Dealing with Debt
by: Legal Services State Support
Fifth Edition Revised June 2012
Table of Contents
Click here to view the entire booklet.
Section 1: Prioritizing Your Debts
If You Can't Pay All of Your Bills
Offers for New Credit Cards
Other Things to Consider
Should You Cancel Your Credit Card?
Tips to Help Keep Credit Card Debt Low
Getting Credit Reports
Disputing a Debt
Paying on Multiple Debts
Stopping the Calls and Letters
Sample Debt Collection Cease and Desist Letters
What is Abuse and Harassment?
Enforcing Your Rights
Protections From Garnishment
Are You Collection Proof?
How Will You Know You Have Been Sued?
How to Respond to a Lawsuit
Responding in Conciliation Court
If You Lose in Conciliation Court
Responding in District Court
Can My Benefits Be Garnished?
Can They Take Money From My Bank Account?
Claiming a bank account exemption
Can They Take Money Out Of My Paycheck?
How Do I Claim A Paycheck Exemption?
What Happens After I Claim An Exemption?
Keep Your Student Loan Out of Default
When Your Loan Is In Default
Getting Your Student Loan Out of Default
Making Your Student Loan Go Away
Don't Turn Unsecured Debt into Secured Debt
Beware of Refinancing Scams
Beware of Lenders That Aggressively Advertise
Benefits of Bankruptcy
Disadvantages of Bankruptcy
Discrimination Due to Bankruptcy
Filing for Bankruptcy
Bankruptcy May Not Be the Solution
Credit Counseling May Help
How to Avoid Scams
Most families face debt at some time or another. Losing a job, losing public assistance benefits, sudden medical bills, or divorce can push a family into debt. Debt collectors can pressure people to make the wrong decisions. Families often pay the wrong bills first or make financial decisions that only make their problems worse. This booklet was written to help families make good financial and legal decisions when dealing with debt, debt collectors, and credit reporting agencies. This booklet is a brief guide and is not meant to answer all legal or financial questions. If you are facing foreclosure, eviction, or repossession of property you should seek legal advice and financial counseling.
There are many ways creditors can try to collect debts. 2 of the most common ways are when they use a collection agency and when they file a lawsuit. These methods are discussed in this booklet.
SECTION 1 - PRIORITIZING YOUR DEBTS
One of the first things you should do if you are having problems paying your debts is to prioritize them. This means sorting them out to see which are the most important to pay first. Make a complete list of all your bills. When you have a complete list you can start making decisions about how to deal with the situation. Not paying some debts can cause much greater problems than not paying others. For example, if you don't pay your rent, you can be evicted.
What should you pay first? Types of debts are listed below in the order of importance.
1. Rent, home mortgage, or contracts for deed
If you do not pay rent a landlord can go to court to have you evicted. If you do not pay your mortgage or contract for deed, or home insurance and property taxes, you can lose your home.
2. Property Taxes and Property Insurance
If you buy your home on a mortgage or contract for deed, the contract usually requires you to keep up on property taxes and insurance payments. If you fall behind, the seller can start a foreclosure case or cancel the contract for deed. So paying your property taxes and insurance are as important as making your mortgage and contract for deed payments.
Even if you do not have a mortgage or contract for deed, property taxes and property insurance are more important than other debts because if you don't pay them, you may lose your home.
If you are behind on your property taxes, the county may get a judgment against you for past due taxes and sell your property at a foreclosure sale. You have five years (less in some targeted neighborhoods) from the sale date to "redeem" (buy back) your home by paying the taxes owed. If you do not redeem, your home will go to the county. This is called "forfeiture." The county may allow you to repurchase your home by paying the taxes owed over a ten year period.
3. Essential utility services
If you do not pay utility bills you can be disconnected. Then you might have to pay an additional deposit and hook-up charges to have them reconnected. You might not have to make a full payment to keep your utilities connected. Call your utility company for more information about budget payment plans, installment repayment plans and the cold weather rule. The cold weather rule gives protection against disconnection between October 15 and April 15.
4. Car loans
Car loans and auto insurance should be paid after you pay for the really critical items like food, rent, utilities and clothing. Failure to pay auto insurance can result in fines and loss of your driving privileges. Pay your car loan before most other debts. If you do not pay your car loan or keep up your insurance payments on the car, your car can be repossessed. Car loans typically have an "acceleration clause." This means that the creditor (person or business you owe money to) can make the whole amount of the loan due and payable after you miss a certain number of payments. The creditor can sell the car and apply the money to your debt. You can be sued for a "deficiency judgment" if the creditor gets less money from the sale than the amount you owe. Never voluntarily return your car to the dealership without first trying to sell or trade it on your own. If the dealership sells your car, they often sell it for far less than the market value and you will still owe the balance.
5. Loans secured with only household goods as collateral
"Collateral" is property you agree to give back to the creditor if you don't pay, such as TV or furniture purchases. These loans should have a lower priority and should be paid after more pressing debts.
Tax liability (money you owe for unpaid taxes), student loans, and debts from public assistance overpayments are of medium priority. In some cases, the government can take your income tax refunds to pay these debts. For student loans, sometimes the government can garnish your wages or social security benefits.
In cases where a creditor has gotten a judgment from the court, your property may be at risk. Paying a judgment should be top priority unless a lawyer has found that you are "collection-proof." If you are "collection-proof" your income or property is exempt from collection efforts.
8. Other Debts
Debts like credit card bills and hospital bills are usually not secured with collateral. This means you have not put any of your property at risk. They have a lower priority than debts that are secured with your property, such as your home mortgage or car.
You can get help prioritizing debts from a Consumer Credit Counseling Service like Family Means at 651-439-4840, ext. 2498 or 1-800-780-2890 or Lutheran Social Services at 888-577-2227.
There are some disadvantages to credit counseling services. The services often will not work with families whose debt is much too large for their income. Many services will not tell you about your legal rights as a consumer.
Don't let debt collection activity force you into paying a debt. You should not let threats that you will be reported to a credit agency affect you. Unless secured property is involved or there is a judgment and you are not "collection-proof" (see page 11), keep your debts prioritized. Do not let the threat of a lawsuit force you into paying lower priority debts. Try not to go deeper into debt by taking out high interest or "payday" loans. If you are the target of a lawsuit or believe you have a good reason not to pay, contact your Legal Services office for help. A list of Legal Services offices can be found in the back of this booklet starting on page 47.
