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Congress Proposes Law to Exempt Creditor Lawyers from Debt Collection Regulations
The U.S. House of Representatives is considering legislation that would exempt creditors’ rights lawyers from the federal regulations meant for debt collectors. The Practice of Law Technical Clarification Act would amend both the Fair Debt Collection Practices Act and the Consumer Financial Protection Act of 2010 so that:
- Law firms engaged in litigation are excluded from the definition of a debt collector; and
- The Consumer Financial Protection Bureau does not have authority over attorneys who are not acting as debt collectors.
If the law passes, state courts would have primary authority to determine whether a creditor lawyer is guilty of misconduct in a case.
Lawyer Exemption
Congress did away with the creditor lawyer exemption in the FDCPA because it protected some attorneys who participated in illegal debt collection practices outside of their court cases. The change was meant to allow debtors to file lawsuits against lawyers for conduct not involving litigation. However, courts have allowed debtors to collect damages when lawyers make technical mistakes in filing litigation against debtors. Lawmakers did not intend for creditor attorneys to pay statutory damages for an honest mistake made when bringing a legitimate lawsuit against a debtor. The new law would protect lawyers from unnecessary lawsuits while still allowing state courts to hold lawyers accountable.
Debt Collection Tips for Small Business Owners
As a small business owner, you likely do not think of yourself as a creditor. However, that is the role you have taken when you allow customers to repay you over time for products or services provided. Collecting debt sometimes requires being more forceful with debtors than you are comfortable with. Because you deal with your customers personally, it may be awkward to hold them accountable for unpaid debts. You can minimize confrontation during debt collection by acting quickly and being thorough.
Crafting an Agreement
You should always finalize any borrowing or repayment plan with a customer by having them sign a written contract. Verbal agreements are difficult to enforce if your customer does not pay you back. A contract should explain:
- The timeline for making payments;
- Any interest accrued as part of the repayment plan;
Law Protects Servicemembers During Vehicle Repossession
Before repossessing a vehicle, an auto lender must confirm whether the owner is a U.S. military member on active duty. The Servicemembers Civil Relief Act includes a section protecting active servicemembers who default on their auto loans. The auto lender must obtain a court order to repossess the vehicle. The order may include forms of financial relief not normally given to vehicle owners. Failing to comply with the SCRA can be a criminal offense.
Qualifications
The SCRA applies to people who are away from home while serving as:
- An active member of one of the branches of the U.S. military;
- A reservist reporting for military service;
- A National Guard member;
- A commissioned officer of the Public Health Service or National Oceanic and Atmospheric Administration; or
Nuances of Business to Business Debt Collection
Businesses are some of the most lucrative clients for finance companies because they need loans to purchase goods or equipment. A well-timed loan can help a business eventually turn a profit and lead to long-term relationships with financiers that benefit both sides. However, businesses are also liable to default on their debts, which may be substantial depending on how much they needed to purchase. Finance companies must use their best judgment in determining how aggressive they should be with business clients.
Personal Communication
Hiring a debt collection agency or taking a commercial debtor to court may sour the relationship between a finance company and a business. Before taking those steps, the creditor can try to settle the debt on a more personal level by:
- Sending a letter to inform the business that it is late in making payments;
Being Thorough with Citation to Discover Assets
After a judge rules that a debtor must repay a creditor, the two parties will often find themselves back in court as part of the debt collection process. The creditor has several tools at its disposal, such as wage garnishment and seizing collateral property. However, the process must start with determining what resources the debtor has available. In Illinois, a creditor can file a Citation to Discover Assets, which compels the debtor to appear in court and answer questions under oath. With this opportunity, it is important for the creditor to ask questions that will help it uncover the debtor’s true asset values.
