How you respond to collection calls can make debt problems much worse — whether or not you eventually decide to file bankruptcy.
As a bankruptcy lawyer, I often see clients who have been pressured into big mistakes when responding to bill collectors.
Harassment from creditors is not fun. It’s entirely normal to feel embarrassment, panic, and an overwhelming desire to make the caller just go away. But what appears to be a simple way to end an exchange can lead to serious complications.
Here are some things to avoid:
1. Don’t send a post-dated check. If you can’t afford a payment now, what makes you think you can afford it later? You may be able to, but keeping your checking account balance straight when there’s an outstanding check can be complicated. And how do you know the creditor will hold the check as it promises? Banks usually don’t review the dates on checks before negotiating them, and unless you notify your bank in writing, it is not liable for paying a check before its date. In some states, writing a check that bounces can result in criminal prosecution.
2. Don’t authorize a bank draft. It can seem so simple and reasonable. The caller says, “We can clear this whole thing up. All you have to do is let us deduct the payments from your checking account.” But a draft arrangement puts this creditor first, whether or not it is your top priority. And once you authorize a continuing payment, it can require some effort to discontinue the authorization.
3. Don’t give the caller a credit card number. . . or any other additional information. Debt collectors are not always the most scrupulous people. I constantly hear of false information and phony threats they convey to my clients. And an unscrupulous person who has your credit card information has a key to your pocketbook. Giving a credit card number or other personal information to someone you can’t trust is an invitation to identity theft.
4. Don’t hire a debt adjustment company. Listen to a sports or other talk radio station, and you are sure to hear advertisements for self-styled debt killers who can “settle your debt for just pennies on the dollar.” Trouble is, it rarely works. Time after time I’ve talked to clients who have sent thousands of dollars to some company in California or Florida that has pocketed most of it as fees and then made piddling payments to creditors, leaving the client further behind. These companies are largely unregulated, and getting any kind of recourse against them in another state is nearly impossible.
5. (And this might be the most important one) Don’t take out a title loan or second mortgage to pay off credit cards, medical bills, or other unsecured debt. It can be tempting to try to fix a problem with several delinquent debts by drawing against the equity in your home or car. After all, dealing with one consolidation loan seems a lot more attractive than being harassed by five or eight or fifteen different collection agencies. And paying 8% interest on a second mortgage looks a lot better than the 31.99% the banks are charging on your delinquent Master Cards.
But consolidating debt like this just trades unsecured debt for secured debt. That’s a bad bargain.
Most people I see can cover all the equity in their homes and cars with exemptions the law gives them. This means that unsecured creditors — whose only recourse is to sue, obtain a judgment, and try to find property to sell off to pay the judgment — can’t reach any of the value in the client’s home or car. But exemptions don’t protect those assets from a lender to whom the debtor has given a lien or mortgage.
To make matters worse, this kind of consolidation can prevent you from discharging a lot of debt you could otherwise wipe out in bankruptcy. This is because unsecured debt is generally dischargeable, while liens generally survive a bankruptcy discharge. When I talk with clients who have made this mistake, I can’t help saying, “I sure wish you had come to see me before you did that!”
So if all these steps are mistakes, what is the right thing to do when bill collectors come a-calling?
First, take a realistic look at your budget and figure out whether you can attend to your living expenses and still pay your debts. This means paying your mortgage or rent, any car loans, and a substantial amount more than the minimum payments on your credit cards.
If you can’t, you can try negotiating with individual creditors to reduce or suspend interest rates or even to write down the principal amounts of their debts. But remember that any principal write-offs may result in tax consequences.
You can also seek the assistance of a legitimate non-profit credit counseling agency, who can advise you on budgeting and perhaps negotiate with creditors on your behalf. But beware of for-profit companies that masquerade as non-profits.
Finally, you can seek the advice of a qualified bankruptcy attorney. You may not be ready to file, or you may not benefit from filing at this point. But a conscientious and experienced bankruptcy lawyer can discuss the things your creditors can do and your alternatives for dealing with them, both in and outside bankruptcy.