What Creditors Can Do When You’re Broke

Being broke is not a legal reason to not pay a debt.

A Facebook fan who is facing threats from a creditor/bill collector wanted to know what a creditor can do when you don’t have any money. Specifically, she wanted to know if a creditor can sue, get a judgment, and garnish her unemployment checks. The short answer is: They can sue and maybe even get a judgment. However, that unemployment check is “untouchable” and can’t be garnished. Read on for more details about how to handle yourself if a creditor comes after you in court.

First off, you have to know that it doesn’t matter if you don’t have the money. If you owe a bill (or even if you don’t actually owe it), a creditor can still sue you, and the Court can still enter a judgment against you. Being broke – even due to unemployment – is not a legal reason to not pay a debt. As a practical matter, however, if you let a creditor know that you are unemployed, they may be more willing to negotiate or settle your debt.

Either way, here’s what to do if you get a summons or notice to appear in court:

1) First, by all means do answer the summons/complaint. If you don’t, the court can automatically enter a judgment against you for whatever amount the creditor requests.

2) Next … Do show up in court. Even if you owe money, you can make a case in court about why you should be able to pay less. Maybe you are disputing the debt, for example, because you don’t think you owe what they say you owe.

3) Know the statute of limitations. If it’s a very old bill, they may not have a legal leg to stand on, and the judge may throw out the case.

4) Rest assured knowing your legal rights. That bill collector/creditor can NOT garnish your unemployment check. Under federal law, certain income can not be garnished. This includes:

* Social Security
* Retirement Plan Benefits
* Public Assistance (Welfare)

Additionally, unless someone gets a judgment against you for child or spousal support, these forms of income also can NOT be garnished:

* Worker’s compensation
* Unemployment
* Disability benefits

So don’t let any creditor make idle threats, and claim they are going to “take” your unemployment income … they can’t!

Here’s what they can take/garnish:

* A vehicle (to sell)
* Regular wages
* Bank accounts

When it comes to money in bank accounts, though, if the money came from the “untouchable” sources listed above, like unemployment, that money can’t be snatched by a creditor via garnishment. Good luck!

5 Things to Know about Filing Bankruptcy

Comic by Dan Gibson @ DestroyDebt.com

The number of people filing for personal bankruptcy was up 36.5% in the first half of 2009 from the same period a year before, and more than likely that number will keep rising as people seek their own personal bailout from the recession. Here are a few things to know if you have ever contemplated filing.

1. More than likely, you will still have to pay something. Some people believe that filing bankruptcy means that they will get out of paying any of their debt. This is not true in most cases. Most people, those with some regular income or certain savings, qualify for a Chapter 13 bankruptcy, which puts them on a repayment plan. Although some of your debt may get reduced or consolidated, you will have to make payments on the remaining balance for about three to five years until the debt is paid off.

2. All assets could be liquidated. Although you can save your home and some other assets under Chapter 13, that is not always the case with Chapter 7—and you’ll still owe on some payments. If you’re without regular income you may be able to file Chapter 7 and avoid a payment plan on eligible debt, such as credit card balances, but will still have to pay on child support, alimony and most student loans. You also will have to pay your mortgage, but in some instances under Chapter 7, you could be forced to sell your home to pay off your debt. If you don’t have enough equity in your home to benefit creditors, don’t think that will save you. In some cases you will just be asked to move out, and your creditor will get to keep the home.

3. Bankruptcy can be better than debt settlement programs. Although I advocate for people to try to settle their debts directly with their creditors themselves, rather than choosing bankruptcy, if you don’t have the stamina to settle your debts yourself, you can opt to enter a debt settlement program. However, you should know that you would still have to make regular payments to the settlement firm before they will negotiate with your debtors. Once there is a settlement plan, you will have to pay taxes on the amount you saved. For example, if your debt was $10,000 and the settlement plan says you only have to pay $3,000, you will have to pay taxes on the $7,000 you saved. The IRS considers it income. If you file bankruptcy, you do not have to pay taxes on the erased debt.

4. You can’t hide your assets. If you’re filing bankruptcy, you have to reveal all of your assets. Selling off items for cheap, or to friends and family until you can buy it back later is not allowed. Anything you sold or gave away within a year of filing bankruptcy can be retrieved by the court or trustee. So if you repaid Grandma $1,000 rather than pay your credit card, the court can make Grandma pay back the $1,000 or risk getting sued. You could also be jailed for perjury.

