Order in Default

Sharon June 25th, 2009

This post is going to get me in some trouble, I suspect, as it ignites the ever-present discussion of whether ordinary people who incurred debts should do anything in order to avoid default or not.  I’m sure I’ll get accused of encouraging people to default, although that’s not my primary intention here.  Instead, what I want to do is give people who are already facing default a rational way of approaching the issue – because I think this is increasingly the reality for many people, as they exhaust their unemployment benefits, use up their savings and still have no hope of a job or income. Yes, it would have been a lot better for those who lived profligately (and some of these people were never profligate, and are merely unlucky) not to buy houses, build up debt, etc… but having done so, they now are facing default or bankruptcy, and it might be wise to know how to navigate that situation.

The reality is that a study recently suggested that if you calculate debt interest payments into cost of living, there are 4 million new poor people just this year in the US, people who are experiencing debt poverty, and whose debt is preventing them from meeting basic needs. 

So let me be clear – I am not advising default, or encouraging you to run up debts and default -  I believe people should pay their bills.  I also live in the world as it is, not as it should be -   if you face an inability to pay your bills, there are ways to minimize the harm to your family. I have no ethical difficulty with minimizing that harm for most people - enormous investments are being made to soften the blows for banks, while nothing is done for ordinary people, many of whom took on these debts not because they were stupid or evil but because they were falsely promised things that were never delivered – I find it hard to blame 17 year olds who signed on for college debts they were told were their ticket away from poverty, or elderly folks whose retirement savings have vanished and medical costs skyrocketed.  If this also helps some jackass who was speculating in Las Vegas real estate, well, it isn’t my goal, I’d rather not, but I can live with it if it does some good to those who, through no fault of their own, are unable to meet their debts.

 The first question is “bankruptcy or default” – although for many poor people, this may not be a question at all.  Legal services are now overwhelmed with bankruptcy cases, and it can be almost impossible to get legal help to file, and many low income families can’t afford the fees to declare bankruptcy.  Moreover, many of the working poor already have trashed credit ratings – and the primary virtue of bankruptcy is that it allows you to obtain credit down the road – but if you have no hope of viable credit in the longer term, it may not be worth the price.  Bankruptcy now means paying creditors gradually – but even gradual payments may be infeasible for many people.  Finally, some debt can’t be vacated by bankruptcy proceedings – student loans among them.  If they are your primary problem, bankruptcy won’t help.  If you do want to declare bankruptcy, find a lawyer, since this is not a home project.  Bankruptcy is almost certainly the best choice for the formerly middle class, anyone with money and anyone with a business. If there’s no money at all, default may be the only choice.

If, however, you need to default, you should know the risks of defaulting on each kind of debt.  What you default on, and in what order if and when you must, depends on your circumstances.  The question is how to minimize harm.  Before I wrote this post I consulted with Stoneleigh and Ilargi over at The Automatic Earth www.theautomaticearth.blogspot.com, and got their advice as well, which I’ve included here.

The first thing every person should seriously consider dumping are luxury items – second cars (yes, I know, you need it, you absolutely need it – and that’s true of a very small percentage of the people who think they absolutely need it), second homes, boats, RVs that you don’t actually live in full time – if it costs a lot of money and you don’t absolutely need it, get rid of it.  Yes, it might be inconvenient, and the item will be repo’d.  But you are better off without it anyway.

This first point seems really obvious to me, but I think it escapes people – it is surprising how often the attempt to maintain some kind affluent norm leads to people losing more in the end than they had to – at first everyone rationalizes “oh, I’ll find another job, we’ll be fine…” – this trying to maintain the lifestyle ends in disaster all too often, as the cascade of problems hits harder than it would if all the extra luxuries were immediately jettisoned.  So dump them now.

After that, the question of what to default on first becomes more complex, and depends on your circumstances.  Are you applying for a job that requires official transcripts?  In that case, don’t default on your student loans, since you won’t be able to get them.  Did you buy your house at the peak, and does it require both you and a partner to have  full time jobs?  Consider getting rid of it by sales or if necessary walking away?  Do you have low payments and lots of equity?  Maybe it would be preferrable to get rid of everything else before the house.  I can’t choose for you, I can only tell you the consequences and advantages of each.

1. Student loans – the good part of defaulting on these is that no one can take away your education.  The bad part is this – you will never be able to get a transcript, your tax return will be taken away forever, and some federal and state jobs won’t hire you.  I admit, of all the ethical issues involved in default, I have the least difficulty with this one, since I think student loan purveyors prey upon very young people who simply don’t understand the implications of the choices they are making – they are told over and over again that they must have a college education at any price, and they then take on loans that keep them in debt slavery for decades.  When the credit card industry preys on teenagers, we complain – but not when the student loan industry does.

