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 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:

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.

Impairment

An intercreditor agreement is based on the junior creditor knowing how much the senior creditor must be repaid before the junior creditor can file a claim on the defaulted debt. Following the agreement, a senior creditor may act on its own to increase the borrower’s debt obligation by:

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:

1. A debt settlement company cannot stop you from contacting them about their outstanding debts. Instead, you are more likely to contact them because they have stopped making any payments.
2. You are not obligated to work with a debt settlement company. Some companies regularly make unacceptable settlement offers or are generally disreputable.
3. The debt settlement company’s plan will increase their debts. A debtor may need to stop paying you for years in order to save enough money to make a settlement offer. During that time, you are likely to add interest to what is owed.
4. They may pay more using a debt settlement company than if they had negotiated directly with you. Besides the company’s fees, there is a tax obligation. The IRS considers any debt that you forgive to be taxable income for the debtor.
5. Nothing is stopping you from suing them for their outstanding debts. If the court rules in your favor, you may use tools such as asset seizure and wage garnishment to collect your debt.
6. The debt settlement process will hurt their credit ratings. Intentionally missing debt payments will affect how future creditors will view them.

Reaching an Agreement

When a lender concludes that it must foreclose on a mortgage, it likely wants to get through the process as quickly and smoothly as possible. The sooner the lender can reclaim the property, the sooner it can try to find a new buyer and recuperate the cost from the failed mortgage. However, the foreclosure process does not work quickly. While this is inconvenient for all mortgage lenders, the situation is most dire for those trying to foreclose on an abandoned property. Recognizing this problem, Illinois is one of the few states to have a fast-track foreclosure law.

Foreclosure Process

Illinois is a judicial foreclosure state, meaning the lender must go to court to receive a judgment on the foreclosure. The process includes:

A Chapter 13 bankruptcy trustee in Illinois recently objected to a debtor’s request to exclude $200 per month from his disposable income in order to contribute to his 401K retirement plan. The trustee questioned the motivation of the decision because the debtor had not made any contributions to the plan in the six months prior to filing for bankruptcy. However, an Illinois bankruptcy court denied the objection, stating that the debtor was within his rights. The ruling shows how bankruptcy courts treat retirement plan contributions as a protected expenditure.

Chapter 13 Plans

As opposed to Chapter 7 bankruptcy, Chapter 13 bankruptcy involves creating a repayment plan instead of liquidating assets. Qualified debtors must submit documents that detail their:

Illinois trial and appellate courts have been going back and forth on a debt collection case between Bank of America and a small business owner. Bank of America is suing the former owner of All About Drapes for the remaining value of an unpaid loan, plus interest and legal fees. The business owner counters that he was induced into signing the loan agreement because the bank falsely claimed that his previous line of credit was expiring. The trial court has twice ruled in favor of Bank of America in a summary judgment, but the appellate court overturned that decision each time.

Case Details

The business owner had originally created an open-ended line of credit with LaSalle Bank. He would borrow money to help him through the winter months — when his business was slow —  and paid the bank back at a two percent interest rate. Bank of America purchased LaSalle Bank in 2008, and the business owner began seeing an August 2009 maturity date on his bills. The owner explained to multiple employees at the bank that his line of credit did not have a maturity date. The bank insisted that:

The Consumer Financial Protection Bureau has created new regulations meant to protect borrows against risky short-term and long-term loans with balloon payments. Commonly known as payday loans and vehicle title loans, these types of loans are usually issued in storefronts and online to consumers who need immediate cash and have difficulty obtaining a traditional loan. The CFPB claims that creditors who issue these loans use unfair and abusive practices by giving loans that they know consumers will be unable to repay and being overly obtrusive in their collection methods. With the new regulations, the CFPB hopes to make the payday loan industry adhere to some of the standards established in other credit industries.

Which Loans Are Affected

The CFPB says that the rules will apply to two types of loans:

A company that has extensive debts has many means by which it can attempt to avoid its creditors. One such way is when a second company purchases the debtor company and its assets. The debtor company often no longer has its own assets that its creditors can claim. Creditors may instead seek compensation from the second company that purchased the debtor company. However, Illinois law presumes that a buyer is not responsible for the debts and liabilities of the company it purchases. Business owners may try to abuse the law by essentially continuing to run a company under another name, while dodging creditors. Fortunately, Illinois courts allow creditors to claim successor liability in order to collect debts from successor companies. The creditor must prove one of four established exceptions that transfer debt liability to a successor company.

Expressed or Implied Transfer of Debt

Successor liability claims are most simple to prove when the successor company has a written or verbal agreement to assume the debts of the company it purchased. However, the successor company can also expressly state that it is not liable for the previous company’s debts. In some cases, the purchasing agreement does not mention debt liability. Creditors can examine the agreement to determine if there is an implied assumption of the debt. A court may interpret the assumption of a contract or obligation from the previous company to imply the assumption of other liabilities.

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:

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:

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:

1. Forbearance: The creditor can temporarily reduce or suspend loan payments, with the agreement that the debtor will repay the difference when the forbearance period has ended. Forbearance is best used when the debtor is going through temporary financial hardship that he or she expects to recover from.
2. Term Extension: The creditor can add years to the loan repayment schedule. The value of each payment will go down, but the overall interest paid on the loan will increase. The creditor must determine how long it is willing to delay reimbursement of the loan.
3. Interest Rate Reduction: The creditor can temporarily or permanently reduce the interest rate on the loan, thereby lessening the payments. The money lost from the reduced interest is often added to the principal of the loan.
4. Principal Reduction: This modification is the least favorable for creditors because it decreases the value of the loan that the debtor must repay. Creditors may forgive a portion of the debt in hopes of increasing the chance of retrieving the remaining debt. However, the creditor is accepting a loss on the loan.

Best Option

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:

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:

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.

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:

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:

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:

When Illinois creditors use court action to retrieve debts, they can collect from debtor wages or other assets. With some exemptions, creditors can claim part or all of a variety of assets and properties. Non-wage garnishment can give creditors access to assets of greater value than what can be deducted from a debtor’s wages, as long as the assets are not exempt.

Bank Accounts

Banks are the most common source for non-wage garnishment. Once a court affirms that a debtor is liable, the creditor can serve the debtor and the debtor’s bank with a garnishment notice. Once it receives the notice, the bank must freeze the debtor’s accounts until a court rules on the garnishment. Banks will typically receive the notice a couple of days before the debtor to prevent the debtor from avoiding garnishment by withdrawing money from an account.

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: