Bankruptcy/Debt Collection

Bankruptcy/Debt Collection [ADVOCATE: Give caller advice per script. Check case acceptance list and refer to appropriate offfice for more services.] I. Explain Judgment Proof Judgment proof means you have little/no income, or your income is protected by law. This also means that you have little or no assets (nothing worth more than $1000). If you are Judgment Proof, you may not need to file for bankruptcy right now because the law already protects your income from your creditors. People often think they can only file for bankruptcy if they have no money. Bankruptcy is actually to protect people with some money from creditors. You can wait and file for bankruptcy after you get some income and assets to protect. Creditors (collection agencies) cannot: Know Your Rights: Dispel Myths on Bill Collection Garnish your wages before getting a court judgment against you; Take any of your property, unless the property is collateral for the loan. (Collateral is property that you agreed to give up if you can t keep up with the payments, for example a car or house.) Send you to jail; or Send your children to foster care. Creditors without collateral can legally: Stop doing business with you. File a report on your credit record, but this may have already happened. NOTE: If caller wants, send them How To Get a Copy Of Your Credit Report Sue you in court. This isn t as serious as you might think. Call us back if you get court papers, and we can discuss your options. February 15, 2005 1

II. To be Judgment Proof, you must have PROTECTED INCOME and NO SPECIAL ASSETS A PROTECTED INCOME Protected Income is income that is from a protected source, or wages that are below a federal minimum living allowance. Ordinary creditors cannot garnish or take protected income. The following income is protected: Employment where you earn less than $154.50 a week (after withholding taxes) Welfare (AFDC, GA) Supplemental Security Income (SSI) Social Security / Social Security Disability Temporary Disability Insurance (TDI) Unemployment Compensation Worker s Compensation Pension for Government Employees Veteran s Benefits B. SPECIAL ASSETS. Special Assets are assets that a creditor may be able to attach to recover what is due them. Collateral is the only special asset that can be attached without a court order, and then it can only be repossessed by the creditor that has the security interest. A creditor would need a court order before they could attach any other special asset. Bank Accounts holding any money from sources other than the protected income listed above. a home or an interest in land or property. Collateral, or property you agreed to hand over if you stopped paying on a loan (like a car or a house). Any one item worth more than $1000 if you were to sell it in the newspaper (for ex., a car). Individual Retirement Account or a Non-Government Pension that you made contributions to. III.Find Out If The Caller Has Any Special Circumstances [Advocate: See next page for more details.] Special Debts Special Debts are debts that may not be forgiven, or discharged in a bankruptcy Child Support Alimony Some Taxes Student Loans February 15, 2005 2

Co-Signers [Advocate: enter co-signer(s) as respondent] If someone co-signed a loan for caller, caller s bankruptcy would not forgive that person s obligation to repay the loan. Similarly, if caller co-signed a loan for someone else, caller will be liable for the loan even if the other person files for bankruptcy. IV. Special Problems of Debtors (Support, Alimony, and Taxes) The law does not treat all debts the same. Some types of debt are more serious, and the law will not allow you to get rid of these types of debts when you file for bankruptcy. These debts include child support, alimony, taxes, and guaranteed student loans. There are also other types of special debts, such as debts arising out of fraud or willful misconduct; liability for injury or death from driving while intoxicated; and criminal fines and penalties. A. Child Support and Alimony Payments. Child support and alimony are payments ordered by courts. The law says these debts are important and that they cannot be discharged in bankruptcy. Also, the law allows a larger amount of wages to be garnished to collect these support payments than it does to collect ordinary types of debt. If the person owing child support or alimony payments does not have another spouse or child, up to 60% of his or her after-tax earnings can be garnished. If that person is 12 weeks or more behind in paying support, up to 65 % can be garnished. (Normally, the most that can be garnished for ordinary debt is about 20%). If the person owing support payments has another spouse or child, up to 50% of his or her aftertax earnings can be garnished. If that person is 12 weeks or more behind in paying support, up 55 % can be garnished. B. Taxes Taxes are debts owed to the government. Income taxes may sometimes be canceled by bankruptcy IF: 1) a return was filed, and 2) the taxes were due more than 3 years ago. However, the government s harsh collection process does not usually permit taxes to remain unpaid for three years. Some taxes can never be discharged in bankruptcy, for example: 1) Hawaii s general excise tax -- This is the 4% or 1/2% tax that self-employed individuals and businesses must pay on all business income received. February 15, 2005 3