2. Medical debt – the bad news about this one is that they can take your house for this.  The good news is that once you have your health, they can’t repo it.  It is usually better to enter repayment plans, however difficult, than to default on medica debt, however.  If you can’t avoid it, and the debts are substantial enough, you will probably lose your house as well, if you have one, so you might want to make provision for moving to a rental before your credit rating is tanked.

3. Your house – for many people who bought from, say 2003 on, this might be the first thing to give up.  Most loans are non-recourse loans – that means if you send the keys back to the bank, you can’t be dunned for the rest.  You will see a cost on your credit rating – and since credit scores can be so essential to getting access to rental housing, you will need to have your rental apartment lined up before you do this. 

Ilargi, Stoneleigh and I disagree on this one somewhat – their general case is that housing prices will fall sufficiently that most people should sell or walk away now, relieve themselves of their debt burden, rent for a while and then buy later.  And they may have a point from a purely economic standpoint.  I tend to lean, if one has reasonable equity and low payments that can be made on one income, to moving more people in and otherwise making your house more sustainable, simply because the land itself, the stability and security have value to most people. I agree with them that we all ought to do a hard analysis of whether we will have a future in our homes, and it can be hard to be honest about this.  That said, however, built up soil, fruit trees and neighborhood community are tough to maintain if you keep moving.  Rental housing is also vulnerable to disruption – landlords lose their houses too, or want to move their relatives in.  My feeling is that if your home can be used to partially sustain you – to develop a cottage industry, to feed and otherwise meet your needs,  and if your costs aren’t too high, it is worth trying to keep it.

4. Your car.  This is a tough one for a lot of people in rural and exurban areas – and yet, far more people could live without cars than do.  Certainly, if you have any kind of viable public transportation system (and yes, buses count) in your area, or even if most people in your community commute to one or two central areas for work, you could probably live (not conveniently or easily) without a car, paying to share someone else’s for essentials and staying at home a lot more.  You’ll have to do the calculation on cost.  At a minimum, however, if you are paying a car loan and can do any car maintenence, get out of your loan immediately and buy a beater – if you are paying for pretty, or even mileage, you probably will do better with something cheaper and fewer trips.

5. Unsecured credit card debt.  Your credit rating will get trashed, but there’s not much that can be done about this – now.  Stoneleigh and Ilargi were both inclined to argue that if you are going to default on this, do it soon – that eventually the penalties for default will get higher and nastier, and I think I agree.  Right now, there’ s not much that can be done – whether it will stay that way is another question (and goes to all of these kinds of debt).

6. Your utility company.  My preference would be that all of us simply learn to get along without these people. I suspect that utility company defaults and shutoffs are going to mean many, many more people lack what we think of as basic resources like lighting, heat and refrigeration, and that it is wise to prepare now to live without them. This is more feasible for some people than others, but if you have invested a lot of energy and time into making your house power outage proof, and are in dire economic straits, letting the electric company turn you off is not the worst thing that could happen.  Other than shutting you off and trashing your credit rating, there’s not much they can do.

There’s another kind of debt I haven’t mentioned here, because I think default on that is completely unethical. In each of the above cases, the hurt from default (which is real and I do not minimize) either falls on many broad backs (ie the taxpayers, and yes,I agree they don’t need more on their backs, but I don’t see a lot of ways around it), or on corporations who can often write off  their losses, or at worst, who find themselves dissolved.  I think those kinds of hurts, while not-trivial, are less serious than direct personal debt.

If you continue to pay none of your debts, the one you should continue with is CHILD SUPPORT – let me be clear, I realize that it is often very difficult for people who have lost jobs, have other families, etc… to continue paying child support. I also realize that in some cases, the onus of child support is unfair in some measures.  But the truth is this – these are your kids.  If you can’t pay, go to court and get it refigured, or work it out with your ex.  But I know too many children whose ability to eat dinner depends on Mom or Dad coming up with the cash to have any respect for someone who shorts out on child support when there is any other possible avenue to survive. 

I would also strongly advocate paying local suppliers and anyone you have an actual relationship with that supplies you with credit – those are people you do not want to cut off.

