There have been comments on one of my email Listservs regarding the Department of Education Act, 2019 provision allowing federal student loans to be put into deferment during a borrower’s active cancer treatment. President trump signed this bill in September of 2018, and it was supposed to be effective “immediately.” Unfortunately, borrowers hoping to receive this relief have faced obstacles.

The primary problem is that the Department of Education still has not provided the application for borrowers to apply and to be given a deferment. If granted the forbearance, the student loans are on “hold” during active treatment, and then for an additional six months after treatment has ended. Instead, many borrowers have received “forbearance” from their servicers. The loan status of “deferment” is incredibly important (as opposed to forbearance) because in some instances the interest on the loans won’t continue to accrue on the balance. The Department of Ed has a webpage for the loan typeswithout interest accrual.

The most important thing, from my perch anyway, is that under many circumstances, an adjustment to an Income Driven Repayment Plan (IDR) may be a better long-term option for borrowers going through treatment. Putting loans in deferment, versus adjusting to a lower or “zero” payment, may be much more expensive in the long run, and the non-dischargeable status of these loans in bankruptcy has been confirmed over and over recently by the courts. For Parent Plus Loans, which do not receive an interest free deferment unless the parent also has other student loan where they are the student, placing them in Income Contingent Repayment(ICR) may be the better option for the future.

Of course, if you or a loved one are going through a cancer treatment plan, the LAST thing to worry about is student loan garnishment or tax intercept- so make sure you get them handled quickly. You can download my free eBook on Federal Student Loans, “Do You Have the Right Student Loan Payment” for step-by-step guidance on getting your options.

I hope everyone is having an amazing summer! Can you believe July 4th has passed us already? Since we are now into July, I suspect that back to school ads and sales are coming soon. I need to let you know about a proposed rule that the Consumer Financial Protection Bureau (CFPB) released regarding debt collection.

Under the rule, even if you don’t owe any money to any collection agency, the CFPB is proposing that the collection agencies can contact friends and family to leave limited contact messages. Yup. One of the proposed rule changes will allow the collectors to contact you if anyone you know owes a collection account. This not only violates the privacy of the person with a debt in collections, but how about your privacy and peace?

The proposed rule has other issues, but that one is going to affect people who do not owe any debt. Here are some rule provisions for people who do have a debt in collection.
The Proposed Rule would allow debt collectors to:

1. Call seven times per week, per debt, and allow one contact per week, per debt. Have five student loans? 35 calls allowed. Three medical debts? 21 more calls. And on and on.

2. Allow unlimited text messages and emails to consumers.

3. Allow legally required notices to be embedded in emails as links, which consumers have been warned NOT to “click” because of the virus and malware dangers.

4. Require the consumer “opt Out” of electronic communications, with no clear procedure to do so, may be required by snail mail. We have to wait and see.

5. Allow collectors to “DM” consumer social media accounts.

6. Allow the collector to violate privacy by leaving “limited contact messages” with friends, family, and neighbors.

7. Not prohibit debt collectors from “tricking” consumers into restarting the statute of limitations on time-barred debts by making any small payment.

8. Has other impacts that may not directly affect local consumers, but may, for example, by allowing collection attorneys to violate the FDCPA with “safe harbor” protections against liability.

As someone who had an account in collection in the past, I personally find this intrusive and stressful. You want to DM my social media accounts? My SOCIAL MEDIA ACCOUNTS? And there doesn’t appear to be a limit- so Facebook, Instagram, and Twitter all a few times a day? Seems like that’s okay under this rule. Sure, they cannot post anything to your page, but “accidents” happen, right? You want to text me however many times a day you want to? What if I am at work? Do I want to open my phone at lunch to a blast of ten texts? Really? Where would it end?

The good news, however, is that we can submit a comment to the CFPB regarding this rule, how it would affect us, and perhaps how we don’t want debt collectors to call us personally if a friend or family member is having a financial issue. If we all submit comments, respectfully and with a discussion of the impact on us, the CFPB must take these comments under advisement before the final rule goes into effect. Here are the links for the rule text (it’s over 500 pages!), the page to submit your comment, and the original release of the rule into the Federal Register. I’m a nerd, and I like to provide sources for everyone. And if you have insomnia, the proposed rule will knock you out in no time.

To submit your written comment:
regulations.gov/comment?D=CFPB-2019-0022-0001

More Information about this Proposed Rule can be found using the following links:
Open Notices Debt Collection Practices Regulation F
Federal Register Publication”

Please submit a comment and help me spread the word to others who may not be aware of this proposed rule. We all have the opportunity to make a public comment before August 19th. After that time, the “public comment period” is scheduled to close. We have over a month to get after this. We can positively influence this rule if we all raise our voices to the CFPB.