Leading Up to Court Appearance
The process starts with filing the Citation to Discover Assets with the local court and serving notice to the debtor. As part of the notice, the creditor can request that the debtor prepares specified financial documents for the hearing. Illinois law requires creditors to include an Income and Asset Form as part of the citation. Debtors must respond to a series of written questions meant to determine:
Four Ways to Present Reaffirmation Agreements During Bankruptcy
Offering a reaffirmation agreement to a debtor going through Chapter 7 bankruptcy can allow a secured creditor to receive close to full value on debts for real and personal property. As part of a Chapter 7 debt discharge, a secured creditor normally repossesses properties if a debtor will be unable to repay the loan. However, the creditor most likely cannot hold the debtor liable for any deficiency after resale of the property. With a reaffirmation agreement, the debtor keeps the property as long as he or she can continue making payments. If the debtor defaults, the creditor can repossess the property, and the debtor would be liable for any deficiency after resale. Knowing the risk this may pose their clients, bankruptcy lawyers will discourage debtors from signing reaffirmation agreements. Creditors need to inform debtors of why a reaffirmation agreement may be to their advantage:
Convenience Fees Not Allowed Without Consent in Debt Agreement
Debtors have multiple payment methods they can use to transfer money when repaying debts. Some forms of payment incur additional convenience fees, such as when debtors use credit cards or money orders. Creditors have at times formed agreements with the third-party vendors to share these convenience fees. However, they should examine state laws and their contracts with debtors before entering such agreements. Creditors and debt collectors are often prohibited by law from collecting convenience fees and may be punished for doing so.
Federal and State Law
The Fair Debt Collection Practices Act states that a debt collector cannot institute a fee that increases the amount a debtor owes unless:
- The debt agreement authorizes the fee; or
- State law permits the fee.
Late fees are often included in debt agreements, which makes them legal. However, convenience fees may not be included because they are normally instituted by third-party vendors as a cost for using their services. Illinois’ Collection Agency Act states that convenience fees must be included in a debt agreement in order for a debt collector to collect or request them. Many states have similar laws, though some do not have any laws addressing convenience fees.
FHA Loans Add Extra Steps to Mortgage Foreclosure
The Federal Housing Administration, through the Department of Housing and Urban Development, offers protected loans to help lower income borrowers obtain mortgages. The FHA insures the loan, which gives the lender greater certainty that it will be compensated in case of default. As part of the FHA insurance, the lender must follow federal guidelines in contacting borrowers when they default on the mortgage. Failure to document compliance can halt foreclosure efforts on the property.
In-Person Meeting
According to the Code of Federal Regulations, the lender must have or attempt to have a face-to-face meeting with the borrower before the borrower has missed three months of required payments. If the lender does not have the meeting, it must show that it made a reasonable effort to contact the borrower, including:
- Sending at least one letter of notice, with delivery certified by the U.S. Postal Service; and
Be Careful When Creating Intercreditor Agreements
When a debtor borrows money from multiple creditors, an intercreditor agreement can be helpful in determining the rights of each creditor. The primary purpose of the agreement is to establish which creditor receives priority in case the borrower defaults on its debts. The higher-priority lender is called the senior creditor, and the other lender is called the junior creditor. In the event of default, the agreement may state that the senior creditor must be repaid in full before the junior creditor can take action on the debt. However, the agreement can also include provisions that will protect the junior creditor in case the senior creditor takes action that impairs the junior creditor's ability to collect on its debt. Depending on the severity of the action, a court can decide to strip the senior creditor of its priority claim on the debt.
The Risks in Working with Debt Settlement Companies
When debtors are worried about their ability to repay their creditors, they become susceptible to people who offer quick fixes. Some debt settlement companies are taking advantage of this by advertising misleading debt relief claims to debtors, such as:
- Being able to eliminate debts in months without bankruptcy;
- Stopping calls from debt collectors;
- Relieving their debts without affecting their credit ratings; and
- Allowing them to continue the same lifestyle with no consequence.
Debt settlement companies tout their services as a win for all parties. The debtor relieves his or her debt, and the creditor receives some compensation for the debt. As a creditor, you know the downside of working with debt settlement companies. They ask debtors to send payments to them instead of you, delaying your reimbursement by years. Once the company has accumulated enough of the debtor’s money, it will come to you with a lower settlement offer than what you may have been able to negotiate directly with the debtor. However, the debtor may have more to lose than you from using a debt settlement company. You can help yourself and your debtors by explaining the drawbacks to them:
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