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Recent Blog Posts
Using Citation to Discover Assets with Debtors
Creditors who take legal action against uncooperative debtors can view their debt retrieval as happening in two overarching stages. The first stage is receiving a court judgment that quantifies the monetary amount that the debtor owes the creditor. The second stage is retrieving the judgment debt from the debtor. Judgment enforcement of a debt can require further legal measures. Though the debtor is legally obligated to compensate the creditor, the debtor may claim financial hardship in order to delay or deny repayment. Creditors can use a citation to discover assets, which forces the debtor to disclose all of his or her available assets.
Citation of the Debtor
When a creditor files a citation to discover assets, the debtor is given notice of a court date that he or she must attend. At the hearing, the debtor is placed under oath and must answer questions about his or her available assets, including:
Piercing the Corporate Veil to Collect Debt
One of the purposes of forming a corporation is to separate the debt liability of the business from its shareholders. When a corporation defaults on its debts, the creditor is often limited to collecting the debt from the corporation itself. If the corporation has insufficient assets or dissolves, it becomes more difficult to retrieve the full debt. However, courts will allow a creditor to seek compensation from a corporation’s shareholders in certain situations. The practice is called piercing the corporate veil, and its success depends on the type of corporation and how closely the shareholders are connected to it.
Piercing the Veil
Illinois courts are likely to protect shareholders from personal liability in a corporate debt case. When deciding whether to pierce the corporate veil, a court is instructed to consider:
- Whether the shareholders' and corporation’s interests are so closely aligned that there is no longer a distinction between the two; and
Four Ways to Modify a Loan to Avoid Default
When debtors are struggling to pay off loans, creditors often consider loan modification before taking more drastic legal action. Foreclosure and repossession are surer ways to recuperate money or assets from a debtor, but those methods may fail to collect the entire value of the loan. By using loan modification, the debtor still has a chance to fully repay the loan, often with added interest. Creditors are taking a risk when agreeing to a loan modification:
- They are permanently changing the loan agreement in a way that may benefit the debtor; and
- They are trusting that the modification will be enough to help the debtor repay the loan.
In some cases, a loan modification only delays necessary legal action to recover a debt. Creditors must judge whether the debtor is likely to repay the loan and whether the modification is worth the effort. There are several ways to modify a loan in order to assist a debtor:
Involuntary Bankruptcy Useful in the Right Situations
Debtors who lack the means to repay creditors protect themselves by filing for bankruptcy. They can liquidate assets or create reorganization plans, after which their remaining debts may be discharged. Though creditors may be unable to retrieve their full debts, they are often forced to cooperate with the debtor in the bankruptcy to retrieve what they can. However, creditors have the ability to initiate bankruptcy with uncooperative debtors. Involuntary bankruptcy is a lesser-used debt retrieval method because it only benefits creditors in certain situations.
Filing for Involuntary Bankruptcy
There are several requirements when using involuntary bankruptcy against a debtor:
- The bankruptcy is filed as either chapter 7 or 11;
- The debtor can be an individual or business, with exemptions for farmers and nonprofit organizations;
Guarding Against Cyber Fraud During Debt Collection
Creditors are increasingly utilizing Automated Clearing House networks as part of their payment systems during debt collection. Electronic payments are more than convenient for debtors – they have become expected. However, the impersonal nature of online transactions makes it susceptible to fraud. Cyber criminals are attacking both creditors and debtors, with the goal of accessing private accounts and syphoning money to themselves. Creditors must take action to protect themselves and their customers from online fraud or risk losing substantial amounts of money.
How Fraud Happens?
All online businesses and consumers are vulnerable to phishing scams and malware attacks. Cyber criminals use these techniques to steal identities and access financial accounts. Because of the urgency involved with paying debts, criminals target creditors and debtors:
Legal Process For Repossessing a Vehicle
When a debtor fails to pay installments on a car loan, an auto lender may have no choice but to repossess the vehicle. Alternatives would be to refinance the loan or to allow the debtor to repay the money owed in a lump sum at a later date. However, the debtor must have a history of reliably making payments before the lender considers those options. Repossession is the surest way to recover money after the debtor defaults on a loan, though the lender may still not recover the entire loss. When repossessing a vehicle, you must follow a legal process that gives the debtor notice and a chance to repay you.
What Allows Repossession
Your right to repossess the vehicle should be clearly stated in the loan contract. Loan agreements typically include security interests, which are properties that can be used as collateral in case the debtor fails to pay the loan. In a contract for a vehicle payment plan, the vehicle is the security interest. When a debtor does not make a scheduled payment, he or she has violated the contract. The security interest identified in the contract will legally allow you to repossess the vehicle as collateral.
U.S. Supreme Court Rules in Favor of Creditors Making Stale Claims
The creditor industry scored a victory in May when the U.S. Supreme Court ruled that creditors are not violating the Fair Debt Collection Practices Act when they file a stale claim during a debtor’s chapter 13 bankruptcy proceedings. The 5-3 decision overturned a lower court ruling that such claims were unfair and deceptive. The decision removes some of the burden on creditors for determining when the statute of limitations for claiming a debt has expired, and protects them from debtor lawsuits that claim they violated the FDCPA.
Stale Claims
Creditors may have an unlimited time to attempt to collect a debt, but there is a limited time period during which they can use court action. When a creditor attempts to use legal action to collect on a debt that has passed that deadline, it is known as a stale claim. The statute of limitations varies by state, and creditors with debtors in multiple states may find it difficult to keep track of the different deadlines. In Illinois, the deadlines for court action are:
Utilizing Foreclosure to Collect Mortgage Debt
For mortgage lenders, property foreclosure is a complex yet effective method of retrieving debt when borrowers fail to make mortgage payments. A successful foreclosure can allow the creditor to sell the property and recover a large share of the borrower’s debt. In Illinois, all foreclosures must go through a court. A judicial foreclosure allows legal protections for both sides but can draw out the process. A creditor must follow a set of legal procedures in order for a court to approve the foreclosure.
When to Foreclose
If you are a mortgage lender, you may start considering foreclosure when a borrower misses a scheduled mortgage payment. However, you must give the borrower amble opportunities to pay the mortgage before you can request foreclosure in court:
- Loan agreements typically have grace periods for when the first mortgage payment is late.
How Bankruptcy Affects Debt Collection
Bankruptcy is one of a debtor’s most powerful tools to avoid paying off debt owed to a creditor. If granted bankruptcy, debtors may be able to absolve themselves from responsibility for some of their debts. When a debtor files for bankruptcy, the court can place an automatic stay on the creditor’s debt collection efforts until it decides on the bankruptcy case. Creditors can object to the automatic stay or the bankruptcy claim. Creditors have two types of bankruptcy they most often deal with, each having a different effect on their ability to collect debts.
Chapter 7
Chapter 7 bankruptcy is considered favorable for debtors who do not own many high-value assets. In order to qualify for this form of bankruptcy, the debtor:
- Must have a monthly income that is less than the median monthly income for households of the same size; or
Retrieving Debt Through Wage Deductions
Of the many means creditors can use to collect debt, wage deduction is considered the final option when all other methods have failed. The process involves working with the debtor’s employer to have money deducted from the debtor’s wages to pay to the creditor. It is often called wage garnishment, but garnishment can actually refer to a separate legal action that takes money from debtor monetary sources other than wages, such as bank accounts and money owed to the debtor. If a creditor is seeking money through a wage deduction, there are legal procedures they must follow.
Filing for Wage Deduction
Before filing a Wage Deduction Affidavit in court, the creditor must notify the involved parties:
- Debtors must receive a wage deduction notice, explaining how much money can be deducted from their wages and their right to a hearing to dispute that amount.
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