Unable to pay my debts
What happens if, I can’t pay the bills?
1. If I can’t pay a debt, can my property be taken?
Under certain circumstances, yes it can. But first your creditor (the person you owe the debt to) will have to take the case to court, and win a lawsuit before the property can be taken. However, if you used the property as security on a loan, and this is established in a signed agreement, your creditor probably can take the security, which in this case would be your property without going to court.
If you borrow funds to buy a car, the car becomes the security on the loan. Hence, if you fail to make the repayments, the person who loaned you the money can take the car back – or repossess it. However, by law it can only be taken when parked on public property. In the event the car is repossessed, you could quite likely still end up having to pay some money. For example, if the car is sold at auction for $9000 and your outstanding debt with the lender was $11000 he could sue you for the outstanding amount plus any costs involved in repossessing the car and reselling it.
A company that repairs or has an item of yours stored, can also take possession of your property without the need to go to court. So if you take a leather jacket to a dry cleaner and fail to collect it within a given time frame, the store may keep the item and sell it.
2. Are creditors allowed to harass me?
Creditors or any debt collection agencies they may use to collect payments for due bills are not legally permitted to repeatedly call you on the phone. Additionally, it is against the law for them to make any threat against you. They should not contact you at your workplace if you have requested that they don’t. If you make a written request that they stop contacting you, they must leave you alone, and at this point can only get in touch with you to let you know they are filing a lawsuit.
Make sure you keep copies of any correspondence you have made to, or received from creditors. Furthermore, creditors and debt collectors should not contact your employer, other than for the purpose of confirming that you are employed. Moreover, they must not send you any document that appears to be legal if it is not.
If you’re being bothered or harassed by creditors, contact a law enforcement agency or your local consumer protection agency. If possible, seek the help of a lawyer.
3. Can I be liable to pay the debts of somebody else?
Under certain circumstances, yes, you could be. If your spouse were to obtain medical care or another necessity, such as food or clothing and could not pay for it, you could be forced to pay. This may also be true for an ex-spouse, providing you were not separated when your ex-partner accumulated the debt.
In just about all cases, under 18’s can get out of an agreement of purchase. However, if you are an adult, and signed a contract or a loan agreement for a person, including somebody who is under 18, you would actually be held responsible for the debt.
In the same way, if you co-sign a financial agreement with somebody who eventually files for bankruptcy, the other person may not be liable for the debt. But you will be.
You would also be liable to pay debts, for example, medical bills on behalf of your child, providing he is a minor.
4. What can I do if a company or person bills me for an item I did not purchase?
If you receive a bill for a product or service that you did not agree to buy, you must attempt to settle the matter is quickly as possible. Write a letter to the creditor and keep a copy. You should also do this if you only believe you only received part of an item or service, and are being billed in full.
If this does not resolve the situation, you will need to seek out the help of a consumer protection agency. These will be listed in the white pages under “Consumer Complaint and Protection Coordinators.” Alternatively to locate an agency in your area, call your state’s Department of Consumer Affairs.
If you feel you have been unfairly billed, you should always bee prepared to find out that you do in fact owe the debt. For this reason it is important to take action quickly because if you do not respond, you could end up with legal problems and a larger debt.
5. Will other people be able to see I have debts?
Unfortunately, yes they can. When you don’t pay your bills on time, it is logged on a report and could very possibly result in a bad credit rating. Your credit rating is determined by reports compiled by credit reporting agencies. The information they use comes from creditors. The reports are then made available to other creditors, landlords, some service providers and landlords.
A credit report will detail if you are a person who pays your bills in a timely fashion, if you have ever had a property foreclosure, if you owe money because of a lawsuit, or if you have been convicted of a criminal offense. All these are cataloged on a credit report for a certain amount of time. For example if you are made bankrupt, it is likely to be documented on your credit report for 10 years.
If a store refuses to give you a charge account because of a poor credit rating, they are obliged to provide you with the contact details of the credit agency that supplied the report. In turn, the credit agency must allow you to see the report.
If you feel any aspect of the report is incorrect, the credit reporting agency must re-examine their information. If they later state their report is indeed correct, you should explain your side of the argument in writing. Therefore, anyone who checks your credit rating in the future will also be supplied with your explanation. On your request, the agency must also send your side of the story to anyone who asked for your rating within the last two years. Anyone who wanted to see your credit report for employment purposes during the last two years must also be sent your explanation.
To make sure your credit report is error-free and there are no signs of identity theft, you really should check your credit report regularly. There are services that will send you any changes to your report on a daily or weekly basis after you pay a subscription fee. You are entitled to receive a free credit report each year from each of the three principal credit bureaus. To order the free yearly reports, either visit www.annualcreditreport.com or call 1-877-322-8228.
6. What happens in the event I am sued?
If the money you owe is on a secured debt, your creditor may sue you for the amount of money you owe, the security you provided at the time of signing, or even both. In the case the debt is less than $5000 (or $7500 if you owe the money to an individual) it is possible your creditor will take the case to the small claims court.
Lawsuits for higher amounts are generally filed at a higher court. If this happens you would be advised to get yourself a lawyer if possible.
If you ever receive a summons from a court because you are being sued, don’t choose to ignore it. You will have a certain time to respond, and if you fail to do so in the specified time, you will automatically lose the case and your property and any funds you may have in the bank can be removed without warning.
Hence, when you receive a summons you should consult a lawyer as soon as possible. He will then make contact with the lawyer of the person who is suing you to try to settle the dispute out of court.
It is possible to come to an agreement even after a suit has been filed, but you can only do this if you respond to the summons.
7. What are the proceedings if I lose a lawsuit?
This will depend on the lawsuit terms. If the suit demanded that you return a secured item, your creditor can get an order allowing a law enforcement marshal or sheriff to take the item from you. Once they have done this, the debt can be canceled.
If the suit demands that you repay money and you fail to repay the full amount that the judge orders, something you own may be attached that has a similar value to the amount you owe. For example, your car could be seized and then sold to pay the debt. There are certain items that you will be permitted to keep which are described in the following section.
A court judge may also order that your employer holds back up to a quarter of your take-home salary in order to settle a debt. This is known as a garnishment of wages.
8. Is there anything I can do to protect my property in the event I am sued?
Unfortunately when you lose a lawsuit, your creditor may also be awarded some of your property. However the law permits you to claim a part of the property as exempt and this cannot be seized from you.
Once the notices are served that your property is going to be attached, you are given 10 days to file a claim of exemption form to a Marshal or the Sheriff. This form should describe your property and explain why it should not be attached. You will find that most court clerk offices can give you the required form or ask your Sheriff or Marshal.
Your creditor then has two choices – he can accept your claim or he may choose to challenge it at a further court hearing. At the court hearing you must provide proof that the property cannot be seized and is exempt. Failure to go to the hearing will result in automatic exemption.
If you owe money for unpaid federal income taxes or for life necessities such as shelter, medical treatment or food, you cannot file a Claim of Exemption. Life necessity debts must be paid.
The things you, or your spouse together, can claim exemptions for include the following:
Up to $100,000 in home equity if your home houses a family. If you’re single you can claim up to $75,000. If you are over 65 years of age, on a low income or disabled, you may be able to claim exemptions up to $175,000.
You can additionally claim exemptions for $2,725 equity in a car or cars.
Up to $7,175 may be claimed in tools or other work-related items. If both spouses use tools for work you may claim up to $14,350.
You may furthermore claim exemption for 75 percent of your wages for the last 30 days or unpaid salary.
Up to $7,175 of exemption can be claimed in family heirlooms, jewelry or artwork.
You can additionally add any life insurance policy with a monetary value of up to $11,475. As a married couple you can combine this exemption regardless of whether the policy belongs to one partner or both of you.
An inmate can claim exemption of up to $1,425 in a trust account.
A bank account in which social security payments are directly deposited can be exempt for up to $2,875 for each spouse. If one Social Security payment is deposited for the couple, $4300 may be exempt.
Other items you and your spouse can claim individual exemptions for include:
Clothing and necessary household furnishings.
A plot in the cemetery.
All or partial disability, retirement, and health-insurance welfare, workers compensation, unemployment, union and any other benefits that are required to support the family.