Enjoy your vacations and the rest of your summer!

 

Anyone who saw the news this weekend saw the incredible act of generosity by billionaire philanthropist Robert F. Smith, the commencement speaker at Morehouse College, in Atlanta. Mr. Smith paid the student loan debt of the 2019 graduating class- a total grant of about $40 million dollars. For most graduates, however, student loans will follow them long after the diploma is received.

Many students are on the “Student Deferment” program for their loans, but after graduation, payments begin in six months. What do they do next?First and foremost, students must have a plan. They must have a budget. Then three steps: 1. get to paying as soon as possible on a repayment plan, 2. get out of the student deferment before it statutorily ends and, 3. stay out of forbearance in the future. Going into and out of forbearance is the fastest way to grow a student loan balance. Why? Because the interest capitalizes every time the loans go into and out of forbearance, and when students change payment plans. Capitalization means that the outstanding interest becomes a part of the principal balance, and you then pay interest on the new principal. This is a reason that student loan balances balloon.

The first issue, that few borrowers truly understand, is that during student deferment unsubsidized student loan interest already capitalizes quarterly for the length of the deferment. Four years of loans every semester, unsubsidized interest amounts capitalizing every quarter. This is why students graduate with thousands of dollars of student loan debt amounts over what they actually borrowed. So, during school, these loans are growing. After graduation, many students are faced with large payments they cannot afford on the “Standard Repayment Plan” over ten years, so they immediately put the loans into “forbearance” and a payment is no longer due. But once again that unpaid interest will capitalize every time the loan goes into and out of forbearance.

So, what to do? Here are a few first steps.

1. Have a budget and include in the budget the biggest student loan payment you can afford. Things may be “tight” again for a little while but getting right into payments and staying out of forbearance will make loan payoffs faster and less expensive.

2. Download the Student Loan Guide, “Do You Have the Right Student Loan Payment” from my website and follow the steps to retrieve your total federal student loan data from the National Student Loan Database (NSLDS). From there, check your loans CARFEULLY, to make sure they are, in fact, yours. Look at the disbursement dates, and make sure you were attending. Mistakes sometimes happen.

3. Use the Debt Snowball for the individual loans. If you can avoid consolidation, you can stack your loans from lowest total amount to highest, and attack the debt using a “debt snowball.” As each loan is paid, you will have a huge sense of accomplishment, and the motivation to keep going.

4. Avoid Forbearance. If you cannot make any payment at all AFTER your student deferment period ends- call your servicer and get into a payment plan, do NOT go into forbearance. If you graduate this month, you have a few months before the first payment is due. Get moving on these, but if there is an unavoidable reason you just cannot make the payment, get into Income Driven Repayment, or some other plan, and make sure you absolutely re-certify every year. When you go into and come out of IDR, guess what? Your interest capitalizes.

In my humble opinion, it is this interest capitalization that is making student loans hard to pay off. And when people enter into forbearance, it is because there is a short-term issue causing a hardship or some other issue. The servicers will happily put you into forbearance, “so you don’t have a payment due for six months” but in the long run, it actually hurts the borrower financially. We need stronger disclosures.

Best of luck to the class of 2019! May you find your joy and excitement felt during “Pomp and Circumstance” lasts for years as you leave college and embark on the rest of your journey!


image credit: gocollege.com

 

I had the amazing privilege to attend the Consumer Assembly last week in Washington DC, and there was a panel discussion on credit scoring. The panel was actually a discussion on a group of American consumers that are dubbed by the industry the, “Credit Invisibles.” These are people who cannot get a “good” credit score in the typical way, by having open lines of credit that are at least six months old. The industry that scores credit, including the Fair Isaac Corporation (FICO), the developers of the FICO credit scoring models, and Vantage Score Solutions, LLC, the developers of the Vantage credit scoring models, feel that “credit invisibles” are disadvantaged in receiving access to credit products. And they are, but this new model by FICO to address the credit invisibles and those with marginal credit is not good for consumers.

I first blogged on the new “UltraFICO” score back in October in a two-part article series. The first was an introduction to the scoring model and the second was on some unspoken dangers related to judgments and bank account attachment when the credit reporting agencies have you bank account information, which you must consent to disclose under this model.

During last week’s panel discussion I learned more about the purpose of the model, and some facts that have me re-thinking my original posts about how this score may be “OK” for a mortgage product. And I was wrong in my previous posts. The model is not “OK” for any credit. None.

Before I move on to the specifics, I have to take a moment and point out that the panelists, including the VP from FICO from whom I received the information directly, entered into the lion’s den of an audience of consumer advocates, and spoke openly and answered questions about their products. That was a very nice thing to do, and I am appreciative of their honesty. I also know that in their “heart of hearts” they believe that they are helping consumers. It is at that point, I cannot disagree more. Remember, the credit scoring businesses are in the business to help people get and stay in debt. Any model that they can create to help consumers access credit is good for them, not necessarily for you. They sell these models. You are denied under one, they offer a second. Here are five “Fun Facts” about the UltraFICO:

1. The “UltraFICO” will be marketed, and is intended, for all types of credit not just secured, collateralized mortgages. In my original post, I speculated that the releasing of banking information to show the history of cash transactions might be “ok” or even great for mortgage lending, the only good use I could envision for this model. Well, when you apply for a mortgage, the banks take your last months of bank statements anyway. So, for that credit product, this appears to be moot. The UltraFICO will be available to all creditors who wish to purchase it.

2. The UltraFICO is intended to be a “second chance” credit scoring model. This little piece of information was new to me, and this is the first indication that it is not good for consumers. I originally believed that borrowers could just “opt-in” to this model by consenting to include their banking info. Actually, this is intended to be an option for people who would be denied credit in the original model. The credit denial becomes a “maybe” and the borrower has the option to “consent” to include their banking info in the hopes that their credit score will go up and they can be approved.

3. The Premise of the UltraFICO by Fair Isaac is faulty. One telling thing about this model is the statement by the panelist that the checking account information would be reliable because, “Consumer’s are in control of those accounts.” I disagree. I had a debit card number stolen and used in a fish market in Mexico. Filed the report, got the money back, but in this day and age of data breaches, I would never make the statement that consumers are always in control. FICO assured us that their model would be able to determine these little situations and not count them, but the scoring models are not transparent. All types of situations can arise where a consumer, for a period of time, may not be in complete control of every transaction in their account.

4. The UltraFICO model needs two to three years of banking information. Ah, another tidbit of info I was previously lacking. To use this model, consumers must 1. not have bounced a check in the last twelve months 2. Have at least two to three years of checking account information available for the model and 3. Have an average balance of $400.00. Good to know. 78% of consumers live paycheck to paycheck. There are many consumers that cannot maintain an average $400.00 balance after bills are paid and groceries are purchased. The VP assured us that in the beta-testing, using Experian as the Credit Reporting Agency (CRA), most consumers had their score increase under this model. But this now provides the information that a consumer may know they do not have, and “opt-out” of the model, rather than be denied AND have a score decrease.

5. Your banking info will be out there to the CRA, including “new” Finicity, who will become a CRA to comply with the Fair Credit Reporting Act. A fourth CRA will enter into the picture, Finicity who will be the CRA for these UltraFICO banking information providers to FICO for scoring. Because FICO never sees anything but the “raw data” they have zero, none, no liability for what happens to your info. Under this model, FICO assures us that it will be a “single use” calculation of the borrowers banking info. Okay, what happens then? The CRA and the creditors are responsible for protecting the data and are subject to the FCRA, so, it’s good. Or is it?

Data breaches have recently revealed sensitive info that an identity thief can use to create an account, such as social security number and date of birth. But now, a breach can put your banking info at risk, no need to create a fake account when they can raid yours, or use the UltraFICO themselves. How many additional hours will consumers add to the identity theft cleanup mess when the bank must investigate everything, and to close that account could subject the consumer to bounced checks and whatever else. But, you can file a dispute with the Credit Reporting Agency online. Eyeroll.

If you are purchasing a house, find a bank who will perform manual underwriting, and do not use the UltraFICO to provide your banking account information. Please. Your info will be out on the internet for who knows how long. Even if the CRAs pinky swear to delete it. For other types of credit, if you are going to be denied without this info- you are going to be denied. The interest rate is likely higher than you would expect anyway once the UltraFICO model is used. And for the car dealers and others who will “deny” people initially to access their banking information for approval, we know, we know. If you give a mouse a cookie, he will want a glass of milk. Protect your banking from the UltraFICO.

 

“The hospital is saying that if we need a lower payment, we have to take out a loan.” I wouldn’t have believed it myself, but that statement came from my client. I actually was at a loss for words. “So, if you do not make the minimum payment the hospital has set you up with on the “plan” they won’t accept any payment at all?”  Apparently, that is what the hospital told them. So, what to do if you are faced with this issue? Let’s talk about it.

First of all, the hospital is not required to carry your debt balances. They can decide that they will make payment plans with patients, provided the debt is paid in 12 months, or 6 months, or whatever. To be honest, medial providers of all types, private doctors, hospitals, labs, etc, are often very quick to turn an outstanding medical debt to collections. It is that fear of collections that can cause consumers to make mistakes in handling these debts.