There you have it.  Now the flames and debates about the justice and ethics of this will start, and I agree, default, if there are other choices, is usually unethical.  But unfortunately, so many people’s backs are against the wall that I don’t see a lot of viable other choices – and I also believe that so much of this situation has been mishandled by unethical leaders that the ethical failings of most ordinary people are reduced to peccadillos in comparison – and that deserves oure primary attention.

 I hope this provides some small help – it is little enough for those in desperate circumstances.

 Sharon

35 Responses to “Order in Default”

  1. Greenpa says:

    It really is something to think about before you have to do it. Many of us are going to face it, in the next couple years. My basic premise is- pay my neighbors first. I need them.

    The big companies are in dire straights, and getting dire-er daily. Have you heard that Advanta Corporation, which specialized (past tense!) in small business credit- just canceled- ALL its credit cards. Before that- they had boosted half their customers to interest rates of over 30%. Guess what? That really does NOT encourage people to pay up- rather it pushes them into “why not default? I’ve got nothing to lose.”

    I just don’t see how the courts or lawyers could possibly keep up with all the defaults already out there- let alone those coming. At some point, they’re just going to have to let them go.

    When the day comes when you look at your bank account, and realize- “Somebody is not going to get paid.” – at least realize- you are far far from alone.

  2. Alexandra says:

    Correct me if I’m wrong, but if you default on credit card debt can’t the CC company sue you for it? (Of course if you have no assets and no garnish-able income it’s blood from a stone, but still, no one likes a lawsuit.)

  3. Sharon says:

    It depends on the state – some states prohibit all wage garnishing, others permit only small amounts, others place no limits, although all states require you receive a very minimal living allowance. That said, however, in practice it can be hard for credit card companies to actually manage garnishment – certainly if you have defaulted because you have no job. They probably won’t know where you are working until at least the next tax cycle, for example.

    Sharon

  4. Susan in NJ says:

    A pretty good rundown Sharon, but here are a few more points from the trenches –

    Bankruptcy – Sharon, you’re a little hard on this one. Rebuilding credit is perhaps the real reason behind chapter 13, which the credit card company’s have helped to gut as a useful tool for the consumer. But if a person has no job, no assets to speak of that you are trying to hang on to (except in some states a house), a chapter 7 bankruptcy should help you clear your life of all the debt collectors who may be hounding you. It won’t help with child support, student loans, and (this one varies) taxes though.

    Child support: This one is probably even harder to dodge (and rightly so in general) than student loans. It will follow you from state to state; most states allow your wages to be garnished and they (the appropriate uber-bureaucrat) will track you down if you have any kind of regular (non-cash) employment and, if you are only working part-time at low wage and owe a lot, sometimes take just about everything you make. If you can’t pay for real reasons like disability, job loss, and you can’t deal with the other parental side of the equation, this is the place the one to try and find some kind of help, either through pro se appearances before the court or a lawyer, paid, legal services, or pro bono. Child support debts will follow you everywhere; in many states, they will be a first lien on any legal judgments (say you are injured in a car accident) even if the monies are owed in a different state. While a credit card company might not know you have that money, your lawyer or the defendant’s lawyer will often be obligated to pay your back child support before you see a dime (or the pittance that state law allows you) And while employers legally (at least in my state) can’t discriminate against you because of a child support lien, the fact is it’s not going to help an employment situation.

    Medical debt — I think Sharon ise right on the money here. One to thing to remember is that these debts, especially the smaller ones, often get sold to collection agencies and these agencies often screw up in ways that may in ways particular to medical debt (violations of patient privacy) possibly allow you to avoid the debt or especially penalties associated with the debt. While not always easy or fair, these are debts that can be negotiated.

    Credit cards — to my knowledge rarely garnish wages. But in some states, the credit card company can go straight to your bank account if it’s with the same bank as the credit card. Something to think about if you may have to default. Once there’s a judgment and by then your account has probably been sold to an collection agency which hired the lawyers (captive inhouse often), then your bank account if you have one is the first thing the collection lawyers are going to look for. If you don’t and you don’t have other visible monetary assets, the judgment may just sit around on the books until the debt is sold to another more aggressive agency OR you try and do something that requires a credit pull.

    Car — will get repo’d if you don’t pay. And since you will probably be upside down if you bought big and borrowed big, the lender will try and come after you for the balance. These can be truly nasty for the amount of money involved.

    Greenpa, Advanta’s business plan anticipated that its small business owners would default and they would collect huge default interest rates — the mode failed because most of the users stayed current and a huge percentage didn’t carry a balance, neither triggered the default rates that Advanta needed to meet its business plan.