9. What happens if I could pay my debt if I were just given some more time?
You can try contacting your creditor and asking for additional time. For example, you could ask if you can make regular small payments in a specific period. If one or all of your creditors agree to the arrangement, be sure to write a letter to confirm the agreement and also make sure you keep a copy.
If you’re not having any luck with persuading a creditor to give you extra time, it could be helpful to contact a credit and debt counseling service. Such agencies help people in debt work out repayment plans with the creditors. But take due care to shop around when looking for a debt counseling agency, and make sure the one you choose is qualified to give you good advice. Also bear in mind that if you end up filing for bankruptcy, you will have to complete a counseling course provided by an agency which is approved by the United States Trustee Program.
It is often tempting to get a debt consolidation loan when you find you cannot pay your debts. However if the interest charged on such a loan is too high, you could end up with an even larger problem. If you do obtain a loan, make sure the financial statements you provide the lender with are complete and genuine.
10. When is it time to consider bankruptcy as an option?
This will very much depend on your individual circumstances. Before making a final decision it really is a good idea to seek the opinion of an attorney. Filing for bankruptcy is not a matter to take lightly as it will greatly impact your credit and may not even wipe out all debts. On the other hand, if your creditors will not give you extra time and you simply cannot pay, it may be the only way forward to start turning the situation around.
Before your file bankruptcy it is required that you complete credit counseling with an approved United States Trustee Program agency. To find such an agency go to the United States Department of Justice website. From there go to “Credit Counseling and Debtor Education.” You must do this even when there is no possibility of a repayment plan being set up. If you fail to do this requirement, your bankruptcy case will be dismissed and your debts will not be wiped out. Additionally, after filing for bankruptcy you will have to take a personal financial management course before any debts will be dismissed.
11. Are there varying degrees of bankruptcy?
There are two types of personal bankruptcy. These are known as Chapter 13 and Chapter 7. Chapter 13 lets you stop the collection of most debt providing you promise to pay any available funds to your creditors according to a predefined repayment plan. A Chapter 13 bankruptcy can be filed at your nearest bankruptcy court. The repayment plan will allow you to pay your debts over a period of five years. It will also allow you to retain your property, providing you make your repayments on time. At the end of the repayment period, pretty much all of your debts can be cancelled, even though they have not been paid in full, as long as you fully stuck to your part of the repayment plan.
If you file for Chapter 7 bankruptcy, this signifies you are not looking for a repayment plan but rather asking the court to wipe out most of your debts, as you do not have sufficient money or property to repay them. In this situation, assets that are not considered exempt will be sold to reimburse your creditors.
To file both Chapter 13 and Chapter 7 you’re required to pay a filing fee in the bankruptcy court. However if you meet a certain criteria it may be possible to file without paying a fee. To determine if you meet the criteria you are advised to contact a lawyer. A trustee will be appointed once you have filed your case.
After you have filed for Chapter 13 or Chapter 7, your creditors are not permitted to attach your salary or other possessions as repayment for the debt without the permission of the bankruptcy court. However a person seeking payment of spousal or child support is permitted to attach a salary, your possessions, and also your exempt property. This is provided they obtained a court order before you filed for bankruptcy from the family Court.
12. When is filing for Chapter 7 the best option?
If you really can’t fathom a reasonable way to pay off the money you owe it is time to consider filing for Chapter 7 bankruptcy. This will allow honest debtors to start afresh and have most debts cancelled. Chapter 7 is sometimes the only way to get out of debt when the money owed has escalated more than you are likely to be able to pay in a reasonable time period.
However, to qualify for a Chapter 7 bankruptcy your income must be within a certain limit. If you earn more than the median income in CA for example, it is very probable you are not eligible for a Chapter 7 bankruptcy. To determine your legibility you will have to pass a “means” test. The purpose of the means test is to decide if you do in fact earn enough to participate in a Chapter 13 repayment plan. Once certain weekly expenses and debt repayments have been subtracted and your income balance exceeds the specified monthly limit, you will not qualify for Chapter 7 and will have to file for Chapter 13 instead. To get full information on means testing go to the United States Department of Justice website and search for “Means Testing Information.”
If you are permitted to file for Chapter 7 the trustee appointed to your case will begin to sell off any property that is not exempt, and use the funds to pay off your creditors.