About 18 months ago, on September 15, 2017, the three credit reporting agencies, Equifax, Experian, and Transunion changed the way they report medical collections on the consumer’s credit report. These changes were designed to help consumers who are paying medical bills on a payment plan or are waiting for insurance to pay some or all of the outstanding debt. I wrote about this briefly in an earlier article, it is not unusual for insurance claims to be filed with errors, and payment is delayed.

What to advise my client? Well, if you cannot afford the payment, and it was a very large payment, the bill will probably be sent to collections, but until it is, make your lower payment amounts to the hospital. Do not stop paying because you cannot afford the amount they are asking. And I gave them the same option I am going to share here. These are the things to consider if your hospital is threatening to send you to collections because you cannot afford their plan.

First, DO NOT take out a loan or put the balance of a medical debt on a credit card. It changes the “character of debt” from medical to “personal loan” or “credit card debt.”  The reporting agencies will not report a medical collection on the consumer’s report for 180 days, that’s six months, after the account is sent to collections. This gives consumers six months to pay the debt in full. If you change medical debt to anything else, you are adding interest, and any late payment can be reported.

Second, many medical collection accounts can be removed, once they are paid. In certain scoring models used by creditors, paid medical collection accounts do not factor in at all, even if the paid debt is not removed.

Third, there will be more flexibility to lower your payment each month with a collection agency. Collectors want a payment. Period. If it takes longer than six months, see above.

Fourth, do not make the medical debt payment at the expense of any of the family’s “four walls.” Food, utilities, rent or mortgage, and transportation are the priorities with your income. PLEASE do not put your “FICO” in front of the electric bill or pay the debt before you get food in the pantry.

The last little tidbit of news here is that the credit reporting agencies must remove any medical collection account within 45 days after it is paid in full by insurance. As I said earlier, mistakes in claim filing, not by the consumer, but by the provider, can delay payment beyond the six months.

 

This is the final article in the “Consumer Lawsuit” series. Part I covered what happens when the consumer is defendant (served with a lawsuit) and what to do. Part II covered two instances “when” the consumer should consider suing a creditor, collector, or credit reporting agency. This article will cover what to expect when the consumer is the plaintiff, or the party that files a lawsuit. I am going to emphasize again in Part III – very few people like lawsuits. They can be stressful, frustrating, and exhausting. But sometimes they are necessary to protect legal rights.

I want to start with one of the biggest obstacles for consumers who should consider a lawsuit- attorneys and fees. Attorneys are often seen as the bad guys in consumer disputes. The creditors often have teams of attorneys, and many collection agencies employ attorneys to collect on debts. This is why collection notices may originate from a law office. For many consumers who want to fight, the thought and costs associated with legal representation are a huge issue. However, these concerns are directly addressed within the consumer protection laws themselves to make sure consumers can get relief.

Consumers can be Awarded Costs and Attorney Fees Under Fee-Shifting Statutes from Violators

For cases brought by consumer under the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA), there are provisions for plaintiffs “who prevail” against the collector or credit reporting agency who violated the law. In addition to “actual” damages the consumer suffered by the violation, there are “statutory” damages, meaning money damages available to the consumer within the law just for the violation, and under “fee-shifting” provisions, the law provides the collector or credit reporting agency pay, “costs” and “reasonable attorney fees.” Rarely is the client out of pocket “up front” for these cases, and many attorneys evaluate these cases without a fee. Also, once a consumer is represented by an attorney, the collector cannot contact them directly, the collector must only contact the consumer through their attorney.

Procedures in a Lawsuit Itself

When a consumer decides to file a lawsuit, there are procedures that must be followed under our system of laws and justice. There is an order to things, and this order must be strictly followed. This is another part of the frustration and emotional toll many lawsuits can take on consumers. Lawsuits may seem overly complicated, slow moving, and the other side has rights to file motions as well. As I covered in Part I, every defendant has the right to receive notice of the lawsuit filed against them and has the right to respond.

If we describe the process in the most basic order of steps, and not all suits are straight lines, there are four to five steps that are common. The lawsuit will contain the original complaint, or pleading to the court, service to and the answer by the defendant, motions and “discovery” around evidence, conferences before a trial with settlement talks, and then a trial. Not all lawsuits make it to trial, in fact most are resolved much earlier in the process. Sometimes settlement talks can occur right after the answer is filed by the defendant and the evidence of consumer law violations is produced. This is because the consumer protection laws under the FDCPA and FCRA are “strict liability” meaning, if the violation occurs, the collector or credit reporting agency is liable. There is no need to prove that the agency had bad intent or malice toward the consumer. Because there is a strict liability component to the laws, many consumers receive relief from the courts when they enforce their legal rights and defend themselves against abusive and illegal tactics to collect debts or credit reporting errors that the agencies refuse to correct.