    You don’t mention taxes –

  5. Lynne says:

    Growing up on a farm (apiary, actually), my Dad had a farmer friend who once in a while could not pay back his spring business loan. This friend was one of the calmest people I’ve ever met, and he would just say, with a straight face: “Boy, the bank really has a problem this year.”
    :)

  6. Lydia says:

    Not pay credit card debt to banks that have robbed this country blind? Oh how terrible!!!! Not.
    Let’s see, they have stolen and robbed and plundered, and we still need to feel bad about default. Oh please. I wish everyone in the country would stop paying their mortgage and all credit cards and all other debt. Just stop. Now that would get the attention of the elite would it not? We might actually get somewhere then. Defaulting on debt is just wealth re-distribution in the other direction. Leveling out of the playing field somewhat.
    Sure-better to never go into debt, but once you realize that you sold your soul to a vampire, then cut off the blood supply for goodness sake. Re claim your power.
    Think about it-the ONLY reason you need a good credit rating is so you can BORROW money at interest. It’s a scam from day one. And why do folks borrow money? Because they do not save it and pay cash because they have the “I want it now disease”. And because wages for forty years have sucked and cost of living is high. Still better to live within your means and NEVER borrow anything. Bankers do no labor, make no product, in effect do no work-they live off the backs of everyone else and we pay for the privilege of supporting them. How sick is that?

  7. George Burdell says:

    If you’re too stupid to survive economic darwinism, then so be it. People survive because they adapt to their circumstances. Unfortunately there are some very smart people that can adapt very fast, have an exceptional ability to see the overall picture, take very little risk and run this world. I’m one of them. Good Luck.

  8. Peter says:

    I don’t know how I feel about these recommendations. Four weeks ago, I would not have had much difficulty with the recommendations you make. Now, I am not so sure.

    Mine is perhaps an unusual situation. I am suffering collateral damage from the serial defaulting of someone else. I am not a creditor to this person; in fact I’ve never met him or done business with him. But because he shares my name, *I* am getting sued by one of his creditors for his default. And the lawsuit is not the main problem. The lawsuit is easily (if somewhat expensively) dismissed. The main problem is that my credit is now utterly trashed. My credit report shows all this other guys delinquent accounts (and boy howdy, there are a *lot*), contains all his previous addresses, has his SSN, his birthdate, etc. The technical term is a “mixed credit file”, and it isn’t easy to repair. I presume that my credit information appears on his report as well.

    The point of this is that defaulting on a debt does not necessarily remain a matter solely between the creditor and the debtor. There is spillover, and I suspect that as more people default, the spillover will become ever greater. I think that is what happened in my case. Debt collectors are so desperate to collect something, anything, that little niceties like actually verifying the debtor’s identity are thrown by the wayside. I don’t think they’ll give up. I think they’ll just get nastier and more and more people will get drawn into this sort of situation. I didn’t even know I was getting sued until the papers were served and a gaggle of predatory debt collectors started harassing me and telling me my credit was in the toilet. I had some dealings with the collector suing me over the phone and in writing, but I was under the impression that the issue was resolved and that I had convinced them the account was not mine.

    It bears thinking about that defaulting, even if necessary, is not a zero-sum game. There are all kinds of collateral damage and compounding effects that can drag in lots of other people who have nothing whatsoever to with the debt, and not just in the form of the general costs to society or the tax payers or the evil corporations or whatever. There are real specific people that have to bear the brunt of some of this well over and above their membership in one of the aforementioned groups. Since I am now one of those people bearing the brunt of someone else’s deadbeatery, I am having a hard time coming to terms with your post. I’m not saying I disagree, but I confess to not liking it much.

  9. Gina says:

    This is timely not so much for my own situation, but I was having a similar conversation with a co-worker today before reading and he was telling me about how he negotiated with his CC company to lower his interest rate a few points to make paying the minimum easier (they did in his case).

    I am curious as to why the others believe defaulting on your house in favor of renting would come before credit card default. I can understand not giving up the car before house (if the cost analysis is in favor of the decision) to transport your family to a new area, a job or what have you in the event the worst has come to an area (i.e. method of escape), but the same co-worker mentioned he would give up his cc before his house and I feel the same way. Perhaps this is in cases where one has over-extended on what they can afford in a mortgage (not to mention prop taxes and insurances) or in cases where there is only unemployment $ coming in and you have to chose between the more affordable cc payment over a major house payment? I understand the equity has crashed in most housing environments, but if you need to shelter and feed your family off your lot I am missing their point in keeping credit card payments going over house payment (and if you can’t afford the house payment, chances are you are not going to afford rent, security deposit, first and last months’ rent unless you move somewhere cheap and those landlords may be used to bad credit). It seems to me, if you are going to default on the house (and it may take months to get you out), you would also default on the credit cards at the same time and put all extra $ towards the car to keep it from getting repo-ed (at least in the majority of the US which has non-existent or crappy alternative transportation exist) or put it aside for the security deposits, etc. From my perspective (and I don’t have the experience-hopefully “yet” won’t ever apply), I am confused a bit on the order. Can you or someone elaborate? Just curious!! :)

