unless the consumer is willing to repay the debt voluntarily according to agreeable terms, the collection agency and the original creditor are unlikely (and in most cases unable) to take any further action on their own. Some creditors have in house legal departments that handle litigation on their behalf, but most outsource their collections to local counsel that practice in the states where the consumers live because the law also requires that any litigation filed in a debt collection matter must be filed in the venue where the original contract was signed or where the debtor lives.
IV. Legal Process
Once your debt is referred to a law firm, you can expect an initial communication from them which provides you with certain disclosures required by federal law. (There may be additional disclosures required by the law of the particular state where you reside.) That letter will also identify the law firm, the creditor who currently owns the debt and the current balance due and request that you contact them to make arrangements to pay the debt. If suitable arrangements are not made shortly thereafter, you can expect to be sued for the debt.
(The following chronology relates to cases filed in New Jersey. Other jurisdictions may offer variations on this general process. If you are involved in such a case, it is recommended that you speak with a legal professional licensed in the jurisdiction where you reside so that you are completely familiar with that process. Hopefully this will give you a general idea what to expect.) Lawsuits are commenced by the filing of a Complaint. That Complaint is then served upon the defendant either by mail (customarily certified and regular mail) or personal service by an officer of the court or private process server. Once the Complaint is served, the defendant will have a limited amount of time to file an Answer to the Complaint. The Answer must address the allegations in the Complaint and articulate any particular defense(s) that the defendant offers to the allegations of the Complaint. If no written Answer to the Complaint is filed by the deadline, then the court will enter a default--sometimes this is automatic, sometimes the plaintiff must request entry of default.
If a default is entered against you, then the creditor can obtain a judgment by sending proofs to the court sufficient to establish what is referred to as a prima facie case. What that means is that there just needs to be proofs sufficient to establish a presumption that there is a meritorious claim. A copy of a credit card agreement or a billing statement together with an affidavit or certification from an employee of the creditor stating that there is a contract and an unpaid balance is usually sufficient to meet this burden.
If you file an Answer to the Complaint (sending a copy to your adversary), then the case enters litigation. At this point, you can expect to be served with discovery demands which usually take the form of interrogatories (questions) and requests for admissions (a list of statements you are asked to admit or deny). The rules of court will require you to respond to these discovery demands. If you fail to do so, it is likely that your defenses are subject to dismissal on application by your adversary. What that means is that while you may have filed an Answer to the Complaint, your failure to respond to discovery puts you in the same position as if you had never filed the Answer, i.e. default (see above).
Another thing you can expect is a summary judgment Motion. The vast majority of collection cases do not include meritorious defenses offered by the defendants. Therefore it is standard practice for creditors to file a Motion for summary judgment which argues that there are no genuine issues of material fact (i.e. no legitimate disputes) and that the creditor is therefore entitled to a judgment as a matter of law. The particular legal requirements for a summary judgment Motion will necessarily vary from state to state, but most will mirror the requirements established for federal district court. If you are served with a Motion for summary judgment and you disagree with any of the facts set forth in that Motion, then you must file a written opposition to the Motion with the court and send a copy to your adversary. The court may also schedule a hearing for the parties to appear and argue their side of the case. If no written opposition is filed, it is customarily the practice for the court to accept as true everything in the Motion and make a decision on that basis.
If it is the case that there is no real dispute, then the court will most likely grant the summary judgment Motion and the case will end. Many defendants are troubled by the fact that they may reach this point without having been afforded the opportunity to tell their side of the story to a judge or jury. In a word, tough. The summary judgment process is designed to clear cases from the court calendar. If every case went before a judge, courts would be unable to handle it. Just because you weren’t able to tell your story to a judge or jury does not mean that you did not receive all the rights to which you are entitled. It just means that you did not articulate a valid defense or a different version of facts that would require a trial to resolve.
V. Losing Arguments
Examples of defenses that are typically rejected by courts and cause parties to lose their case in summary judgment are:
• I can’t afford to pay this bill
• The creditor should never have loaned me this money
• My credit limit was only X but the balance is now 3X
You can also thank the internet for a slew of debt elimination garbage, including:
• There is no contract because the creditor cannot prove that it follows Generally Accepted Accounting Principles.
• Signing the credit application and "depositing" it with the credit card company is the same as depositing cash into that bank.
• The credit card company must present a "note" prior to the debtor being obliged to repay the debt.