And that’s really about it for the basics of the consumer lawsuit. If you missed Part I or Part II, you may want to go back and read them. If you have questions or comments about this series, please let me know. I want to re-emphasize that if a consumer owes money, there is a right way to collect a debt within the law, and a wrong way that violates the law. If a credit reporting agency makes an error, and refuses to correct it, there can be serious consequences for the consumer, whether it is being denied a job, having a security clearance revoked, or increased insurance rates. When agencies violate the law, consumers have rights, and they need to enforce them.

 

In the first article of this series, I discussed the consumer lawsuit from the perspective of the consumer as defendant, meaning the consumer received a lawsuit from a creditor, debt collector, or debt buyer. In this article, Part II, I want to discuss when a consumer might consider suing a creditor, debt collector, or even credit reporting agency (Equifax, Experian, or Trans Union).  I want to say what I said last article, very few people like lawsuits, they can be time consuming and emotionally draining.  Consumers file suit against collectors at a far lower rate than collectors sue consumers. Unfortunately, there are times where a lawsuit may need to be filed by a consumer to stop abusive practices against them or to correct inaccurate information causing serious consequences. Here are two instances when a lawsuit may be the consumer’s only real option.

1. If after the consumer has tried all of the self-help strategies available and the collector or credit agency is refusing to comply with the law, a lawsuit may be necessary to protect the consumer’s legal rights. There are many, many steps a consumer can take to try and work with a collector or credit reporting agency, whether the debt is owed. Here are some resources for different types of consumer problems that outline what the consumer can do on their own, without legal assistance:

A. Identity Theft. If the consumer is a victim of identity theft there are steps to dispute debts and credit reporting items that do not belong to the victim. If the consumer follows these steps, and the collector or credit reporting agency refuses to comply with the law, a lawsuit may be necessary.

B. Collector Harassment. Even when a consumer owes the money, there are federal laws that protect consumers from misrepresentation and abuse by collectors. A great resource describing the limitations on debt collectors, what they are allowed to say or do, and not allowed to say or do is available on the Consumer Financial Protection Bureau Website. If the collector continues to violate the law, a lawsuit may be necessary.

C. Credit Reporting Errors. If the consumer has already disputed mistakes on their credit reports with Experian, Equifax, and TransUnion. The steps for consumers to order a free report from each of the bureaus and dispute any items on the report is found on this Federal Trade Commission Link. It is important to note that the credit reporting agencies are just that, reporting information provided by the “furnishers” of information- creditors, collectors, debt buyers, the IRS, bankruptcy courts, etc. If there is an issue with the organization that granted credit, the consumer must make sure to address the dispute with the furnisher as well.

2. If the Consumer is sued by a collector, creditor, or debt buyer, violations by these organizations may be grounds for a counter-suit (cross-complaint) at the time the consumer is sued. When the consumer has suffered frustrating months leading up to a lawsuit by a collector who does not follow the law, the consumer may bring a counter claim against the collector. In the last article, I talked about when a consumer receives a lawsuit, but if the consumer has been a victim of abuse, harassment, misrepresentation, etc, these claims can often be brought in court even when the consumer has been served.

 A collector or creditor does not get a pass on following the law just because the consumer is sued to collect a debt.  If a consumer receives a lawsuit, they should speak with an attorney. Look to local legal aid societies or find a “debt defense” or “consumer law” attorney for help. The consumer must respond to any lawsuit quickly, and if counter-claims are available, they must be filed with the answer.  If the consumer is represented by an attorney, the collector can only talk to the attorney, and no longer contact the consumer directly.

State Laws for Consumers and Other Protections for the Military
It is also important to note that most states have consumer protection statutes, many that are similar to the federal statutes. For Example, In California there is a body of law under the Unfair and Deceptive Acts ad Practices (UDAP) that protect consumers.  This means that the collector may have violated state law, and there may be a lawsuit in state court available to the consumer to protect their legal rights.   If the consumer is a military member (or dependent in some cases) there are specific laws such as the Servicemen’s Civil Relief Act (SCRA) and the Military Lending Act (MLA) that may be available to a military consumer. The military consumer can contact the local Judge Advocate General’s (JAG) office for assistance.

The Consumer Must Preserve Their Rights by Keeping all Letters and Starting a Call Log.   First, the consumer should save EVERY piece of correspondence received from a debt collector or creditor. If a law firm sends a letter trying to collect, save it. Start a folder and save everything. Second, start a call log. Texts, calls, and email messages. There are rules about identifying themselves as a collector, and a requirement to let the consumer know they are calling to collect a debt.

Note when a phone call is received or when the consumer makes one, who they talked to, any promises made, and what the outcome of the call was. In this day and age, we have caller ID, and we can note the date and time of calls, voicemail messages, and hang ups. It is critical that the consumer preserve this proof that they are receiving calls in violation of the law. And many collectors call in violation of the law. Either too early in the morning, or too late, or at work, or even after the consumer requests they stop calling.