IF YOU CAN'T PAY ALL OF YOUR BILLS (OTHER THAN CREDIT CARDS)
First, make a budget. Know how much money comes in each month and how much you spend. Writing down all of your expenses, even those that seem unimportant, helps you to see where your money goes. It also helps you find areas where you can cut back. Also write down all your income. See pages 39 - 40 in the back of this booklet for a sample monthly budget.
Follow these general rules
- Start with food and medical essentials. An example of a medical essential is a prescription that you must take to prevent a serious medical problem. An unpaid doctor bill would not be an essential debt.
- Next pay your rent or mortgage, property taxes and insurance and essential utilities. If you don't pay your rent you can be evicted. If you stop paying your mortgage or property taxes and insurance, you will lose your house. You also need to pay for heat, electricity, water and garbage services to avoid shut-offs. Keeping your telephone connected may also be important if you need it for medical emergencies.
- Pay for your car if you need it. If you stop making payments, a car can be repossessed quickly.
- Figure out where you can cut back. For instance you could cancel services you do not really need like cable or newspaper delivery. You may want to get help from a service like Consumer Credit Counseling Service by calling 651-439-4840 or 1-800-780-2890. You could also call your creditors and ask them if you can lower your interest or work out a new re-payment plan.
- If there are charges made on your card for things you did not buy, you are protected by the Fair Credit Billing Act. If this happens you can "dispute" or disagree with those charges. If you write to the credit card company and dispute the charge within 60 days after you get the bill, the company must investigate your claim. The company cannot close your account and it must resolve the dispute within 90 days of getting your letter.
- If your credit card is lost or stolen, the most you have to pay is $50, under the Truth in Lending Act.
- If you know you cannot make payments on your credit cards you must stop using the cards. If you use a card knowing that you cannot pay you could be guilty of fraud. Never send a check to a creditor if you don't have the money to cover it. It is not against the law to leave a debt unpaid but it is against the law to write a bad check.
Do not listen to debt collectors when trying to figure out which bills to pay. Do not let them scare you into making a bad decision. The law protects many types of income and assets owned by senior citizens from creditors. Talk to a lawyer to see if you are at risk. Don't mortgage your home to pay credit card debts. Minnesota law protects up to $300,000 of your home's value from most creditors. However, you will lose your home if you can't pay a mortgage.
OFFERS FOR NEW CREDIT CARDS
It is a good idea to limit yourself to no more than 1 or 2 credit cards. If you have a lot of credit cards it is very easy to end up with large debts. Using a credit card is borrowing money at a very high interest rate. Ignore temporary "teaser" rates, especially if you cannot pay off your credit card charges in full each month. A "teaser" rate is a very low interest rate offered for a short period of time (usually 6 months or less) that automatically goes up. If you build up a balance when the interest rate is low, you will be paying it back at the much higher permanent rate.
OTHER THINGS TO CONSIDER
Besides the interest rate, you should check to see if the card offers a "grace period." A "grace period" means no interest charges if you pay your account in full before the due date. Some cards charge you interest from the date you use your card to make a purchase. You should also find out if the company charges an annual fee for the card.
Annual fees can run from $25 to $100 or more. Also look at other charges such as
1) transaction fees?these are often charged when you use the card to get a cash advance
2) late charges
3) over-the-limit charges.
Read the terms carefully because some cards raise your interest rate if you make a late payment.
SHOULD YOU CANCEL YOUR CREDIT CARD?
If you have a credit card with a high interest rate, transaction fees, an annual fee or no grace period, you should think about cancelling the card! You can cancel a credit card at any time, but you will have to pay any money you still owe on the account.
TIPS TO HELP YOU KEEP CREDIT CARD DEBT LOW
- Try to pay off the total balance each month.
- Carefully check your statement each month to look for mistakes and unauthorized charges. Also check to make sure your credit card company has not added a service you do not want (like loss protection or credit insurance.)
- Pay more than the minimum payment if you can. Sometimes the minimum payment does not even cover the amount of interest you are being charged each month. If you only pay the minimum, you will never pay off the debt and you will end up paying interest on the unpaid interest charges. Try to pay one card off at a time. Pay as much as you can. The more you pay, the sooner you will pay off the card. Then go on to another.
- Make your payments on time. If your payment is late you will be charged a late fee. Many cards raise the interest rate if the payment is not on time.
- Avoid special services and programs the credit card companies offers. These are things like credit card fraud or loss protection and life insurance. Most of these services are a bad deal. They are usually expensive and not necessary.
GETTING CREDIT REPORTS
Once every 12 months you can get a copy of your credit report for free from each credit reporting bureau (Transunion, Experian and Equifax.) See page 41 in the back of this booklet for more information about credit reports.
While no law protects you from paying debts you owe, the Fair Debt Collection Practices Act (FDCPA) is a federal law that can protect you from abusive debt collection practices. Minnesota has a state law that includes all of the protections of the FDCPA and other additional protections too. All debt collectors doing business in Minnesota must follow it.
This section explains your rights when you are contacted by a collection agency. If you owe money to a business they may try to collect it themselves or they may hire a collection agency. Either way you have the right not to be harassed or abused. You have even more rights if a collection agency has been hired. If a lawyer regularly collects debts the law treats the lawyer like a collection agency too. Creditors who are directly collecting their own debts, such as department stores or credit card companies, are not covered under the FDCPA.
WHAT ARE MY RIGHTS UNDER THE FAIR DEBT COLLECTION PRACTICES ACT (FDCPA)?
Within 5 days of its first call or letter to you, the collection agency must send you a written notice. The notice must include
· the amount of your debt
· the name of the company that you owe and
· the fact that they will assume their information is correct unless you disagree within 30 days.
DISPUTING A DEBT
If you disagree with their statement of your debt, you should send a letter to the collection agency within 30 days. If you send this letter, the collection agency must stop trying to collect it until they send you verification of debt.
You may be able to set up a payment plan to take care of the debt. Many creditors will be satisfied with a small payment, as long as it arrives regularly. Ask the creditor for a payment plan. Some creditors will freeze or reduce the interest charges if you start making payments. If you make any kind of deal, try to get it in writing. If nothing else, write it down in a letter to the agency or creditor. Always keep a copy.
