Helpful Articles

Do's and Don'ts of Debt

By Julie Kreutzer

As an attorney who deals with debt, I do debt negotiation and bankruptcies. Sometimes clients contact me early in the crisis and sometimes after they are being sued. Here are some of the things I wish I could tell all of them from the beginning:

- Never ignore a bill even if you are certain you don't owe it. Never pay less than the full amount because you think there is an error. If there is a problem communicate with the creditor. If there is an error, get it corrected and if the creditor refuses and you are sure they are mistaken, get legal help. Otherwise, even if you are right and you don't owe the bill, the creditor will likely sue you and your credibility will be low since the court will wonder why you didn't make any effort to correct the error and unless you have good evidence to persuade the court of their mistake, you will be found liable and they can pursue remedies like garnishment and taking property from you.

- Never ignore any type of court document. If you don't read the documents and participate in the legal process you will lose regardless of any defense you might have. What happens when debtors don't answer is that creditors wind up with a default judgment that they can use to garnish wages and seize property. If they don't know where the debtor banks or what property could be seized, they will ask questions as part of the legal process. If they don't get an answer, they will ask the Judge to require a response and the judge will order the debtor to answer. If no answer is made, the creditor will move for contempt of court. If a debtor doesn't answer, then they are found in contempt and a bench warrant issues. That means if a police officer happens to pull over the debtor for something like an expired plate, they will find the warrant and arrest the debtor. The debtor is not being jailed because they owe money; they are in jail because they ignored a court order. Typically, if a debtor is at the point they are being sued, they really need to get a consult with an attorney to determine if they have the option to negotiate or whether they should file a bankruptcy.

- If you know you owe money and have moved, run a credit report. It is quite possible collections are under way, but the debtor is not aware of them because they moved. ?That ?does not provide enough advance warning or options if collections have moved to the litigation stage by the time the creditor finds the debtor. In some cases, there has been litigation that the debtor was not aware of and they have already been found liable for a debt (even if a debtor was never properly served, it is problematic to prove that). No matter how bad the debt situation is, it's better to know the extent of the debt, so that the debtor is making reasonable decisions instead of being blind-sided with a garnishment when they least expect it.

- If you can't afford to pay a bill, either negotiate the amount and type of payment, go see an attorney who can negotiate for you, or file a bankruptcy. You, or an attorney, can negotiate the amount of debt (you don't have to accept interest and fees, you can offer less if you are offering a lump sum) or payment plan (if you can't do a lump sum the creditor may not agree to reduce interest and fees but might agree to a payment plan). If you have too much debt and you don't have a lump sum to negotiate with and you can't manage a payment plan that covers your debts, you may need to do a bankruptcy.

- Do not borrow or cash in your retirement, take money from the equity of your home or borrow from family and friends, until you talk with an attorney. It is common for a person to cash out their equity, retirement and borrow heavily from family and friends and still need to do a bankruptcy. Chapter 7 bankruptcy protects a fair amount of equity in your home and it protects retirement money most of the time. Also, if you can't afford to pay creditors, who would you rather be listing as your creditors?

- Don't make deals with creditors unless you are certain you can afford them and they are in your best interest. When a creditor is pressuring you, you are in danger of making an agreement that is not in your best interest and is not affordable. Giving access to your bank account for automatic debt payments is an example of an agreement that can be highly hazardous. If you are offered a good agreement (they are getting rid of interest and penalties and reducing the overall debt), get it in writing as to a) the debt will gone once the amount is paid; b) exact terms, such as when payment is due, c) how much they are reporting to the IRS (example: you owe $1,000 and they agree you can pay $500.00. If they are sending notice to the IRS they have forgiven $500.00 that is considered income to you that you will pay tax for. If they agree that the debt is actually $500.00, there is no tax consequence since they do not send a notice.) It is critical you have this document in your files since you may need it if the creditor acts in bad faith or forgets and sells your debt to a collection agency.

- Beware of debt management companies who claim they can negotiate with your creditors and deal with them for you. Most of these agencies get most of their funding from creditors and are not acting in your best interest. Many of them require a significant up-front payment before they do any work and they often will require a lump sum before they make any deals. Even when they have both, they often come up with plans with such a highly monthly payment that the debtor can only make payments for a few months. There are a few agencies that are legitimate. Do searches on the web for any agency you are considering to see how many people like or dislike their work. If you are in serious debt, you should schedule a consult with a bankruptcy attorney first because otherwise, you might spend a fair amount of money without resolving your debt when you should have just filed a bankruptcy.

- Be very wary of cash advances, use of credit cards and selling and transferring property. If you are considering relying on these options to pay debt, the danger is that you may create more financial problems and may also jeopardize your chance to file a timely bankruptcy. Again, weighing your options with a bankruptcy attorney might save you a lot of trouble. (For example, if you borrow several cash advances and use your credit cards for non-essential purposes, that is considered a fraud in the bankruptcy system and you will either have to pay that money back or wait to file.

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