5. You need money to file for bankruptcy. Most people don’t realize that lawyer fees for Chapter 7 bankruptcy could be $2,000 or higher. And guess what? That lawyer wants to be paid upfront, after all they want to be sure that they will get paid. Lawyers in Chapter 13 cases might just roll part of their fees into the payment plan. Chapter 7 lawyers can’t do that because you’re seeking relief from all debt, which would include their bill!

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Get Help Now

Not sure how to proceed now? Get free personalized financial coaching from the National Foundation for Debt Management (NFDM), a reputable non-profit credit counseling agency which negotiates with creditors, gets your interest rates lowered, and creates a plan to quickly get you out of debt. Since I am a spokesperson for NFDM, they’ve agreed to provide a free on-one-one counseling session to my readers and fans. With NFDM, there is no obligation to buy anything, and there will be no pressure on you to do anything. All you have to do is share your situation openly and honestly, and in return, I promise that you will get honest and real-world advice on how to handle your situation. To arrange for your free counseling session, click on this link http://www.themoneycoach.net/gethelpnow.htm to sign up for your free consultation.

Statute of Limitations on Debt

Consumers often pay off debt for which creditors can no longer seek legal action because the Statute of Limitations has already expired for the account. Consumers pay off these accounts perhaps because the accounts still appear on their credit reports, they fear court action, or they simply don’t know their rights.  There are even cases of “Zombie debt” where agencies are claiming to collect a debt from years ago that one may have already paid off, or never owed in the first place.

Know the Statute of Limitations for your state or the state where a potential creditor is based.  The chart below provides links to various state laws.

 

STATUTE OF LIMITATIONS ON DEBT; STATE BY STATE

State	Oral	Written	Promissory	Open-ended Accounts	State Statute: Open Accounts
AL	6	6	6	3	§6-2-37
AR	5	5	5	3	§16-56-105
AK	6	6	3	3	§09.10.053
AZ	3	6	6	3	§12-543
CA	2	4	4	4	§337
CO	6	6	6	3	§13-80-101
CT	3	6	6	3	§52-581
DE	3	3	3	4	§2-725
DC	3	3	3	3	§12-301
FL	4	5	5	4	§95.11
GA	4	6	6	6 **	§9-3-25
HI	6	6	6	6	HRS 657-1(4)
IA	5	10	5	5	§614.5
ID	4	5	5	4	§5-222
IL	5	10	10	5	735 ILCS 5/13-205
IN	6	10	10	6	§34-11-2
KS	3	6	5	3	§84-3-118
KY	5	15	15	5	§413.120
LA	10	10	10	3	§3-118
ME	6	6	6	6	§5-511
MD	3	3	6	3	§5-101
MA	6	6	6	6	c.260, §2
MI	6	6	6	6	§600.5807
MN	6	6	6	6	§541.05
MO	5	10	10	5	§516.120
MS	3	3	3	3	§15-1-29
MT	3	8	8	5	27-2-202
NC	3	3	5	3	§1-52(1)
ND	6	6	6	6	28-01-16
NE	4	5	5	4	§25-206
NH	3	3	6	3	382-A:3-118
NJ	6	6	6	3	25:1-5
NM	4	6	6	4	§37-1-4
NV	4	6	3	4	NRS 11.190
NY	6	6	6	6	§2-213
OH	6	15	15	6	§2305.07
OK	3	5	5	3	§12-3-95
OR	6	6	6	6	§12.080
PA	4	4	4	4	§5525
RI	10	5	6	4	§6A-2-725
SC	3	3	3	3	SEC 15-3-530
SD	6	6	6	6	§15-2-13
TN	6	6	6	6	28-3-109
TX	4	4	4	4	§16.004
UT	4	6	6	4	70-09a
VA	3	5	6	3	8.01-246
VT	6	6	5	3	§3-118
WA	3	6	6	3	RCW 4.16.080
WI	6	6	10	6	893.43
WV	5	10	6	5	§55-2-6
WY	8	10	10	8	§1-3-102

** Georgia Court of Appeals came out with a decision on January 24, 2008 in Hill v. American Express that in Georgia the statute of limitations on a credit card is six years after the amount becomes due and payable