Also note the outcome of the conversation. Did the collector promise to send something? Promise to remove the consumer form the auto-dialer?  Promise not to call because the consumer made a promise to pay, “next Friday?” Write it down. And as frustrating as it may be, dealing with the collector, the consumer must not BREAK THE LAW themselves. The collector will advise the consumer that the call is being recorded, but depending on state law, the consumer may not record the conversation. Write it down. 

Part III of this series on the Consumer Lawsuit will address what the consumer should expect (in most instances) if they decide to file a lawsuit against a creditor, collector or credit reporting agency.  Unlike the collectors who often have teams of lawyers (or are lawyers), many consumers do not have an advocate, know where to get one, or are afraid of the costs involved. These are all real concerns, particularly if the consumer is already in financial trouble.   

 

 

Creditors and debt collectors sue consumers on all types of delinquent debt, including credit cards, medical bills and auto loans. Honestly, very few people like to be involved with a lawsuit. Bringing an action in court is time-consuming and can be both frustrating and emotionally exhausting.  If a collector escalates a delinquent debt into a lawsuit many times it is because the consumer fails to respond to attempts to collect or cuts off any collection action with a cease and desist letter. Unfortunately, it is not always possible to avoid a lawsuit. When the consumer is properly served (with notice of) the lawsuit papers, a response to the complaint is the best course of action.

Debt collectors (and creditors) file many more lawsuits each year against the consumer than consumers file against the collector. Statistics compiled by data and analytics firm Web Recon, LLC reveal that consumers filed 15409 lawsuits under three consumer protection statutes nationally for the entire year in 2017. These lawsuits were filed under the Fair Debt Collection Practices Act (9784 times), the Fair Credit Reporting Act (4346 times), and the Telephone Consumer Protection Act (4392 times).

For comparison, during that same timeframe in Texas, and only Texas, creditors and collectors filed over 160,000 lawsuits against consumers. That’s right, in 2017 lawsuits filed against consumers to collect a debt in Texas were ten times the number of lawsuits filed nationally by consumers against collectors. The ugly truth is that a recent Consumer Financial Protection Bureau Debt Collection Survey found about 1 in 15 consumers with a debt in collections was sued in 2017. Scary numbers, but consumers have rights in these suits, and often do not assert them. The purpose of  the rest of this article is to provide the steps a consumer can take to ensure their legal rights are protected. 

First and Foremost Consumers Should NEVER Ignore a Lawsuit

Depending on where a consumer lives, a response to the complaint will be due back to the court quickly, typically within 20-30 days. If the consumer (now the defendant) does not respond, they can lose their right to defend themselves in court. If the debtor ignores the lawsuit the collector can get a “default judgment” against them, meaning the plaintiff collector will get an order from the court saying the consumer owes the money without needing any evidence to prove it. The collector wins automatically because the consumer didn’t show up to the court hearing. With that default judgment in hand, the collector has a legal right to collect the money awarded by the court, often with additional collection and attorney fees. Collectors can take that legal order and attach the consumer’s bank accounts, garnish wages, etc.

Consumers Should Seek Legal Assistance Pronto

Contact an attorney or local legal aid program. It can be a result of a consumer’s shame or fear that will stop them from contacting a lawyer. Most legal aid programs offer legal help either free or for a reduced cost. There may be debt defense options available to the consumer, such as having the creditor prove the amount of the debt owed and even that they have a legal right to collect the debt. With the recent proliferation of “debt buyers” which are debt collectors who buy debt accounts from other companies, often the original creditor, who has already written off the debt. Many times the creditor who sells the account databases with the list of debts does not guarantee the accuracy of the accounts they sell to debt buyers!

Some of the accounts that debt buyers receive are inaccurate, or too old to sue on, or may be already paid off, but weren’t cleared from collections before they were sold. Yet, these debt buyers will aggressively attempt to collect on these mistakes, or file suit. It doesn’t really hurt the collector to file a suit with the anticipation that the consumer won’t show, and they will get a default judgment. If the consumer responds and appears in court, they may even drop the suit right then. If the consumer ignores the suit because they were scared, or believed the suit was a mistake, when they don’t respond the collector wins. Every consumer who receives notice of a lawsuit should at least speak with legal counsel.

If You Find a Judgment by Checking Your Credit Report

Sometimes a consumer will only learn about a lawsuit from their credit report. A default judgment was entered under “public records” and the consumer never even received notice of the lawsuit! This tactic is affectionately known as “sewer service” and is used by some unscrupulous organizations to secretly file suits to get default judgments on debts. And this tactic is illegal. Consumers must be personally served the with the lawsuit. In our system of justice, the party being sued has the absolute right to notice and must have a chance to respond to a lawsuit.