    I guess one would have to look closely at their individual situation to determine what to let go of first (although maybe I am missing the point you mention several times that if you default on CC before house, your credit will make renting harder???) I tend to agree with you that if the house can be a sustainable part of your life and you are able to take in boarders and survive, I’d try to keep the house before any other debt, especially unsecured CC debt.

    Sorry to ramble on here. I also wanted to mention I saw a blurb today on a news site about a German basketball player’s ex-fiancee going to jail (in Texas, I think) for not paying for several thousand dollars worth of dental work (charge=theft). I don’t have any details beyond that small bit (there is probably a lot more to the story), but my worst fear for the future of strapped Americans is that companies/medical providers/etc. will no longer sue (change laws), but bring theft charges against a defaulter instead of just credit damage! This is such a scary thought IMHO!

  10. Gina says:

    Yikes, ignore all the typos-having a long, tired day today!

  11. Shamba says:

    Also, beware of zombie debt collectors. “Zombie” debts are those you have paid off, like a cc debt but somehow it gets passed on to a 3rd party debt collector and they come after you for the money you have already paid off. this can apply to partially, negotiated amounts.

    Keep whateveer proof you have of paid off accounts to use in case 3rd parties come after you, I guess that’s the same as the “zombies” coming after you in a different case.

    I personally happen to believe in keeping papers/records forever and i know not everyone can do that but think before you just discard anything that shows something paid off. This advice stood me in good stead when I had a problem with the IRS with my mother’s tax accounts in past years.

    Just my 2 cents for today,
    Peace, shamba

  12. Tara says:

    Gina – yes, that did happen here in Texas, but she was also arrested for a probation violation from another state. She had priors in theft and forgery, apparently. So this isn’t quite the same as “average citizen loses job and defaults on their credit card”.

    Collectors ARE getting more desperate, though. My husband and I have both gotten phone calls at our house, asking for us by name, but the creditors weren’t looking for us – they were looking for people we know – friends or family members. They KNOW the debt isn’t ours. I suppose they think that if they lean on us, we will in turn lean on the debtor in question, or turn them over. We also get calls for the previous owner of our house (a friend of ours). What’s curious about that is that we were issued a new phone number when we moved in. There had been no phone service at the house for two years prior to that, and the previous owner was never attached to this number in any way. It’s as if they’re cross referencing every bit of information they have, and then running that data up a flagpole to see who salutes.

  13. Lurker says:

    Seems like a good idea. Debt is currently a moral hazard and needs more risk to reduce it and make it more stable.

  14. Robin says:

    Lydia-

    I tend to agree with your feeling that it is ethical to stick it to the ones who got us into this mess, but unfortunately credit scores now matter when trying to rent a place to live or get a job. It sucks, but it’s a fact.

  15. Kathie says:

    Some very interesting thoughts. I wanted to just add for folks to check out individual state laws carefully. In Montana (and I believe a few other states do this), we have a homestead act that we can file (for a very small fee around $25) with the state to protect our homes from creditors up to $250,000. It could be worth it too alot of folks, I know we filed one as a “what if” precaution against any kind of health crisis.

  16. Kat says:

    Shamba, we had a situation like that a few years ago. We went to HH Gregg to buy a refrigerator, and had the cash to do so. We had bought a really beaten-up modular home to fix up and live in so as not to incur more debt than necessary on a home. (It helps that my husband was a carpenter before he became an estimator.) That part of the plan worked. But then the salesman at HH gregg talked us into a 12 month same-as-cash deal that was interest-free for a year. He was supposed to send the details in the mail. So we got the fridge and I watched for the details, which never came. (One of the details that wasn’t mentioned by the salesman was that payments had to be made on a monthly basis.) Finally, I just started sending payments to HH Gregg, and saved the cancelled checks as proof that they’d been paid. When HH Gregg finally got around to contacting us, it was with threats and BIG penalties. Now, mind you, every dime for that refrigerator was paid well in advance of the one year deadline (I still have the checks to prove it.) And we sent a firm letter to the contact person WITH front and back copies of the checks to show when they were cashed. So there should really have been no issue. Well, that was 7 years ago, we’re still getting nasty letters from some collection agency, which we do not respond to, and the ‘penalty’ for having been stupid enough to trust that salesman and HH Gregg is up to about $1500 – not for the refrigerator, it’s paid for – that’s just the penalty. But since we’ve never yet had any trouble getting credit – and it isn’t something we ask for very often, we’ve just decided not to worry about it. We are honest people, and we know it. We refused to negotiate with the debt collectors because we didn’t owe anything. It seemed to work. We get letters twice a year from them, but that’s it.