PAYING ON MULTIPLE DEBTS
If a collection agency is collecting on more than one debt, you can choose which debt your payment will go toward. You can't choose to have your payment applied to a debt you are disputing.
Never give anyone a post-dated (a future date) check. A collection agency is allowed to ask for one, as long as they don't cash it before the due date, but it is not a good idea to give them one. If it does get cashed, you will end up bouncing checks.
STOPPING THE CALLS AND LETTERS
You can stop the collection agency from calling you or writing you by sending them a letter (called a Cease & Desist letter). Your letter should ask them to stop calling and writing you or it can tell them that you are refusing to pay the bill. Date your letter, sign it and keep a copy.
After getting your letter, they can only contact you to tell you that they are stopping their collection efforts and what legal action they intend to take. Remember, this does not give you the right to ignore court papers. For example, if you get a letter (called an Order for Disclosure) telling you to reveal what money and assets you have, you must respond or you will face fines or jail time for contempt of court.
SAMPLE DEBT COLLECTION CEASE AND DESIST LETTERS
At the end of this booklet are sample Cease and Desist letters that you can put in your own words and send to collection agencies. These letters are meant only as examples. Your letter may need more information and the facts will be different. Your letter may be shorter or longer than the ones in this booklet.
The most important thing is that you ask the debt collector to stop contacting you. It is especially important that you make a copy of the letter you send. If possible, send the letter by certified mail with a return receipt requested, so you will know the debt collector got it.
WHAT IS ABUSE AND HARASSMENT?
In general, a collection agency cannot contact other people and tell them about your debt. They cannot tell your employer, co-workers, neighbors, parents, relatives, or friends about your debt. If they need your home address, work address or phone number they can call people to ask for it. But they cannot say that you owe money. They cannot say that they work for a collection agency unless they are asked.
It is illegal for collection agencies to
■ use obscene or abusive language
■ call before 8:00 a.m. or after 9:00 p.m.
■ call you at work if they know your employer does not allow personal calls or creditor calls
■ accept cash without giving you a receipt
■ threaten you with criminal prosecution
■ contact you directly if they know you have a lawyer
■ make a letter look like it is from the government, the court or a lawyer
■ fail to give you the full name of their agency
■ threaten to take any legal action that they do not really intend to take
■ give you legal advice, like "You have no legal defense to this debt."
ENFORCING YOUR RIGHTS
If you think a collection agency is breaking the law, keep careful records of your contacts. When they call, write down the following
■ the date
■ the time
■ the name of the caller
■ and what was said
You might be able to take the collection agency to court. Usually you need to start the lawsuit within 1 year. Call a lawyer or your local legal aid office.
To make complaints about collection agencies you can write to
Minnesota Attorney General and The Enforcement Division
Consumer Assistance MN Department of Commerce
1400 NCL Tower 133 East Seventh Street
445 Minnesota Street St. Paul, MN 55101
St. Paul, MN 55101
(651) 296-2488 or 1-800-657-3602
(651) 296-3353 or 1-800 657-3787
The Federal Trade Commission
Washington, D.C. 20580
Describe in detail the actions you believe violated your rights. See Sample Debt Collection Cease and Desist Letters on pages 34-35.
Threats of being sued, and actually being sued, are 2 different things. When a creditor starts a lawsuit against you, it does not mean they will win in court and be awarded a money judgment.
Even if the creditor wins the lawsuit, there is no guarantee the creditor will be able to collect the amount of the court's judgment from you. It is expensive to go to court. If the debt isn't large enough, some creditors don't think it is worth going to court.
If the creditor starts a lawsuit and wins, the court awards the creditor a "judgment." A "judgment" is a court order stating the specific amount you owe to the creditor. The judgment usually includes the amount the judge says you owe, plus allowed court costs and fees. The judgment earns interest at a set rate, so if it is not paid promptly the amount will go up with every passing day.
The court's order doesn't force you to pay. The order simply says you owe the money. Usually the creditor takes further steps to force you to pay. For example, garnishment of your wages, other income or bank accounts (see Section 5). It can also be seizure (called attachment) of your property to either force you to pay, or to get your property so that it might be sold and the money applied to pay off the judgment.
Your wages or bank account could be garnished even without the creditor getting a judgment against you. If you get a "Summons and Complaint" you should follow the instructions on it to avoid garnishment.
PROTECTIONS FROM GARNISHMENT
If you do not pay a bill, a creditor or collection agency may be able to garnish your wages or bank account or force the sale of your property. Remember, the creditor does not need to get a judgment against you to be able to garnish your wages or bank account. But, the law protects some of your money and property.
For example, a creditor can't take more than 25% of your "net wages." Net wages means your "take home pay" or what you earn after taxes are taken out. Your salary or earnings cannot be garnished for six months after you stop receiving any form of public assistance. Income from Social Security, the Veteran's Administration or public assistance is protected from most creditors. You can keep your home if the value is less than $300,000, a car worth up to $4,200 and furniture and appliances worth up to $9450.
Contact a lawyer to figure out if your income or property is at risk.
ARE YOU COLLECTION PROOF?
Federal and Minnesota state laws "exempt" a certain amount and certain types of income and property. "Exempt" means that certain things cannot be garnished, seized, or taken in order to pay a judgment debt. This happens when you have little or no income and little or no property. Certain types of income are also exempt. If you are unsure of whether you, your income, and your property qualify as exempt, you should contact your local legal aid office or a private lawyer.
If your income or property is "exempt," creditors cannot take your property or income to pay the judgment they won in court. Even though a court order says you should pay the creditor, your income and property are protected from the creditor's attempt to collect the debt and you are "collection-proof."
HOW WILL YOU KNOW YOU HAVE BEEN SUED?
You will know when you are sued because you will get papers called a "Summons and Complaint."
Receiving the papers is called "Service." Service means papers are delivered to you in person, by mail and sometimes through a published notice in the local legal newspaper. If they are delivered to you in person they will be delivered by a "private process server" or a sheriff's deputy. If the papers come in the mail and are about a lawsuit filed in the district court, you will be asked to sign and return a statement saying that you got them. If you don't sign and return these papers, the court may make you pay the other side's costs of using the sheriff's deputy or a "private process server" to serve the papers on you.