2) Social Security tax -- Employers are required to withhold and pay this tax for each employee. The methods that the federal, state and local governments can take to collect debts owed to them are more harsh than those of any other creditor. For example, the government can take property such as a car or a house and sell it to pay your tax debt, even if you haven t finished paying for the property. The government can even place a claim (lien) against money or property you get in the future. Government collection processes are set by law, and they only give debtors limited rights, such as: 1) the right to receive notice or demand of taxes owed and notice of what the government may do to collect them; 2) the right to contest or appeal the government s decision of amounts owed; 3) the right to keep a bare minimum of possessions and income if the government exercises its right to seize them to collect unpaid taxes. For more information on federal tax collection, request Internal Revenue Service Publication #594, -- The Collection Process. The state of Hawaii does not have such a publication, although the process is similar. Many libraries have the Hawaii Revised Statutes (laws of the state) which describe the tax collection process in chapter 231, beginning at section 25. C. Student Loans. Bankruptcy will not discharge any guaranteed student loans, except in the rare case of substantial hardship. After the borrower stops making payments, the loan goes into default. The government can intercept the borrower s income tax refunds and apply them to the defaulted student loan. If the borrower is employed, the government can garnish wages without suing the borrower. There are many kinds of guaranteed student loans, and their terms vary widely. Legal Aid Society of Hawaii has additional information on options available to debtors who cannot make required payments. Most student loans can be cancelled in the event of total and permanent disability. A. Co-signers. V. Co-signers and Divorces: Other Special Problems of Debtors A co-signer is a person who agrees to be responsible for a loan or debt of another person if that person does not pay. The lender has the right to collect the unpaid amount from the co-signer, even if the co-signer did not receive any benefit from the loan. If the person who was supposed to pay the debt files for Chapter 7 bankruptcy, the co-signer is still obligated to pay the debt, unless the co-signer also files for bankruptcy. B. Divorce. Divorce decrees usually assign marital debts to one or the other spouse. This agreement is not February 15, 2005 4

binding on creditors. If both spouses sign the credit application, lease, etc. the debt is a joint debt. The creditor has the right to collect from either party, no matter who the divorce decree says must pay. Similarly, the credit report of both parties will show the payments or lack of payments on joint debts. If one spouse fails to pay debts as ordered in the divorce decree, the other spouse may request a court order to enforce the decree. However, that action is taken only against the ex-spouse. It does not stop the creditors from collecting payment from either party. [Advocate: if caller has joint debt with spouse or former spouse, send out sample letter of non-responsibility.] ADVOCATE: If caller is NOT JUDGMENT PROOF, has SPECIAL ASSETS, has SPECIAL DEBTS or CO-SIGNED LOANS is BEING HARASSED BY CREDITORS AFTER SENDING CEASE CONTACT LETTER, or has RECEIVED COURT PAPERS, check case acceptance and route to appropriate office. NOTE: if LASH office does not have bankruptcy clinic, refer to HLC. If Caller IS JUDGMENT PROOF, go over rest of script and close call, unless they want to file for bankruptcy even though they are judgement proof. In that case, fill out the questionnaire and refer to the appropriate office, if meets case acceptance. Information on LASH s Bankruptcy Clinic LASH is running a clinic that teaches people how to fill out the papers and file a simple Chapter 7 Bankruptcy. The clinic consists of 2 classes, held about a week apart. Each class is about 3-4 hours. Clinics are being run in Honolulu (all of Oahu), Kauai, Hilo and Kona offices. If client wants to go to a clinic, use the questionnaire to screen them. If they pass the screen, they will receive a letter from the appropriate office telling them the time of the next clinic. VI. If You Are Judgment Proof, What You Can Do to Protect Yourself: A. Prioritize Your Spending Keep your money for critical needs: Food Shelter Children Small payments on your debts may hurt you: They don t reduce the debt, only go to interest They encourage bill collectors to harass you more They allow the creditor to come after you for 6 more years (statute of limitations is 6 years from last activity ) NOTE: Case law defines last activity as last payment, purchase or signing of promissory note. B. Make Sure Your Protected Income is February 15, 2005 5