In Part II of this series, I will discuss the steps consumers can take as plaintiffs under a number of consumer protection laws. These statutes cover areas such as debt collection and consumer credit reports. There are instances where the consumer may have to bring a lawsuit under one of these federal statutes to stop illegal and unlawful actions taken against them.

 

Lots of news floating around about how a new legislative proposal where the federal government would take 10% of a student’s wages as an automatic payment for student loans, basically a garnishment, and this may affect many of the current 44 Million borrowers. This suggestion has drawn fire from many consumer law advocates, like myself, who feel that this plan would allow the government to prioritize student loan debt above necessary living expenses; food, utilities, shelter, and transportation. But this proposal also has me thinking about the state of current student loan garnishment structure.

Garnishment is simply a “forced” withholding of part of a consumer’s income in response to a debt. Federal Student Loans are subject to “administrative wage garnishment” and will not need a court order if the borrower is in default. The current percentage of wages which is subject to administrative wage garnishment is 15% of a borrower’s “disposable income”, defined as the net check, or income after withholding taxes and other deductions. But this 15% is after mandatory minimum amounts that are protected from any garnishment. I will cover both consumers earning regular wages, and then consumers on fixed Social Security income.

Please note that PRIVATE student loans require a court order and a judgement against the borrower before the lender can garnish. Also note that the total amount of garnishment for debt allowed by law is 25% of the debtor’s wages… meaning, I am going to talk at the 15% rate in this article, but if the consumer already has a garnishment from somewhere else, the total garnishment cannot exceed 25%, so the federal student loan garnishment may be less than the full 15%.

For Consumers Earning Wages

The rule is 15% of wages after deductions, but what exactly does that mean? First of all, there are minimum amounts that are “exempt from levy” meaning, that amount cannot be touched for any reason by federal student loan garnishment. The current amount, as of this article, is 30 times the minimum wage after deductions. This means, at the current minimum wage, which is at $7.25 an hour (15 USC §1673), the consumer “keeps” the first $217.50 per week. That is the amount “exempted” from any garnishment calculation. The government can then take the LESSER of either the amount that is left after the $217.50, OR 15% of the consumer’s total income. It can be confusing, so a few examples are in order.

A. Consumer’s net income is $300.00 per week. After the exempted $217.50, the consumer has $82.50 left over. 15% of the $300.00 is $45.00. The government can take the LESSER amount, or $45.00 per week. In perspective, out of $1200.00 net income per month, the government can take $180.00. (This is why us student loan/ consumer law types want to do everything possible within the law to prevent garnishment for student loan delinquency.)

B. Consumer’s net income is $500.00 per week. After the exempted $217.50, the consumer has $282.50. But, 15% of $500 is $75.00, so the LESSER is $75.00 a week, or $300.00 per month. Another ouch. This is one reason that over a certain threshold, the calculation is almost always just 15% of disposable income.

One more thing, both Federal Pension and Private Retirement payments that are exempted from garnishment for debts in most states, is also subject to garnishment for delinquent student loans.

For Consumers on Social Security Retirement and Social Security Disability

Unfortunately, most of the time when I run into the “offset” (garnishment) of social security payments, it is because the consumer co-signed someone else’s student loan. If the borrower becomes permanently disabled, there are administrative actions that can be taken towards forgiveness of the federal loan debt. This is true for federal loans where the student passes away as well. But there are many cases where the Department of Education is offsetting Social Security Retirement Income (SSRI) and Social Security Disability Income (SSDI) payments. SSI, the program for the indigent, is exempted from “offset”.

Social Security Retirement and Disability are subject to an “offset” to recover federal debts since 2001 under the “Debt Collection Improvement Act of 1996.” The Department of Education can offset up to 15% (31 USC §3716). The amount offset is the LESSER of 1. The total amount of the debt 2. The amount that exceeds $750.00 per month, OR 3. 15% of the total benefit amount.
Here are the actual examples from the legislation:

Example 1:
A debtor receives a monthly benefit payment of $850. The amount that is offset is the lesser of $127.50 (15% of 850) or $100 (the amount by which $850 exceeds $750). In this example, $100 would be offset.
Example 2:
A debtor receives a monthly benefit of $1250. The amount that is offset is the lesser of $187.50 (15% of 1250) or $500 (the amount by which 1250 exceeds 750). In this example, the offset amount is $187.50 (assuming the debt is $187.50 or more).
If the recipient receives $750 or less, nothing will be offset.