If you are served by published notice (in the newspaper), only the Summons will be published. Being served by published notice usually means that the person who is suing you doesn't know where you are. If you actually see the published notice, it is up to you to contact the plaintiff in the lawsuit (the person or business that is suing you) and let them know where you are. Once you let them know they must serve you with the actual Summons and Complaint. If you don't see the notice, the lawsuit can go ahead without you.
HOW TO RESPOND TO A LAWSUIT
If you are sued you should always respond, especially if you think the creditor's claim is wrong. If you don't respond the creditor will almost always win by "default." You are in "default" if you do not respond to a lawsuit.
How to respond depends on if you are sued in Conciliation Court or in District Court. Conciliation Court is the small claims court here in Minnesota. If you are sued in Conciliation Court, you will usually be served with notice of the lawsuit by mail. The notice papers are called the Summons and Complaint. The paperswill tell you the date, time and place for your hearing. They will also give you a short statement about the claim brought against you.
In Conciliation Court you do not have to respond in writing unless you have a separate claim against the party who is suing you. This is called a counterclaim. But you must go to court at the proper time to tell the judge why you should not be held responsible for the claim filed against you.
If you are sued in the District Court, the notice you get will not tell you the date or time for the hearing. The hearing will be scheduled later by the court administrator's office. Your response to the papers must be made in writing to the lawyer who is representing the other party. Your response must be made within a limited period of time, usually 20 days, or you will be in default for not responding.
RESPONDING IN CONCILIATION COURT
Conciliation Court is Minnesota’s small claims court. You can be sued for up to $7, 500 in this court. You don’t need a lawyer. You also don’t have to file a written answer to the claim brought against you. For cases started on or after August 1, 2012, the limit goes up to $10,000. For cases started on or after August 1, 2014, the limit will be raised again to $15,000.
If you want to respond to the lawsuit brought against you with a claim or lawsuit of your own against the person who is suing you, then you must bring a counterclaim. To do that you must go to the court administrator's office at least 5 days before the date of your hearing to fill out the necessary forms.
You might want to try to settle your case before the hearing by making an agreement with the other side. You might agree to pay some amount but not as much as the other party sued you for. You might even agree to a plan to make payments on the agreed upon amount. Or you might agree to turn property over to the other party (or they to you) in settlement of your claims. If you want to settle
with the other side, call or write to them before the hearing date. In the metro area you may even be able to arrange for a mediator to work with the two of you before the hearing to help settle the dispute. In Minneapolis you can call the Conflict Resolution Center at (612) 822-9883.
If you manage to settle your case, you should put your agreement in writing. Try to be as clear as possible in describing the agreement you have made. On the day of your hearing take the written agreement with you to court and ask the judge to approve the agreement and make it a part of the court order in your case. This will protect you and the other side in case there is a disagreement later on.
You must go to court on the day and at the time scheduled. If the court is behind schedule you should wait. Your case eventually will be called for hearing. If you know that you can't go or have to leave due to some emergency, call or tell the court administrator's office as soon as possible. You can ask for another hearing within 20 days after the scheduled hearing but you have to be able to prove that you had a serious emergency (like being hospitalized) which forced you to miss your scheduled hearing. In very rare cases, you can ask for a new hearing within a reasonable time.
Prepare for your court appearance. You will have to speak for yourself so plan what you will say before you get there. Make a written outline of everything you need to say.
Talk to any witnesses who might have some thing to say about your case and ask them to come to the hearing and tell the judge what they told you. The judge probably won't accept a written statement from a witness who can't come to court.
If a witness you need won't come to your hearing when you ask them, talk to the court administrator about how to make them come by sending them a subpoena (a court order ordering them to appear).
If the defendant (the other side) has papers, documents or other things that help your case, and won't let you see them, ask the court administrator for a subpoena. The subpoena will order the defendant to provide you with the documents.
If specific laws or statutes are involved consider going to your county law library (usually in the county courthouse) or on the Internet to look up those laws so you can point out how they do, or don't, apply to your case.
It is a good idea to do the following
1. Practice the presentation you plan to make in court to the judge. Go and watch a conciliation court hearing well before the time scheduled for your own hearing.
2. At the hearing remember where you are and that the judge has the power to decide the case either way. Be very polite to the judge and to the other party.
3. Organize your documents and bring all of your evidence with you to court.
Evidence might include
■ leases or other contracts which may be involved in the case.
IF YOU LOSE IN CONCILIATION COURT
If you lose, you have 20 days from the date of the court's judgment to appeal the decision to the District Court. If you are sure that you want to appeal, call a lawyer as soon as possible to ask for advice on how to appeal. There is a risk you will lose the appeal and may have to pay even more money to the other side. You may need to hire a lawyer to represent you and this could mean even more for you to pay.
If you lose and the other party wins, they are the "prevailing party." As the prevailing party they get a judgment from the court. The judgment is an order stating you owe a certain amount of money to the other party. If you don't or can't pay the judgment amount, the winner (also known as the judgment creditor or the prevailing party), may take further action to force you to pay the debt.
They may try to garnish your income or bank accounts or try to seize some of your assets. A portion of your income, some of the property you own and possibly some money you have in your bank accounts may be protected. See the sections called "Are you collection-proof?" on page 12 and "Don't turn unsecured debt into secured debt" on page 26.
If you appeal to the District Court and lose, the judgment will stay on your record for 10 years unless you pay it off or have it removed in bankruptcy. If you do not pay it off, the creditor can renew it for another 10 years again and again until it is paid off or removed in bankruptcy. Judgment amounts earn interest at a rate established by law. The interest rate will depend on the established rate for the year in which the judgment happened. A judgment will be on your credit record just like a bankruptcy and may make it hard for you to get credit.
The winner or "prevailing party" can collect the judgment anytime within the 10-year period if they find out that you have new income, accounts or assets.
RESPONDING IN DISTRICT COURT
District Court is more complex than Conciliation Court. If you get District Court papers, you should see a lawyer as soon as you get them. If you have a low income, you should contact your local Legal Services office. For a list of local Legal Services offices see page 47.
The District Court papers you get are called a "Summons and Complaint." You must respond by writing an "Answer" to the Summons and Complaint within 20 days. If you don't, you will normally lose your case by default. You need to mail your Answer to the other side's lawyer. If they are not using a lawyer, mail it directly to them. Keep a copy of your Answer for yourself and take it to court.