  17. Shamba says:

    For Tara, who wrote”phone service at the house for two years prior to that, and the previous owner was never attached to this number in any way. It’s as if they’re cross referencing every bit of information they have, and then running that data up a flagpole to see who salutes.”

    YES, these people are always fishing and tryiing to see who tries for the hook!

    Calling neighbors, relative and friends of those who “owe them” is against the law. so, is calling the employer and telling the employer what they want with their “debtors”, this is a Federal law that is intended to stop harrassment and embarrassment by the sharks out there.

    shamba

  18. MEA says:

    Sometimes, it’s very, very hard to live within your means. Last year, I spent just over $17,000 in unrembused medical costs (which is just over half my annual gross income). Next year, it may well be more. (We can discuss endless if I should have chosen a different job or a different children or not realized that the insurance I had though my job could change what was covered and what wasn’t when I made those choices, but let’s just take it as done deal for now.)

    Right now, I’m breaking even, but if there is a bump on the road, it will be off the the Credit Union for a loan to tide us over. Yes, I can see that leading to bigger problems down the road, but I need to put out the fire I’m dealing with now, know what I mean.

    And, yes, I’ve made a few uncessary purchases in my life, but not, I think, to the tune of $17,000.

    So I can easily understand someone getting overwhelmed by medical (or other) debt, and then needing a way out from under.

  19. Shamba says:

    Kathie, thanks for the info on the homestead act. Almost every state has one and it is more than worth checking out. some homestead acts are automatic up to a certainly amount, usually 100,000 to 200,000 dollars.

    shamba

  20. Brandi says:

    I walked away from a house which we bought in 2007…I take full responsibility, but on the other hand, we should have NEVER qualified for a $450,000 loan! The whole credit score scare, makes me angry. In my area there is an abundance of rentals (people are not able to sell and have to rent out, plus all of the investors who bought up homes during the boom). We just explained to the owners of the home we currently rent what happened – we were completely honest – and we moved in two weeks later. Landlords are desperate for tenants here and probably in many places as housing was put up at astronomical rates in the past couple of years. So if you have to walk away from your house, my advice is to stay as long as you can (up to a year in my state) and save your money. No one is going to say no to someone with a couple of months rent up front.

    Don’t let the credit score thing scare you! It was made up by banks and leans to their favor – there are so many things that can screw up your credit score that are not your fault (ie the person above with the same name as someone defaulting). Don’t buy into it! I agree with Lydia about the massive default – It will probably happen anyway…

  21. Shamba says:

    On last thing about this stuff, if you are every notified to go to courts, small claims court for example to face a claim against you by a creditor, GO to court! DO NOT ignore this or you will probabaly automatically lose against the creditor. then with a court judgment against you they can garnish wages, attach bank accounts–depending on the amount they might be able to wipe the bank accounts comletely–and maybe even take your income tax returns, state or federal, depending on the situation and the laws of the state.

    If the court is in a different state than yours, them I’m at a loss for what you could do except actually go there or have an attorney go for you.

    The reason I know all these things is that I was a law librarian in a state library the public could call in for info. We ususally got these kinds of calls for help about debrt, eviction or other things after the fact. Or we were the last resort for people who had tried every other agency or lawyers. either the cases were beyond help or they didn’t want to hear what they were told. After the fact, we had no info that could help them. I neve knew the whole story of these situations but it was hard to listen to in good times. What are my colleagues listening to these days? :(

    Kat, glad to hear your situation hasn’t given you any serious trouble! Sometime these people will back off if given a little resistance.