• Although goods and services were received no money was lent because the creditor did not risk any of their own money.
• The issuance of credit is counterfeiting and therefore illegal.
• Banks are not authorized to "lend credit".
• The debtor is his own surety.
• The debt is uncollectible pursuant to the Fair Credit Billing Act because the credit card company does not abide by Generally Accepted Accounting Principles nor does it risk its own money.
• The debt is uncollectible pursuant to the Fair Credit Billing Act because the consumer issued a blanket dispute of the entire balance due.
• The debt is uncollectible until the creditor complies with the debtor’s understanding of the Fair Debt Collection Practices Act (always incorrect) and/or the debtor consents.
• The debt is uncollectible because the debtor does not get paid in gold, which is the only recognized legal tender.
• Other theories are frankly too disjointed to summarize.
There are other goofy methods that some debtors will employ, including copywriting their own name and claiming that others require a license to use it in any letter or legal pleading. These people will then attempt to assess a charge (typically in excess of $10,000) for any "unauthorized use" of their name. Others will invoke sham arbitration, refer the case to some nefarious outfit and obtain a phony arbitration award which will claim that the debtor owes no money on the credit card and the creditor now owes the debtor $5,000. They will then seek to enforce that arbitration award in the court.
Do not be fooled into paying for any of these debt-elimination methods because they are all bogus and many of these companies are quickly shut down by the attorney general or local prosecutors because they are committing fraud. As I stated before, there is no magic bullet. If you created the debt, you will be liable to repay it. Courts will not be tricked into finding for you because you have some clever sounding economic theories. The easiest case I ever litigated was against someone who tried to advance one of those "no money lent" theories on a credit card debt. He also tried to make some weird claim that we had sued a legal fiction and he was not his name. The oral argument for my summary judgment Motion went something like this:
Judge (to defendant): State your name for the record.
Defendant: The name they sued was ______. But I am not my name.
Judge: Is that the name on your driver’s license?
Defendant: Yes, but it is not who I am.
Judge (looking at Complaint): Where do you live?
Defendant: I live in my skin.
Judge (getting angry, to court officer): Go get his driver’s license and bring it up here.
(Judge then reads defendant’s name and address into the court record.)
Judge (to defendant): I read the moving papers and understand plaintiff’s claim; what is your defense?
Defendant: (Lengthy explanation of economic theory claiming that banks cannot lend credit and arguing that the creditor had no real damages.)
Judge (to defendant): I understand your argument, but it has no basis in the law or reality. Judgment entered for the plaintiff in the amount set forth in the moving papers.
I said absolutely nothing and won the case because the defendant’s argument was so much nonsense. The hardest part for me was to stifle my laughter at the defendant's ridiculous arguments. Just because an argument sounds impressive or uses legal terms and phrases does not mean that it will serve you well in court. Judges are much more practical than some people may believe.
VI. Resolving Your Debt
You have probably heard advertisements on television and the radio where you are told that you have the right to settle your debts. That is absolutely true. It is also true that you need not have any particular total amount of debt, nor do you require the assistance of a credit counseling company or attorney to negotiate on your behalf. In most cases, a consumer can negotiate just as good a deal with the creditor as one of these other parties. In many cases, the amount that the consumer pays to the attorney or the debt elimination company could have been used to pay or settle the debt. Do not be afraid to negotiate on your own behalf. Your situation cannot be made worse by virtue of the fact that you are trying to work it out—the worst the creditor can do is say "no" to your overtures.
There are customarily two options that you can take advantage of when attempting to resolve your debt. They are lump sum settlement on a reduced balance and monthly payment arrangement on the full balance. It is unlikely in most situations that you can negotiate a monthly payment arrangement on a reduced balance. You may be able to negotiate a reduced interest rate, but it is essential that you maintain regular monthly payments or you can expect your APR to once again skyrocket. Payment of a settlement is usually required within a very short period of time—30 days is a common deadline, but they will vary depending on the creditor and the amount of the settlement. Monthly payment plans usually require a payout within 2 or 3 years at the outside but longer terms can sometimes be negotiated.
If you are uncomfortable negotiating for yourself, you may seek the assistance of one of those companies you hear ads for. I do not recommend doing so, but if you have made that decision, here is what to expect.