Your Answer must say why you think you do not owe the money the other side is claiming in the lawsuit. The fact that you don't have the money or can't afford to pay the amount claimed is not a "defense" and won't stop the court from entering a judgment against you.
If more than 20 days have passed since the date you got the Summons and Complaint, call a lawyer right away. It may still be possible to present a defense to the court.
The court may try to get you to settle the case by making an agreement through a process called "alternative dispute resolution." This is also called mediation. You and the other party may be asked to choose a mediator to help you try to reach an agreement. An agreement might have things like, paying the other party some of the money or making a payment schedule. If both of you come to an agreement, put it in writing and give it to the judge for review and approval.
If you are representing yourself, prepare for your hearing. It is a good idea to learn what you can about the process of presenting your case and about the laws which affect the outcome of your case. Ask a person you trust to help you practice how to present your case. Practice what you will say to the judge.
Garnishment is when someone collects money you owe by taking it out of your bank account or your paycheck. Sometimes, the creditor will get a court judgment against you, but usually not. The creditor does not need a judgment in order to garnish your bank account or paycheck.
In some cases your money cannot be garnished. Money that cannot be garnished is called "exempt." You will have to fill out papers claiming that your money is exempt. If your money is not exempt, try to work out a deal with the company or person that has a judgment against you. They might accept a payment plan, or even payment of less than the full amount. If you make a deal, be sure it is in writing and signed by both sides. Keep a copy of it.
A non-profit debt counseling agency like Consumer Credit Counseling can help. Call 1-800-388-2227 for a local office. Watch Out for companies that charge money to "repair" your credit. Many of these are rip-offs!
CAN MY BENEFITS BE GARNISHED?
Usually, public assistance benefits cannot be garnished by creditors. These benefits are called "government benefits based on need." Government benefits based on need includes programs like
Note: This list does not include all programs that are government benefits based on need. At least 2 courts in Minnesota have ruled that EITC (Earned Income Tax Credit) money is exempt from most garnishments.
Other programs like Social Security RSDI and Veterans Benefits are also exempt from garnishment.If you are not sure if the benefits you get are exempt talk to a lawyer or call your local legal services office.
BUT, there are times that this money is NOT safe. Get advice from a lawyer if someone has threatened to take your benefits.
·Up to 15% of your social security retirement, disability or survivor benefits can be garnished to pay for government-related debts like child support, student loans and income taxes as long as you get a minimum of $750 each month. You must get a warning from the U.S. Treasurer before this happens.
·Also, your benefits can be reduced or stopped if your county decides that you got benefits that you should not have.
CAN THEY TAKE MONEY FROM MY BANK ACCOUNT?
Yes, unless the money is "exempt." If your bank account is garnished, you won't be able to use your money in your account. It will be "frozen" while you claim your exemptions. You do not get a notice before this happens. The bank sends you a notice after the money is held. The notice tells you your rights about exemption. It will take time before your bank will release your funds.
If you have written checks or have automatic payments - they may bounce!!Talk to the people you wrote checks to and tell them about the problem. If you have set up automatic payments, these will bounce also. Cancel your automatic payments! Talk to the bank manager about what is happening. They might agree to cancel overdraft charges.
Money in your bank account from certain sources is protected (exempt) from garnishment. Some of those sources are
·government benefits based on need and most other public benefits
·life insurance proceeds
·the earnings of your minor child
·any child support paid to you
·disability insurance benefits
Loans, gifts, and other peoples' money are not protected from garnishment when they are put in your bank account. BUT, if you have a joint account, the other person's money may be protected. Talk to a lawyer right away.
Sometimes money that is usually exempt is not protected if you owe debts like
·alimony or spousal maintenance
·student loans or
Exempt wages only stay exempt for 20 or 60 days after you deposit them in the bank. See section below "Can They Take Money Out Of My Paycheck?"
If a bank or financial institution is trying to take money you owe out of another account you have with them call a lawyer right away.
HOW DO I CLAIM A BANK ACCOUNT EXEMPTION?
You will not get any warning before your account is frozen. The bank must send you a written notice and exemption forms after the money in your account has been frozen. If your money is exempt (see above) fill out BOTH exemption notices. Be sure to include copies of your bank statements for the last 60 days. Give one copy to the person or company who is garnishing you and one copy to your bank. If the company does not object to your claim in 6 days, the bank should put the money back into your account. If the bank does not get your exemption notice within 14 days, it will continue to hold your money, and you will not be able to use it.
CAN THEY TAKE MONEY OUT OF MY PAYCHECK?
They cannot take money from your paycheck if
1.You are getting or got "government benefits based on need" in the last 6 months (see section on benefits above)
Note: Courts in Minnesota have ruled that EITC (Earned Income Tax Credit) money is exempt from most garnishments. One court has ruled that MinnesotaCare is a "government benefit based on need."
2.You were an inmate in a correctional institution in the last 6 months.
These 2 exemptions protect your paycheck for 60 days after you deposit it in your bank.
I don't have those exemptions. How much can they take?
Most of your paycheck is protected - even if you are not exempt. Usually, your paycheck can only be garnished up to 25% of your take-home wages as long as you still get a minimum of a $262 per week.
ONLY 20 DAYS: This "25% limit" also applies to paychecks deposited into your bank account - but only for 20 days. Example: if you deposit a $1000 paycheck into your bank, $250 can be garnished right away and the other $750 could be garnished after 20 days.
BUT- if the garnishment is for child support, then up to 65% of your wages can be withheld.
NOTE:If you are an independent contractor or if you own your business, then these wage exemptions may not apply. You should talk to a lawyer to see if this applies to you.
HOW DO I CLAIM A PAYCHECK EXEMPTION?
You should get written notice at least 10 days before your paycheck gets garnished for the first time. Find out if your money is exempt (see above). If your wages are exempt, fill out the exemption notice that comes with the letter. Hand- deliver one copy to the person or company who is garnishing you and one copy to your employer. Do this as soon as possible. If you do not do it within 10 days, you can still claim the exemption, but it will take longer to stop the garnishment and get your money back.
WHAT HAPPENS AFTER I CLAIM AN EXEMPTION FOR MY PAYCHECK OR BANK ACCOUNT?