Safe If your protected income is in a bank, write the bank a letter stating that all the income in that account is protected from attachment by law. Mail it certified mail and keep a copy. If there is income from any unprotected source commingled with protected funds in an account, take out the unprotected funds. If necessary, open a second account with the unprotected funds, or deal in cash. Interest accrued on protected funds is not protected. You can withdraw that quarterly. Call LASH if you receive a notice from your bank saying that a creditor is trying to garnish your account. C. How To Stop Creditors From Harassing You Remember, your income is protected, so your creditors can t take it from you. They can not get anything from you unless you agree to it. Write your creditor a letter telling them to stop contacting you * One letter for creditors to cease contact at home. They do not have to cease contact at home upon receipt, but they may. * One letter for creditors to cease contact at work. They do have to cease contact at work upon receipt. * One letter for 3rd party debt collectors. They are required by law to cease contact at work and/ or at home upon receipt of written letter. Send letter to each creditor and debt collector. Keep copies. It is important to send via certified mail, return receipt requested, otherwise collection agencies will ignore it. NOTE: MAIL sample cease contact letters. You do not have to talk to your creditors Don t let them into your home (You only have to let a creditor repossessing something into your home if s/he has a court document served by a sheriff) You don t have to sign any new agreement with creditors. Collection agencies must be licensed in Hawai`i or they may be liable to caller for a statutory fine. If your debts have been referred to a collection agency, you can check if they are licensed in Hawai`i by calling 587-3222. If the agency is not licensed call LASH back, we may be able to help February 15, 2005 6

you. If caller has any debt that is secured with collateral (e.g., car loan) repossession script has information on Repossession of personal property (not including real estate). Pros: VI. If Caller Wants to File for Bankruptcy -- Some Pros and Cons of Filing. Bankruptcy will appear on your credit report, but some companies may be more willing to give you credit after your bankruptcy because they know that you have cleared off your debts. Expect to pay maximum interest rates. Bankruptcy will eliminate the legal obligation to pay most of your debts. This is called a discharge of debts. It is designed to give you a fresh financial start. Can stop foreclosure on your house or mobile home and allow you an opportunity to catch up on missed payments. (Bankruptcy does not, however, automatically eliminate mortgages and other liens on your property.) Can prevent reposession of a car or other property, or force the creditor to return property even after it has been repossessed. Can stop wage garnishment, debt collection harassment, and similar creditor actions, to collect a debt. Can restore or prevent termination of utility service. Can give you back your driver s license if it was taken away for a debt. Once bankruptcy is filed, by law, creditors cannot come after you. Cons: Bankruptcy cannot eliminate certain rights of secured creditors. A secured creditor has taken a mortgage or other lien on property as collateral for the loan. Common examples are car loans and home mortgages. You can force secured creditors to take payments over time in the bankruptcy process, and bankruptcy can eliminate your obligations to pay any additional money if your property is taken. Generally, if you want to keep the property you must pay for it, even inbankruptcy. Bankruptcy cannot discharge types of debts singled out by the bankruptcy law from special treatment, such as child support, alimony, student loans, court restitution orders, criminal fines, most taxes. Bankruptcy cannot protect co-signers on your debts. When a relative or friend has cosigned a loan, and you discharge the loan in bankruptcy, the co-signers will still have to repay all or part of the loan. February 15, 2005 7

BROCHURES FOR CLIENTS Bankruptcy (red): Bankruptcy Facts* Debt Collection* Common Bankruptcy Questions* Special Problems of Debtors* How to Check Your Credit Cease Contact Letters Student Loans (purple): Direct Consolidation Wage Garnishment Wage Garnishment Statute Call Us Back If: Your creditors keep harassing you after you ve sent them the Cease Contact letter. You receive court papers. You get a steady job and your net income is above $154.50 per week. You receive a lump sum of money. You expect to inherit money or property. CCourt Brochures (blue): How to Represent Yourself (in court and administrative hearings)* Small Claims Court (Department Brochure) Regular Claims Court (Department Brochure) February 15, 2005 8