The law states that employers are not allowed to fire you, refuse to take you on, or pass you up for promotion, because you have filed for Chapter 7 bankruptcy. However, needless to say, although Chapter 7 may solve some of your debt problems, it will not affect future bills. Also, bear in mind that debts can only be discharged through Chapter 7 once in an eight year period.
When filing for Chapter 7 bankruptcy you or your lawyer need to file quite a number of papers and forms with the bankruptcy court. Included are a list of your property, your debts, information about your income, and what you spend your money on. The court will then decide if you may be better suited for Chapter 13 bankruptcy instead of Chapter 7.
Judges are not obliged to cancel or your debt and can refuse to discharge some of them through a Chapter 7 bankruptcy. One example would be if you have run up bills on purpose or borrowed further money, knowing you were about to file for bankruptcy. A judge will probably decide these debts should not be cancelled.
13. Will Chapter 7 bankruptcy cancel all debts?
No. There are certain debts that Chapter 7 does not cancel. These include:
Any Lien on real or personal property. The debt may be cancelled but you won’t get to keep the security unless you pay for it.
Most income taxes from the last three years.
Student loans – in the event you don’t qualify for a hardship discharge.
Child and spousal support or the settlement of a property.
Money that you owe because you injured or killed someone while operating a car, vessel or other type of vehicle while under the influence of drugs, alcohol or another illegal substance.
The debts won’t be written off if your creditor can prove that you did not tell the truth about how much money you earn, or if you have attempted to hide details about property owned or committed fraud.
One option is to reaffirm a secured debt. This means that you will pay the debts and retain ownership of the secured item even though a Chapter 7 bankruptcy would usually cancel the debt. If you do not choose to reaffirm the debts and the agreement allows repossession of the secured item because bankruptcy has been filed, the item can then be repossessed even if you don’t currently owe on the repayment.
14. Once I have filed for Chapter 7 will I be allowed to keep any property?
Most likely, yes. If your property is exempt it will not be used to pay off your debts, other than if you owed child or spousal support at the time you filed for bankruptcy. Even if property is exempt it can be used to pay a spouse or child support claim. When Chapter 7 bankruptcy has been filed, you may choose one of two sets of exemptions. These exemptions can be claimed if you have lived in California for a minimum period of two years before filing for bankruptcy. If your time in California is less than two years, you will have to use exemptions that are available in the state where you lived previously.
One set of the exemptions available is the same as the one used to protect the property from creditors in a lawsuit. Generally homeowners prefer this set, as it permits a far larger home-equity exemption compared to the other set. Examples of what you and your partner are permitted to keep if you opt for the second exemption set can be found below. The dollar amounts will be changed in April 2013.
You may keep $22,075 interest available in a home or a burial plot. If you don’t own either, you could apply this monetary value elsewhere in order to retain non-exempt property; for example to an income tax refund. In addition you are given a $1,175 floating exemption. This can be applied to any property that is non-exempt.
An interest value of up to $3,505 in a motor vehicle.
Up to $1425 in jewelry.
Up to $2200 in books or working tools that are required in your job.
Up to $11,800 in a life insurance policy, which has not yet matured.
15. When is it optimal to use a Chapter 13 plan instead?
You should always consider a Chapter 13 bankruptcy plan if you think you can find a way to make repayments on your debts, or a least on part of them, over a given period of time and still be able to pay for living necessities. This type of bankruptcy could be your only option in the event you are not eligible for Chapter 7 bankruptcy.
According to the law, you may use a Chapter 13 plan provided you have a steady income. This equates to working for wages, owning a small business, or receiving a pension, or other benefits such as Social Security. You must also owe a smaller amount than $1,081,400 in secured debt, for example in the case of a mortgage and a value lower than $360,475 in all other debts.
If you do qualify the Chapter 13, together with your lawyer you will need to work out a plan that the court will approve. The plan should demonstrate exactly how you are intending to pay your debts either in full or partially. The court will state that some debts must be paid in full. These are typically secured debts, state or federal income taxes from the last three years, and court, attorney, and trustee fees involved in executing the plan. In the event that your circumstances change, for example if you lose your job, or become too ill to work while you are in the process of paying off a Chapter 13 debt plan, you can request that the court switches you to Chapter 7.