(from: 31 C.F.R. § 285.4(e)(3)(i), 31 C.F.R. § 285.4(e)(3)(ii), & 31 C.F.R. § 285.4(e)(3)(iii))

Alternatives to Default, Garnishment or Offset

I have covered in previous articles how dangerous it is to a consumer’s financial future if they default on student loans. There are currently nine, that is right, NINE repayment options available through the Department of Education for student loans, and while nobody qualifies for all of them, many qualify for more than two. So PLEASE readers, know your options. Please do not let your student loans go 269 days past due. Call your servicer or a student loan attorney if you need help. If you have private student loans, the payment options may be limited. But contact the lender if there is a problem making your payment. As for the topic that inspired this article, legislation proposing the 10% monthly payment option. You can see how it would begin to prevent defaults, and the amount proposed is less than the current garnishment scheme. But then again, I believe consumers should control their income and not have to choose between food and federal debts. A garnishment is imposed because federal student loan notices were ignored, or nine total monthly payments were missed in a row.

The National Consumer Law Center (NCLC) recently published a report on debt collections and complaints surrounding those collection actions for 2018. This report includes an online interactive map, which can be searched by state, showing the statistics on the percentage of the state residents in collections, along with the top complaint types against debt collectors. Honestly, it’s an ugly state of affairs. And if you, my reader, are currently in collections, you may want to take a look at the information for your state. I promise, you are NOT alone in the frustration and fear surrounding collections, particularly when bad actors break the law. The top three complaints reported by the NCLC?

> “Calls After Getting ‘Stop Calling’ Notice” (227,917 complaints),
> “Calls Repeatedly” (210,238 complaints),
> “Makes False Representation about Debt” (192,704 complaints),

I also promise you, dear reader, these numbers are way underreported. A vast number of consumers won’t complain. Won’t assert their rights. And collectors know this, which is why they continue to violate federal law. The Urban Institute reported in July 2018 that 71 million American adults had at least one account in collections. 71 million Americans in collections, yet under one million complaints against collection agencies who violate the law.

There is a very honorable, yet misguided reason, many people won’t report harassment from collectors. Because they owe the money. But do they really? One of the biggest complaints is that consumers are harassed about debts that don’t owe, or that are time-barred form a lawsuit when the statute of limitations runs out. That’s right. The debt can become too old for a lawsuit. Still on the consumer’s report? Sure. Consumer still technically owes the money? Sure. But the consumer cannot be sued in court.

This is a huge distinction under the law and there is one mistake many consumers make. The statute of limitations will be restated if any payment is made on the account, no matter how small. Let me reiterate that very important point: Collectors will harass, call, and threaten a consumer for just, “any payment at all” because if the consumer gives them even a dollar on a debt that is too old to sue on, THE CONSUMER WILL RESTART THE STATUTE OF LIMITATIONS.

And they won’t warn the consumer that the debt they are calling on is too old, sometimes called a “zombie” debt. Why? Because it is part of their business model. They aren’t obligated by the law to tell the debtor. They will call and ask the consumer to settle. If the consumer makes ANY payment or promise, and revives they statute of limitations, the consumer is again are at risk for a lawsuit. Even if the debt was only days from being time-barred. So they do it. Call on very, very old debt. And they will harass the consumer to try to get them to settle again, or start to threaten with a lawsuit. And make no mistake, threatening a lawsuit when they do not intend to follow through is a violation of the law. Credit.com has an interactive map with the statute of limitations for each state. It’s possible that the collector may, however, still report a time-barred debt to the credit bureaus. Unless the debt is too old for the collector to do that either. And they won’t tell the consumer that tidbit either when they call.

But, there is some good news, and some maybe not good news on the horizon for 2019. First, the good news. Many states have debt collection laws that are stronger than the Federal Debt Collection Practices Act. Ans some states are taking aggressive action to force collectors to tell consumers when the debts are too old. California, for example, recently enacted legislation that require collectors to place specific notices on communications to ensure consumers know when the collector is trying to collect a time-barred debt, including an additional notification if the debt is so old it can no longer be reported to the credit bureaus under the Fair Credit Reporting Act. Many states have an “Unfair Practices Act” type set of laws as well that have protections for consumers, these vary by state.

Now, for the maybe good news. On the national level, The Consumer Financial Protection Bureau is expected to take steps this March and release some changes to the rules around debt collection practices on the federal level. Consumer advocates are pushing for those changes to include a rule requiring Collectors give written notification to consumers when a debt is too old for a law suit or too old to be reported on the consumer’s credit report. I’ll let you know what comes out. For now, there are a few things to remember to do if you are in this situation:

1. Check your state statute of limitation for consumer debt before making ANY payment, no matter how small, to a collector.

2. If you are being harassed, or a collector is trying to get a payment on a debt you do not owe, contact a consumer advocacy agency or attorney and find out the federal and state laws available to protect you.