    Okay, peace to all,
    Shamba

  22. Speaking of debt . . . I have a question for any who are inclined to give an opinion. My son and his wife (late 20’s) moved to Portland, OR about a year ago. Their sole income is from an online business — etched glassware they make themselves. They are currently renting but want to buy a home, plant a garden, put in a studio, and maybe even start a family. They do not, however, qualify for a mortgage on their own. My husband and I are in a position where we could help out, but is it wise? Would they be better off renting? I am inclined to think that this is a good time to buy — interest rates are low, Obama is offering a first-time buyers an incentive, and housing prices in a place like Portland might not necessarily fall much further. But is this a good time to be taking on debt???

  23. z says:

    Sharon, I have to say I wish you would fact-check these things better or run them by a real lawyer. There are a couple inaccuracies here– for example, they can’t just “take your house for medical debt.” It’s not as simple as that. Some medical debt is secured and some is not. Some can be converted into a judgment against property, but that’s a whole other procedure. Debtors can also change the character of their debt by refinancing. And as others have pointed out, you made no mention of homestead exemption in bankruptcy and garnishment, which is kind of a big deal. Not to come down hard on you, but these misstatements of the law do people a disservice, and cause readers to question the accuracy of everything else you write.

  24. tim-10-ber says:

    The challenge with just walking away is it will be incredibly hard to ever get credit again. The rules have changed. People who were able to obtain credit when they shouldn’t won’t be able to get it in the future — at least not easily or cheaply. If you work with the lenders, try to consolidate loans. understand the pros and cons of bankruptcy before you act…it might at least help one understand what they are up against. I do believe it is very hard to get our student loan debt. After all the debt is truly backed by the government…

    If you can live without credit cards or a mortgage or car payment (shouldn’t we all do this?) then you will be fine.

    Yes, property owners need renters. Too many homes are sitting empty. Yet…there might not be a reason to walk from a home if you can pay the equivalent of rent for the area. Talk with your lender or servicer. They need the houses occupied.

    Best advice I can offer is talk to your creditors, explore the options, know the facts…then decide what is right for you.

    In the future make sure you have a full year emergency fund, no credit cards and buy nothing on credit.

    if you are employed, have your emergency plan then work as hard as you can to get out of debt.

    Best of luck -

  25. Very helpful advice, Sharon.

    The sorts of strategy you mention are common in business.

    Another approach to dealing with debt. Drastically cut expenses (e.g. by living with relatives; giving up some possessions). Work out arrangements with debtors.

    Bart / EB

  26. Gina says:

    Thanks, Tara! I figured there was probably more to the media blurb I read which reported it as if she stole service from the dentist who did her work, LOL!! I was using it as an example of a re-hash of the ol’ debtors prison and I completely agree a cc default is no where even close to this woman’s situation, but who knows what changes they will make in the future (they seem to make up the rules/laws themselves).

    The other thing I would recommend after reading some of these comments is to do a search for the federal Fair Collections Act. I see some really illegal stuff going on by the collectors here and it is an automatic win in court if they break the fair collection laws. Also, there are statute of limitations ineach state. My state has a SoL of 6 years. This is the number of years a business can sue you over a debt. Of course, with all the recent changes in laws, these could change in a heartbeat, but both the fair collections (and I think “reporting”) act and the SoLim are still the same in this space and time. I used the laws to settle a medical debt on my husband’s credit report and it was challenging, but armed with real regulations will at least make them think twice about ignoring the error.

    I am a landlord (not by choice, but by not being able to sell my home) and I am willing to give people breaks. I agree with the commentor who mentioned saving up some money-it will show the landlord you are serious and willing to invest in housing upfront. I also recently sold a house by land contract and the people are slow payers. It is frustrating on this side of the fence too, but I’m not a faceless corporation, but a real person depending on their payment to pay my debt.

    Last, one little story about a collections agency. A few years ago I kept getting this message for a man to call a collections agency. After many, many of these messages I finally called the agency to tell them I had had that particular number for 6-7 years and the man in question did not live with me nor did I know him. The man asked my name and (stupidly) I blurted it out. he says, “Gina X, Gina X…I have something on you too…” in an incredibly gruff voice. I knew he had nothing on me, but I could not believe how ungrateful he was I stopped wasting his time; he just wanted to intimidate me i guess because it had become the limitations of his interpersonal skills!

    interesting thread and one, I believe, a good majority of us are not immuned to these days.

  27. Joanna says:

    I had to file for bankruptcy back in 2001 after getting my finances tangled up by a sociopathic 2nd husband. Before that my credit had been perfect. I had debt collectors calling me for debts he incurred long before we met, and had papers filed even. I was able to get out of the entaglements (and away from the sociopath) by selling my house that I loved, and leaving the area.