There are two kinds of company that assists people in resolving their bad debt. There are "credit counseling" companies and "debt elimination" companies. Credit counseling companies typically negotiate monthly payment arrangements with your creditors based on the total amount of debt owed. They can usually negotiate a lower interest rate and can sometimes get an extended repayment term (as long as 5 years). They operate like debt consolidation—you pay them one monthly payment which they will then distribute among your creditors. Using this method will allow you to resolve your debt on a fixed schedule and will usually prevent any further collection activity since the creditors are all receiving regular payments.
Then there are the "debt elimination" companies. These companies will accept monthly payments on your behalf and put the money into an escrow account. They will then contact your creditors to advise them that they are handling the account on your behalf. What often happens at this point is what gets many people into trouble and that is nothing. Debt elimination companies eliminate your debt by offering lump sum settlements to the creditors. But until they get a certain amount of your money into the escrow account, they take no action whatsoever. Moreover, even if they are negotiating a settlement with one of your creditors, they are probably doing nothing to address the others. Also, they take a sizeable fee for their services—this fee comes out of your payments before they start building your escrow funds; it may therefore be several months before you have any kind of balance to settle your debts.
During this period of time when you are paying the debt elimination company, your creditors are getting zilch and they are by and large not happy about that. Accordingly, you can expect them to send your case to an attorney who will then file suit against you. Given what I have already explained above, the likely outcome of this is that there will be a judgment entered against you. Once they obtain a judgment, many creditors are far less likely to negotiate a settlement because a judgment enables them to engage in certain collection efforts including executing on wages (again, depending on the state). If a creditor has the ability to take money directly from your pay, then there is little motivation for them to accept a monthly payment or a settlement from you.
In addition, the way some of these companies make money is that they keep the money left over after they settle your debt. For example, you may have $10,000 in debt and $10,000 in your escrow account—enough to pay off all your creditors in full. The debt elimination company may still try to negotiate settlements with your creditors because they can then keep the excess money. At this point, it’s obviously in your best interests if your creditors just get paid off. But it’s not in the best interests of your debt elimination company, so it’s unlikely to happen.
I’ll give you an example from personal experience what these companies will sometimes do. I had a case with an elderly woman who had engaged the services of a particular debt elimination company that is no longer in business after having been shut down by the Florida Attorney General (we’ll refer to them as "HK" for simplicity.) I spoke with her about a week before the case was scheduled for trial in an effort to see if the case could be resolved. She informed me that she had hired this company to negotiate on her behalf. I told her that we had not heard from them and suggested she contact them to have them call us to work something out. On the day of trial, I met with the woman in mediation—a court ordered settlement conference. At that time, she told me that she talked to someone from HK who indicated that they had called my office, spoke to someone named "John" and made a settlement offer, which we rejected. I had to inform this woman (who had been paying HK approximately $500 per month for about a year) that not only had HK not contacted my office, but also despite the fact that it was a very common name, my firm did not have, nor had we ever had an employee named John.
So be careful when you are deciding whether to engage the services of a debt elimination company. They may sway you with promises to cut your debt in half or better, but they often can’t deliver on these promises. Or, while your debt might eventually get resolved, in the meantime, you are faced with judgments and wage garnishments against you. Finally, some of these companies are simply out to defraud their customers as I outlined above.
Be proactive when trying to resolve your debts. If you see problems coming, contact your creditors immediately and try to get yourself put on an arrangement that you can afford before the account goes into default or charges-off. If you have a good payment history, try to negotiate your interest rate so you can better afford the monthly payments. Or negotiate settlements on your own behalf. Many lenders are still in a cash crunch right now. This means they are much more likely to take a lump sum payment to settle your debt.
VII. Bankruptcy
I am not a bankruptcy attorney. I have some knowledge about bankruptcy, but it is, as is sometimes said, "just enough to be dangerous". Certainly, if your debt is considerable and your income is insufficient to enable you to negotiate reasonable settlements or payment arrangements with your creditors, bankruptcy may be a viable option for you. I certainly don't begrudge those who are truly in need to avail themselves of this protection. As a collection attorney, I'd rather see more truly deserving candidates actually file bankruptcy--this would enable me to close more of my files rather than continuing to waste my time digging dry wells.
Certainly if your debt seems overwhelming, you should explore the possibility of bankruptcy by speaking with an attorney who specializes in bankruptcy to discuss what it would mean to you and your finances and credit going forward.
I hope nobody reading this actually needs this information. But as bad as things are out there right now, it’s likely that at least a few people here are in a tough spot and hopefully they will be helped by it.