You can call the creditor and ask when they will tell your employer or bank to give your money back. The creditor might ask you for more information or proof, like benefits statements. You might get your money returned sooner if you send them the proof that they ask for. You might need to talk to a lawyer to help you prove your exemption claim.
WHAT IF THE CREDITOR OBJECTS?
If the creditor objects to your exemption claim, they have 6 days to ask for a court hearing to see if your money is exempt. You can go to the hearing without a lawyer. Remember to bring any documents that will help prove your exemption.
IMPORTANT: If you do not claim your exemptions or ask for a hearing on time, you can still do it later. You never lose your right to stop a garnishment or to get your exempt money back. Never rely on legal advice from a creditor or debt collector.
A college education can be one of the best investments you ever make. It can significantly increase your earning potential.
Many people have to borrow money in order to pay for school. Student loans are different from other kinds of debt. They can be easier to manage because a number of different payment options are available. But they can also be harder to manage because lenders, including Guarantee agencies and the US Department of Education, can be difficult to communicate with. If you fall behind on student loan payments, the loan goes into "default." That means the lender may be able to take your money even if you are otherwise "collection-proof."
Remember that you have to repay any loans you take out. Try to finance your education with grants, scholarships, work study, and other types of financial aid as much as possible. Minimize your living expenses while you are in school. If possible, finance your education with Direct Student Loans (made directly by the US Department of Education), because they often offer the best terms.
KEEP YOUR STUDENT LOAN OUT OF DEFAULT
You have a number of options available to keep your student loan in good standing. If you are not able to make your monthly loan payment, contact your lender.
Income based payment plans
You can ask your lender to reduce the amount of your monthly payments. If you took your loan out after July of 1993, the lender may be required to offer you a repayment plan that is based on your income.
Some types of loans, such as Federal Family Education Loans (FFELs) require that your monthly payment at least cover the interest on your loan.
If you have a Federal Direct Loan (money lent to you directly by the US Department of Education), and your income is low, you can ask for an Income Contingent Repayment Plan (ICRP). Under an ICRP, there is no minimum payment. If your income is below the poverty level, your monthly payment could be zero.
If you have a FFEL loan, and cannot afford the minimum payment, you should consider refinancing the loan with a Direct Loan.
If you can't make a payment at all, ask for a "deferral." A deferral means you will not have to make any payments and no interest will be added on the loan for the length of the deferral. A deferral can last up to three years.
You may be able to get a deferral if you lose your job, have health problems, take time off of work to care for your preschool children, or have some other form of hardship, such as low earnings. You can only get a deferral if your loan is not in default when you ask for it and you have not already used up your three years of deferral time.
You can request a "forbearance." A forbearance means the lender agrees to allow you to stop making payments for awhile or accept reduced payments. The lender may grant you forbearance even though you have already used up your three years of deferral. However, interest will be added to the principal of your loan during the length of the forbearance.
The difference between a deferral and a forbearance is that interest continues to grow with a forbearance.
WHEN YOUR LOAN IS IN DEFAULT
The lender may declare the loan in default if you fail to make the required payments for at least 9 months.
There are serious consequences of default.
1. You lose your right to a deferral.
2. The lender can sue you, get a judgment against you, and seize any of your income or property that is not exempt under state law.
3. Even without bringing a lawsuit against you, the U.S. Department of Education can take any federal income tax refunds (including the earned income tax credit) you may be entitled to.
4. Without suing you or getting a judgment against you, the U.S. Department of Education or State Guarantee agency may garnish your wages if you earn more than thirty times the federal minimum wage, currently $175.50 per week (after taxes).
5. If you receive Social Security or Veterans Administration benefits in an amount more than $750 per month, the U.S. Department of Education can take15% of your check, or the amount by which your check exceeds $750, whichever is less. If you receive Supplemental Security Income (SSI), or your Social Security benefits are not more than $750 per month, the Department of Education cannot take any part of your benefits.
6. If you want to go back to school, you can't get any new financial aid, either loans or grants.
GETTING YOUR STUDENT LOAN OUT OF DEFAULT
There are a number of ways to get your loan out of default. You can stop the Department of Education from taking money from your wages or Social Security benefits and from taking your tax refunds.
1. You can "rehabilitate" your loan. To do this, you and your lender decide on a monthly payment amount that is reasonable and affordable to you, considering your income and expenses. You must make nine consecutive monthly payments of this "reasonable and affordable" amount.
2. You can take out a consolidation loan, which is offered by the U.S. Department of Education. The new loan would pay off your old loan. If your lender has not obtained a judgment or an order of wage garnishment against you, you could qualify for a consolidation loan. Some reasons for taking out a consolidation loan are
● You would no longer be in default, so you would qualify for deferral, even if you had already had a deferral on your old loan.
● A Direct Consolidation loan can be repaid under an "income contingent" repayment plan. In other words, the lender would have to accept as a monthly payment an amount that is affordable to you based on your actual income.
To inquire about a Direct Consolidation loan, call 1-800-557-7392.
3. If your main concern is that you want to qualify for more loans and grants to go back to school, you can make 6 consecutive payments that are reasonable and affordable based on your actual income. You would have to agree with the lender about what is affordable to you. After the 6 payments, you are eligible for new educational loans and grants. However, your loan would still be in default for other purposes, such as collection. The lender could still take collection actions, such as intercepting your tax refunds and garnishing your wages.
4. Even if you took your loan out before July of 1993, you may be able to reinstate your loan (get it out of default, renew your eligibility for deferrals, stop collection action) by making 12 consecutive payments in an amount that is reasonable and affordable based on your actual income.
You can ask for a forbearance even if you are in default. A lender may, and sometimes must, give you a forbearance. A forbearance does not take your loan out of default, or renew your eligibility for new student loans or grants, but it will stop collection action.
MAKING YOUR STUDENT LOAN GO AWAY
The general rule is that student loans cannot be discharged in bankruptcy. Discharge means you do not have to pay the loan back. However, if a judge decides the student loan will cause you "undue hardship" if it is not discharged, he/she can order the loan discharged. If the loan is discharged, then you no longer have an obligation to pay it. The lender cannot take any further collection action, and you would be eligible for new student loans and grants.
"Undue hardship" is a difficult standard to meet. You have to show that you have no income or resources to make any significant payments on your student loans, and that you will not be much better off in the future. It is easier to do this if you are disabled.