    The very minute after I filed BK, I opened secured credit cards & charged stuff I paid right off. It didn’t take long before I was issued really good cards, high limits & low interest. I kept charging & paying off.

    By 2005, when my partner & I found the perfect place to ’stead, my credit was good enough to help get us the best mortgage terms available.

    The place we have can just about be paid for on one income, so while we’re both working, we’re investing in whatever we need to make growing our own food easier. If need be, we can let a lot of bills go before our quality of life declines, and we’re constantly putting what we can in assorted savings. We still have a little extra debt to pay off, but we’ll never do it at the expense of what feeds us & shelters us.

  28. Greenpa says:

    One tactic on credit scores:

    My own personal credit score, and my business’s are in the toilet. Primarily due to illness, and trying to hang on to some employees too long…

    But. I have two sons, who have excellent credit scores.

    Just connect the dots.

    That, of course, requires close family ties, and real trust. Lucky for me, we have that.

  29. Student says:

    Just a word on the child support issue – Many states can take away a parent’s driver’s license if they are in arrears on child support. They can also suspend business licenses, contractor licenses or revoke passports.

    Needless to say, if you are unemployed and can’t pay child support and then lose your driver’s license, it will be even harder to find work. Not to mention you probably will lose visitation with your children as well. Unless you have a good relationship with your ex…

    I think it is wise to talk with an ex-spouse ahead of time about any possibility of unemployment and how you would both deal with it. If you are unemployed anyway, maybe you can take over babysitting duties, or provide other services for the family or children. Of course, this assumes a good relationship again.

  30. Susan in NJ says:

    Just another thought on child support — an arrest warrant can also issue and you may be jailed until arrearages are paid (almost like debtor’s prison, I say).

  31. Sharon says:

    This was never an attempt to cover all of the legalities of any situation – I think you shouldn’t default on child support because those are your kids, much less that they will follow you, put you in jail, put your name in the paper….

    Your right, I didn’t mention homestead exemptions, nor did I mention many situations where one state has different laws than another. I also am assuming right now that in some cases, the present is different from the past – ie, that the free flow of credit is drying up and that re-establishing good credit will often not be that viable for others – perhaps I should have been clearer. I also didn’t mention taxes because I assume everyone knows that not paying your taxes is a bad idea ;-) .

    Susan, maybe I’m unfair about the bankruptcy thing, but given that you can have to pay this off for a long time now, I’m not clear that bankruptcy does get the creditors off your back – yes, it means they can no longer call, but I know several people who have ended up back in court, unable to pay the amount that they were required to on their debt, and going through the cycle again. I think for middle class people in a temporary downturn, the old rules may hold – if things are direr than that, I’m not sure it is worth spending the money.

    Peter, I can sympathize – there is another Eric Woods out there who doesn’t pay his child support – when we refinanced our mortgage, we got a call from a guy saying “what has your husband done about the child support?” My reaction was “huh?” He insisted – “what has your husband done about his child support?” “Ummm…he lives here and supports his children?” And on until we discovered that someone else with the same name but different middle initial apparently wasn’t paying.

    It is true that default does harm. It is also true that sometimes there’s not much that can be done, and the best you can do is to minimize that harm.

    Sharon

  32. Tiffany says:

    Every state likely has different laws about what is protected and what is not. If you are considering what not to pay, it is worth it to call the local legal aid branch or visit the local library to learn about what property you have that may be exempt. In some states, you may be able to protect more than just your home against judgments by creditors.

  33. Lynnet says:

    On the “homestead exemption”, here in the state of Colorado the note forms that you would have to sign to get a mortgage specifically eliminate the homestead exemption. So if you have a loan, you have no homestead exemption.

    The warning about going to court if you if you get a notice is VERY IMPORTANT! This happened to my sister-in-law who had a habit of not opening mail she didn’t want to see (like bills). When she didn’t show up, the judgment was entered against her even though she would have had a good case if she had contested it. She is now trying to unwind this judgment, and it is just a nightmare.

  34. Mark Hankins says:

    Just a note with respect to Lynnet’s comment above: waiving homestead exemption with respect to your mortgage lender doesn’t waive it with respect to the whole world. If you’re sued for debt, you’re not going to lose your home as long as you pay your mortgage lender and the amount of equity in the home doesn’t exceed your state’s exemption. If and when you’re bumping up against the equity limit, you need to consider that if a judgment creditor makes a move to foreclose on its lien you will need to pay a settlement on the judgment or file BK at that point or you will lose the home.

  35. the last time I rented an rv I crashed it I was glad i got the $5 insurance lol

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