You likely will not need to file a lawsuit against a friend who keeps forgetting to pay back the $20 he or she owes you. Refusing to repay $20,000 is a different matter. Some people do not lend money to friends or family because they want to avoid an awkward situation where they have to pressure these people to repay them. However, it can be difficult to say no to a friend who is having a hard time paying for basic living expenses or needs financial assistance to start a business. You will decide whether to hold your friend accountable for the debt, but you should know that you have the same debt collection options as other creditors.

Written vs. Oral Contract

Illinois law enforces both written and verbal contracts, but a written contract is more concrete evidence in court. It is prudent to write down an agreement for a sizeable loan, even if you trust the person. With the written agreement, you can:

• Prove that your friend agreed to repay the loan;
• Set a deadline for repayment; and
• Establish what action you will take if your friend does not repay the loan.

A court will likely uphold an oral loan agreement, as long as you can show that you gave the money and your friend benefited from the money. However, an oral agreement has a five-year statute of limitations in Illinois, as opposed to a 10-year statute of limitations for written agreements.

The Illinois Supreme Court has adopted new rules regarding procedures for credit card companies and debt buyers who file lawsuits against debtors. The rules will go into effect on Oct. 1 and will apply to both new cases and active cases that have not reached a judgment. The new rules do not apply to an original creditor that is not a credit card company. The rules create new requirements that are meant to force creditors to be more timely and thorough in filing specified motions in court. There are three notable rule changes:

1. New Affidavit Requirements: A credit card company or debt buyer must use a new affidavit form when filing a complaint against a debtor. A statement must accompany the affidavit that says that the complaint was filed within the statute of limitations. Applicable creditors can modify their existing affidavit to comply with the new rule, as long as it includes the debt contract, relevant information on both parties, and a history of the debt.
2. Same-Day Motions: Credit card companies and debt buyers will need to give prior notice before requesting a continuance or voluntary dismissal of a trial. This means that the court will no longer accept a plaintiff’s written or oral request to end or continue a trial if it is made on the day of the trial. Courts may require that applicable creditors file a motion to dismiss a trial at least five business days before the trial. As for a continuance, the court may accept a same-day request if both parties agree to it and the continuance would serve the interest of justice.
3. Identity Theft Rules: A defendant may claim that he or she is not liable for a debt because he or she was the victim of identity theft. A new rule requires a debtor to file an identity theft affidavit. Once the affidavit is filed, the creditor will have 90 days to either dismiss the lawsuit or contest the affidavit. To contest the identity theft claim, the creditor must submit its own affidavit that gives factual evidence as to why the identity theft claim is false.

Effect on Creditors

The new rules largely favor debtors because they require creditors to make quicker decisions on how to proceed during their cases. Failing to comply with the rules could delay a judgment or lead to a dismissal. A Chicago creditor’s rights attorney at Walinski & Associates, P.C., can help you remain in compliance with court rules and obtain the judgment you need in your case. Schedule a consultation by calling 312-704-0771.

One of the advantages that debtors gain by filing for bankruptcy is putting a stop on debt collection and property repossession efforts by creditors. By using bankruptcy, debtors often pay less than what they actually owe and discharge their remaining debts afterward. Some debtors abuse the process by being serial bankruptcy filers. Bankruptcy laws require filers to waiting a certain number of years before they can discharge their debt again. Serial filers try to continuously delay creditors’ debt collection actions by repeatedly filing for bankruptcy without ever completing a case. Debtors who attempt to defraud creditors through serial bankruptcy can face criminal charges.

Recent Example

In the case of United States v. Williams, the defendant was convicted on five counts of bankruptcy fraud for using repeated bankruptcy filings to prevent debt collection efforts by her condominium association. The defendant had fallen behind on payments to several creditors, including fees she owed to the condominium association. As part of the scheme to avoid debt collectors, the defendant would:

When repossessing a property from a debtor, having a perfected security interest in the property helps you prevent other interested parties from gaining possession of it. According to the Uniform Commercial Code, a security interest is created when:

• The property has been given value;
• The debtor has a right to the property; and
• The debtor agrees that the creditor shall attach a security interest to the property.

The security interest gives the creditor the right to possess the property if the debtor cannot meet the debt obligation, and perfecting the security interest gives the creditor priority over other parties who may claim ownership of the property. A recorded financing statement is a common means of perfecting a security interest. However, actual possession of the property can be sufficient with properties such as vehicles.

Recent Example

An assignment of rents clause in a mortgage agreement can be helpful when the borrower collects rent from tenants on its property. With the clause, the mortgagee may be able to collect rent payments directly if the borrower defaults on the mortgage. However, it can be difficult to predict how the clause will work in practice because of the vagueness of the law and inconsistencies between different state’s laws. Mortgagees with borrowers in Illinois have used litigation to enforce the clause. U.S. district courts have interpreted Illinois’ law on the assignment of rents to allow the mortgagee to collect rent when it meets certain requirements.

Property Possession

Establishing the possession of a rental property is the clearest way for a mortgagee to assert the assignment of rents clause in a mortgage. The mortgagee can claim actual possession of the property or constructive possession, which means the mortgagee effectively controls the property. In order to take possession of a real property during foreclosure:

A foreclosure case between a bank mortgagee and borrower made its way to the Illinois Supreme Court earlier this year. In Bank of New York Mellon v. Pacific Realty Group, LLC, the courts had been trying to solve two points of contention:

• Whether service by publication was an adequate means of informing the borrower of a pending foreclosure when the borrower does not have an agent in the state; and
• Whether the 60-day deadline for a borrower to file a motion to quash a foreclosure should have included a period during which the case was inactive.