2. Forgiving the Loan
Sometimes the lender must give up trying to collect on your loan. This is called "forgiving" the loan.
The lender must forgive your loan under certain circumstances as follows:
A. Closed school
You received a loan after January 1, 1986, and were unable to complete your education program because your school closed.
B. Inability to benefit
Your school allowed you to enroll in a program from which the school knew you could not benefit. For example, if you did not have a high school diploma at the time you enrolled, and the degree/license or certificate you were working towards required a high school degree.
C. Your school forged your signature on the loan application.
D. You are totally and permanently disabled.
The Department of Education has forms for you to apply to forgive your loan. You can download them from the website athttp://www.ed.gov/offices/OSFAP/DCS/forms.html
Provide as much information and documentation as you can to support your claim. You should return the completed form, together with supporting documents, to your lender or their collection agent.
Refinancing your debt when you cannot afford your current monthly payments may seem like a good idea, but sometimes may not be in your best interests. Here are some things to consider when refinancing seems like a way out of your debt situation.
·If you have any doubts, don't refinance. Refinancing almost always costs money. It may be up front costs or it may be over the term of the new repayment schedule. Ask yourself if the payments you make now or the new refinanced payments will be better for you. Add up the costs. What will the new grand total be that you will pay over the lifetime of the loan?
·For how much longer will you have to make payments?
·How much is your new interest rate and what does it mean in terms of the total interest you will pay over the lifetime of your loan?
Don't turn unsecured debt into secured debt
"Secured loan" means that the creditor can take a promised piece of property (called "collateral") if you don't pay. The creditor does not need to sue you first - they can usually take the collateral as soon as you are late. These are usually home mortgages and car loans. "Unsecured loan" means that there is no collateral. If you don't pay, then the creditor has to sue you in court to collect.
It is usually a bad idea to borrow money from a secured loan to pay for an unsecured loan. The reason this is bad is because your exemptions may protect all of your property from unsecured creditors (like credit card companies.) But these exemptions do not stop secured creditors.
For example: you borrow money from your house (called Home Equity Loans) to pay your credit card bill. Even though the house was safe from the credit card company, you could lose your house if you don't pay on the Equity Loan.
Ask questions before you sign any document.
·What will your new interest rate be?
·What property that you own are you putting up as collateral for the loan?
·How long and for how many years and/or months will you be paying on the new refinanced debt obligation?
·What will the grand total of all your monthly payments be when you get done paying the debt?
·Are there any special rules (terms) about your payments during the time you have the loan?
·Will the amount change?
·What are the up front closing costs?
·Are there any continuing closing costs?
·When can your new lender demand you pay the total amount owed before the end of the contract?
Beware of refinancing scams
Do you know the bank, loan business, or finance agency you are dealing with? Were you introduced to them when someone came to your door? It is much better to use a local, established company than a "fly-by-night" agency. There are many people out there looking to scam you. They will take your money today and be gone tomorrow by selling your payment obligation to another financing company that may not be available to work with you. You could lose your home.
Beware of lenders that aggressively advertise
·Be careful of a lender that offers to lend you more money than the collateral is worth.
·Be careful if they promote the tax deductibility of your loan. If they do, make sure they explain when and why your loan may not be tax deductible in language you can understand.
Don't refinance with the same company that holds your original debt
They may require you to pay new loan closing costs and other fees as a condition of getting the loan. They may charge you prepayment penalties when they pay off your old loan. They may insist you pay a higher interest rate on your new loan. They may also insist you add more property to the deal to secure your new debt obligation.
Get independent legal or financial advice from a professional before you sign
You need to choose the person to help you. Don't just use someone the lender suggests. Ask the person to review the paperwork and give you advice about the details and obligations before you sign.
If the loan is a home equity loan or credit linethen you have 3 days to cancel the loan after you sign. You can cancel for any reason by letting the lender know in writing. Remember with this kind of loan you are putting your home up as collateral.
Bankruptcy is a legal proceeding in federal court. A person with a lot of debts can get rid of those debts ("discharge" them) or get a new re-payment plan ("re-structure the debt") if it is approved by the court. The two primary types of consumer bankruptcies are called Chapter 7 and Chapter 13.
Chapter 7 bankruptcies are also known as liquidation bankruptcies. The debtor can discharge their liability for all or most of their debts by giving up their non-exempt property for sale. The money is then used to pay off their creditors. In this type of bankruptcy the creditor will only receive pennies on the dollar of the original amount they were owed. If the bankruptcy is approved, the debtor is no longer legally obligated to repay the "discharged" debts unless they "re-affirm" their obligation to pay specific debts after the bankruptcy is granted. Reaffirming a debt means you agree to pay that specific debt.
Chapter 13 bankruptcies allow a debtor to re-organize his or her debts and assets. A "Chapter 13 plan" is created for the debtor to pay off his or her debts over a span of three to five years. The bankruptcy court has to approve the plan. The creditors don't usually receive all of the money you owe them but they get some of it. The idea is that it is better to get some money back than to get none back. In this type of bankruptcy the debtor can sometimes keep some non-exempt property. But property that was listed as a "security interest" or collateral is different. The debtor may have to work out a new agreement or contract with the company listing the property as a security interest. You can't always keep all your property in this type of bankruptcy.
BENEFITS OF BANKRUPTCY
1. Gives you a fresh start on managing your finances and meeting your financial obligations.
2. Lets you keep your home or car so that you can continue to use them to provide for your future needs. Filing for bankruptcy can prevent foreclosures, cancellations of contracts for deed and repossession of vehicles.
3. Puts a stop to collection activity for a time.
Filing for bankruptcy protection stops the following:
Collection activity including garnishments and attachments that are already started
Lawsuits for foreclosure, eviction, cancellations for contracts for deed
Lawsuits to enforce collection of other obligations
Collection of judgments against you.
Stopping these activities is only temporary, but within that time you may be able to work out a new payment plan or make other arrangements to put an end to collection action.
DISADVANTAGES OF A BANKRUPTCY
● Bankruptcy can mean that you have to give up property that is not exempt or which is not protected for some other reason like being subject to a mortgage, contract for deed or security interest (like your house or car).
● Bankruptcy can also mean you will have a difficult time obtaining credit in the future for important and necessary goods and services. A bankruptcy stays on your credit history for ten years and may discourage many lenders from approving credit.
Some local creditors may not concern themselves with a credit report, or because of your local standing in the community, may still be willing to provide you with credit.
● Bankruptcy may have a negative impact on your reputation if it becomes known publically. This may be a reason for you to "re-affirm" debts owed to lenders in your community.
DISCRIMINATION DUE TO BANKRUPTCY
Filing for bankruptcy protection may lead some businesses to discriminate and refuse to provide credit to you. They may also refuse to hire you.
An employer cannot fire you for filing bankruptcy. A utility company cannot deny or refuse services because you have filed for bankruptcy.
Medical providers cannot discriminate against you when you have filed for bankruptcy and you need emergency medical services. Medical providers may refuse routine services to you if you have a bankruptcy in the past, unless you have proof of present ability to pay.
If you can show that the denial of services or employment or housing is because of your bankruptcy filing, you could have a basis to sue in court and get the denial overturned.
FILING FOR BANKRUPTCY
To file for bankruptcy you will almost always need the help of a lawyer. Many lawyers charge a set fee plus court filing costs for specific types of bankruptcy help. Some lawyers are willing to structure payment schedules for their fees. Others insist on receiving the entire amount up front. If you have questions about bankruptcy meet with a lawyer who practices bankruptcy law in order to discuss your rights, options and the required procedure.
If you would like legal advice about your debts or a possible bankruptcy, you should call a lawyer or your local legal aid office (see the list of offices on page 45). If you would like help with budgeting or with paying your debts, you should call the Consumer Credit Counseling Service (CCCS) at 651-439-4840 or 1-800-780-2890. CCCS may be able to help you set up a repayment plan to take care of all your debts.
BANKRUPTCY MAY NOT BE THE SOLUTION
Bankruptcy is NOT the only way to deal with your debt. You have options. Bankruptcy may not be necessary or make sense if
§you have no income, savings, or other property or assets which can be taken from you to pay off your debts
§you want to keep property that can be taken to pay off your debts
§you have only a few debts
§you have a strong defense why you don't owe the debt
§you have a way to make payments on your debt or
§the only reason you want to file for bankruptcy is because you want to stop being bothered by creditors. There are ways to stop this other than bankruptcy.
Note:If the debts you are worried about are backed (secured) by your home or car or other important property and your income isn't enough to pay both current and past due debts, bankruptcy will not help you (see page 26).
If any of these factors apply to you, there are other things you can do instead of bankruptcy.
CREDIT COUNSELING MAY HELP
Legitimatecredit counseling agencies can help you figure out the best way to deal with your debt. Legitimate agencies are here to help people, not scam them. The best way to be sure that the agency is legitimate is to use a nonprofit service that is either free or low-cost. Good credit counselors will help you review your situation, give you options, and advise you on the best ways to get back on your financial feet. They also may offer free or low-cost financial training so you can avoid credit problems in the future.
Make sure that the agency you use is "accredited." This means that they are given a seal of approval that they meet high standards. Also make sure that the counselors are "Certified Consumer Credit Counselors." These counselors have to pass tests to make sure they are good counselors.
HOW TO AVOID SCAMS
Being in debt can be very stressful. That stress can make it easy for people to fall for scams. There are many dishonest "businesses" that make you think they want to help you. In fact the "business" is just a scam to get your money.
Do not to fall into a trap that makes your debt problems worse. Here are some things to look out for and avoid.
1) DO NOT sign up with any business that says it will help you
-get out of debt
-fix your credit
-get creditors to leave you alone
Get advice from a legitimate nonprofit credit counseling agency. Again, make sure the agency is accredited and their counselors are certified.
2) Be careful of companies offering "debt management" services or plans. These are plans where the company acts as a go-between with your creditors. The company says they will set up a repayment plan with each of your creditors. Then they take a lump sum payment from you each month and make the monthly payment to each of the creditors. But, the lump sum you pay will include fees for the debt management company. You should make sure the lump sum you pay includes the full amount owed to your creditors in addition to the fees. Ask the debt management company to tell you exactly where all the money you pay goes.
Debt management service companies MUST have a license from the Minnesota Department of Commerce. They MUST follow strict Minnesota laws. For example, BEFORE you sign a contract with them they have to tell you which of your creditors has said they will be part of the plan and which refuse to participate. They can't charge more than a one-time $50 "origination" fee and then no more than $75 per month "maintenance" fee.
3) Be very careful about companies offering "debt settlement" services. These companies say they will lower your debts by getting creditors to "forgive" a large part of what you owe. Do not sign anything until you check to see if the service has a current license from the MN Department of Commerce.
Debt settlement companies MUST have a license from the Department of Commerce. They MUST follow very strong Minnesota laws that protect consumers. For example, before you sign a contract, they have to make sure the plan is right for your situation. They have to tell you they don't guarantee success, and that you can still be contacted and sued by creditors. They also have to tell you that interest and fees will keep adding up during the time you are in the debt settlement plan.
Note: The main purpose of "debt management" is to help you fully repay all that you owe. The main purpose of "debt settlement" is to help you get part of your debt "forgiven" so the total you have to pay is less than what you owe.
Before signing up with a debt management or debt settlement company, make sure they are licensed. You can check with the Department of Commerce to see if the company is licensed by calling 1-800-657-3978 or going to their website at
http://www.state.mn.us/portal/mn/jsp/content.do?id=-536881352&agency=Commerceand clicking on "Debt Related Services" and then choosing either "Debt Management" or "Debt Settlement Services." Then you need to scroll to the bottom of the page and enter the name of the company into the License Lookup Directory.
ANISHINABE Anishinabe Legal Services
ANOKAJudicare of Anoka County
CMLS Central Minnesota Legal Services
LADC Legal Assistance of Dakota County, Ltd.
LAOC Legal Assistance of Olmsted County
LASNEM Legal Aid Service of Northeastern Minnesota
LAWC Legal Assistance of Washington County
LSNM Legal Services of Northwest Minnesota, Inc.
MMLA Mid-Minnesota Legal Assistance
SMRLS Southern Minnesota Regional Legal Services
MinnesotaLegal Services Coalition
2324 University Ave.West, Suite 101B
St. Paul, Minnesota 55114