The supreme court answered the second question in favor of the borrower and sent the case back to the appellate court in order for it to rule on the first question.

Background

When a borrower is defaulting or about to default on a loan, the lender can offer to modify the loan agreement to allow the borrower to repay the debt and avoid the consequences of violating the agreement. Loan forbearance is a tool that lenders and borrowers use to temporarily reduce or stop debt payments. The borrower agrees to repay the missed payments at a later date, with interest sometimes added. Forbearance is most often used when a borrower is going through a temporary financial hardship and anticipates being able to catch up on the payments once the hardship has passed. However, forbearance is different from loan modifications, and some of the differences can be advantageous to a lender.

Separate Agreements

With a loan modification, the lender and borrower are changing the original loan agreement to create a new repayment plan that the borrower can adhere to. Loan forbearance is creating a new agreement that temporarily supersedes the original loan agreement. The forbearance agreement should state:

A group of Illinois State Representatives has introduced a package of bills that are meant to increase debtor protection against creditors. The bills are all stalled at the committee level, putting their future in doubt. However, that is unlikely to stop the legislators from continuing to push these bills or from creating similar bills in the future if the current bills die. The laws would reduce a creditor’s ability to collect on outstanding debts by shortening the window of opportunity to enforce a debt judgment, reducing interest rates on debts, and providing greater protections for debtor assets.

Proposed Changes

The legislators have presented five bills that would amend Illinois’ Code of Civil Procedure, including:

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

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:

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:

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:

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:

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:

1. Property Importance: Some collateral property during a bankruptcy has greater value to a debtor than others. A debtor may be more eager to hold onto real estate and personal vehicles than luxury items. Thus, debtors will be more receptive to proposals that allow them to retain possession of important properties.
2. Realistic Plan: A court will reject a reaffirmation agreement that puts an undue burden on the debtor. Debtors must also be current on their debt payments in order to enter an agreement. Creditors should understand whether debtors will have the financial means to make payments after bankruptcy. If a debtor does, the creditor can explain why it is reasonable to reaffirm the debt.
3. Short-Term Debt: In some situations, the remaining debt on an agreement may be small enough that the debtor could repay it in a year or less. Offering short-term repayment plans that allow them to keep their properties may be more palatable to debtors.
4. Modifying Loan: The debtor may need an extra incentive in order to reaffirm a debt. The creditor can present an agreement that lowers the burden on the debtor by reducing the monthly payments or interest rates. A better deal may entice a debtor to reaffirm.

Reaching an Agreement

Debtors must state their intention to reaffirm debts before their debts are discharged during Chapter 7 bankruptcy. Though either party can file a reaffirmation agreement, creditors are most often the ones to initiate the discussions. Reaffirmation agreements must be filed within 60 days after the first meeting of creditors. A Chicago creditor’s rights attorney at Walinski & Associates, P.C., can help you negotiate a reaffirmation agreement with your debtor. Schedule a consultation by calling 312-704-0771. 

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:

When facing bankruptcy, some debtors prefer filing for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. A well-constructed Chapter 13 repayment plan can prevent property foreclosure and repossession while clearing the filer of debt obligations. Creditors can benefit from Chapter 13 bankruptcy, as well, but only if the debtor creates a fair and reasonable plan. Creditors must examine repayment plans for possible objections before the plan reaches its confirmation hearing. Failing to object in time allows an unjust repayment plan to become legally enforceable. There are several objections that a creditor can make before the plan is confirmed:

1. Understated Debt: A debtor’s proposed repayment plan may exclude certain debts that he or she is required to repay. Priority debts must be part of the repayment plan. Mortgage and auto payments may also need to be included if the debtor wants to keep the related properties.
2. Insufficient Payments: Unsecured creditors must receive compensation from the repayment plan that is at least equal to what they would have received by liquidating properties in Chapter 7 bankruptcy. This is the tradeoff that debtors must make in exchange for keeping those properties.
3. Withholding Disposable Income: Plan payments must use whatever income is left over after necessary living expenses and other financial obligations. Some debtors will try to hide how much money they make so they do not have to repay as much of their debts.
4. Unsustainable Payments: A repayment plan should be based on what the debtor will realistically be able to afford. The plan may fail if the debtor cannot prove he or she will have the income to maintain those level of payments.
5. Unqualified Debtor: A debtor is allowed to file for Chapter 13 bankruptcy only if he or she meets certain requirements. The debtor does not qualify if he or she has insufficient disposable income, is behind on income tax payments or has debts that exceed the legal limit.
6. Bad Faith Plan: The debtor must be honest and fair with his or her creditors when creating a repayment plan. Any evidence that the debtor tried to deceive his or her creditors may terminate the plan.

Outcome

If the court upholds your objection, the debtor will have to revise the plan or abandon filing for Chapter 13 bankruptcy. The debtor may still be able to file for Chapter 7 bankruptcy if he or she does not qualify for Chapter 13. A Chicago creditor’s rights attorney at Walinski & Associates, P.C., can identify objectionable aspects to a debtor's bankruptcy repayment plan. To schedule a consultation, call 312-704-0771.

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: