There are a variety of ways that creditors may be able to address delinquent debts. While pursuing foreclosures or repossessions may be the best option in many cases, creditors may be able to mitigate their losses and ensure that debtors will be able to make ongoing payments by negotiating loan modifications. However, in some cases, these modifications may be classified as troubled debt restructurings (TDRs), and they may need to be reported to the appropriate regulatory agencies. By understanding when loan modifications are considered to be TDRs, creditors can ensure that they are in compliance with all applicable laws and regulations.

What Is a TDR?

Creditors may work with debtors to make multiple types of loan modifications that are meant to help a debtor afford ongoing payments and prevent the default of a loan. A loan modification may be considered a troubled debt restructuring if a borrower has experienced financial hardship and a lender makes concessions that typically would not be made in other situations. While defaulting on one or more payments may be an indication of financial hardship for a debtor, other financial issues that may affect a person’s ability to make payments may also be considered, such as the loss of a job. Concessions that a lender may make may include:

• A permanent reduction of the loan’s interest rate
• Forgiveness of some of the principal of the loan
• A reduction in the amount of interest that has accrued on the loan
• Extension of the term of a loan at an interest rate that is below the current market rate

Modifications that are considered to be TDRs may need to be reported as nonaccrual assets, and they may need to be considered when estimating a creditor’s Allowance for Loan and Lease Losses (ALLL). In some cases, these loans may need to be charged off.

Originally published: May 31, 2020 -- Updated: December 28, 2021

UPDATE: While Governor Pritzker’s executive order had placed a halt on vehicle repossessions, this restriction expired on August 22, 2020. For more than a year, auto lenders and other creditors have been able to engage in asset recovery methods and repossess property in cases where debtors have defaulted on loan payments. However, as the COVID-19 pandemic continues to affect people, some creditors may be hesitant to move forward with repossessions, and they may be looking to determine whether other alternatives are available.

When a debtor who owes money to a creditor defaults on these obligations, the creditor will have a number of options for recovering the amount that is owed. However, debtors have the option to file for bankruptcy, which will affect a creditor’s ability to collect debts. Debtors who have secured debts such as home mortgages or auto loans may pursue Chapter 13 bankruptcy, or they may use this type of bankruptcy to avoid the liquidation of certain assets. A Chapter 13 bankruptcy will create a repayment plan that will allow some of the person’s debts to be repaid over a period of three to five years. In these cases, creditors will need to be sure to understand how they can protect their rights and their ability to recover at least some of the debts that are owed.

Priority of Debts in a Chapter 13 Bankruptcy

A Chapter 13 repayment plan will be created based on a debtor’s disposable income. The amount that a person will be able to put toward their repayment plan each month will be calculated by considering all forms of income and subtracting applicable expenses, including taxes, living expenses, utilities, transportation costs, and union dues. The amount remaining will be considered disposable income that the debtor may use to make ongoing payments throughout the entirety of their repayment plan.

When determining how the amount paid through a repayment plan will be allocated between different creditors, certain types of debts will be prioritized differently. Domestic support obligations, including child support or spousal support, are given the highest priority. Secured debts will usually be given the next highest priority. Unsecured debts will be addressed after payments are applied toward other types of claims. When debts are classified into different categories, the debts within each category must be treated equally, and a plan cannot unfairly discriminate against different claims within a certain class.

A creditor’s ability to collect debts that are owed will be affected by a debtor’s bankruptcy filing. After a debtor files a bankruptcy petition, the creditor will be subject to an automatic stay that will prevent them from taking any collection actions. However, there are some situations where creditors may be able to file a lift stay motion asking the court to allow them to take action to protect their financial interests. By working with an attorney who has experience in matters involving debt collection, a creditor can make sure they will be able to recover as much of what is owed as possible.

Relief From the Automatic Stay

In general, a creditor may be able to lift the automatic stay if they can show that they will suffer immediate and irreparable losses due to their inability to collect debts. The court may allow the automatic stay to be lifted in multiple situations, including:

Lack of equity in property secured by collateral - In a secured debt such as a home mortgage or auto loan, the property purchased through the loan will serve as collateral. If the value of the property is less than what the debtor owes on the loan, the debtor will not have enough equity in the property to repay what is owed. In these cases, a creditor may be able to have the automatic stay lifted so that they can proceed with a mortgage foreclosure or the repossession of property. Even if a lift stay motion is not granted, a creditor may proceed with repossession if a debtor does not take steps to redeem or reaffirm a secured loan within 30 days after filing for bankruptcy.

Creditors lend money to debtors under the presumption that these debts will be repaid. If a debtor fails to make the required payments, creditors can take action to collect the debts that are owed. However, there are a variety of laws that apply to debt collection, including the Fair Debt Collection Practices Act (FDCPA). Creditors and collection agencies will need to make sure they are in compliance with these laws, and they can make sure they are doing so by working with an experienced debt collection attorney.

Restrictions on Debt Collection Activities

In general, the FDCPA prohibits creditors and debt collectors from engaging in unfair or harassing actions against debtors. The restrictions that apply under this law include:

• When a debtor can be contacted - Creditors cannot contact debtors at times that are known to be inconvenient. The law specifically prohibits calls made to a debtor before 8:00 a.m. or after 9:00 p.m. in the time zone where the debtor is located. However, there are some cases where creditors may receive permission from a court or a debtor to contact a person outside of the hours that are normally allowed.
• Harassment or abuse - Debt collectors cannot attempt to intimidate debtors into complying with their requirements. Prohibited actions include threats of violence, the use of obscene language, coercion through threats to ruin a person’s reputation, or repeatedly contacting a debtor without providing identifying information or describing the types of debts that are being collected.
• False or misleading statements - A debt collector cannot lie about their identity, such as by claiming to be a law enforcement officer or government official. They cannot falsely report the amount that is owed or make any untrue statements about whether a person will be arrested or face criminal prosecution if they do not pay the debts owed.
• Unfair debt collection practices - Creditors cannot charge unauthorized fees when collecting debts, and any additional charges must be allowed under the original contract with the debtor or any applicable laws. Creditors are also prohibited from publicly revealing that a person owes debts or the amount that is due, such as by including this information on a postcard sent to a debtor.
• Who can be contacted - A creditor may communicate directly with a debtor. This communication will usually be limited to contacting a debtor at home or via a personal phone number or email address. In some cases, a creditor may be able to contact a debtor at their place of employment, although this will be prohibited if a debtor notifies a creditor that they should not be contacted in this manner. If a debtor retains an attorney, creditors or debt collectors must communicate with the attorney rather than contacting the debtor directly.

Contact Our Chicago Creditors’ Rights Attorneys

While creditors have a number of options for collecting debts, they may run into trouble if they violate the FDCPA or other laws that apply to them. Creditors can ensure they are in compliance with all applicable laws by working with an attorney. Walinski & Associates, P.C. can provide legal representation for creditors, and we can help pursue legal action against debtors who have failed to meet their obligations. Contact our Chicago debt collection lawyers today at 312-704-0771 to learn how we can address your legal needs.

Mortgage lenders have options for ensuring they receive the amount owed from homeowners, and when a person defaults on their mortgage payments, a lender can initiate foreclosure proceedings. However, second mortgagees may be unsure about their options in these cases, including whether they can collect payment following a short sale or another situation where the sale of a home will not fully cover the amount owed. By working with an attorney who understands laws that affect debt collection, second mortgagees can determine their best options for receiving payments following a foreclosure.

Foreclosure and Subordinate Loans

In a second or subsequent mortgage or home equity line of credit (HELOC), a borrower will be taking out a loan against the equity they own in their home. Most of the time, these loans are considered to be subordinate loans, and the first mortgage will have the priority claim to the property. If a homeowner defaults on their first mortgage, the lender may foreclose on the home. Second mortgagees may also initiate foreclosure proceedings if the homeowner has remained current on their first mortgage but has defaulted on subordinate loans.

During the foreclosure process, a home will be sold, and the proceeds of the sale will be used to pay off the amount owed by the homeowner. A first mortgage will have priority, and second mortgagees will only receive payments if there is enough money left over after paying off the first mortgage. In short sales or other situations where a home is sold for less than what is owed on a first mortgage or any subsequent mortgages, a second mortgagee may not receive enough to fully cover the amount that is owed.

When a debtor files for bankruptcy, this can put creditors in a difficult position. Loans from creditors to debtors are made with the presumption that the debtor will repay the amount that is owed. While bankruptcy may relieve debtors of their obligations to repay certain debts, it will also allow for some of these debts to be repaid. When an individual files for Chapter 13 bankruptcy, or when a business files for Chapter 11 bankruptcy, the debtor will propose a reorganization/repayment plan in which they will pay off certain debts. If this plan will not properly address some of the debts that are owed, creditors may object to the confirmation of the plan. By understanding when these objections can be made and the potential reasons for objecting, a creditor can ensure that its financial interests will be protected.

Issues Affection Objections to Confirmation

A creditor must have “standing” to object to the confirmation of a bankruptcy reorganization plan. Generally, a creditor will be able to object if they are a “party in interest,” meaning that they have a financial interest in the outcome of the bankruptcy case. A creditor must also be directly affected by the issues that are being challenged in the plan, and their objections must be based on the potential unfair losses that they may experience if the plan is confirmed.

Objections to confirmation will often be based on the best interests of the creditor. A reorganization plan must pay creditors at least the amount they would receive if the debtor’s assets were liquidated in a Chapter 7 bankruptcy. Creditors may also object on the basis that the amount of a debt has been understated, that certain priority debts have not been included in a reorganization plan, or that a debtor’s disposable income was calculated incorrectly. Objections may address the amount that will be repaid, the timing of payments, or the classification of debts.

Car loans are some of the most common types of debts held by consumers, and in most cases, auto lenders have options for recovering what is owed when a debtor fails to meet their obligations. While a lender may be able to repossess a vehicle following a default by a debtor, this may not fully cover the amount owed on the loan. In these cases, lenders may pursue a deficiency judgment against the debtor. Lenders should be aware of the potential issues that may affect them in these situations.

Issues That May Affect Deficiency Judgments

After a lender repossesses a vehicle, it may sell the vehicle through an auction or other methods. If the amount received from selling the vehicle was less than the amount that the debtor owed on their auto loan, the lender may attempt to collect the additional amount owed, as well as costs related to the repossession, through a deficiency judgment. Lenders should be aware of issues that may affect their ability to collect a deficiency judgment, which may include:

• Notice - A lender is required to mail a debtor a notice stating that they have the right to redeem the vehicle by paying off the loan and any other amount owed. Depending on the loan agreement, a lender may also provide the debtor with the option to reinstate the loan by making up all past-due payments, penalties, and other costs. If a lender did not provide the debtor with the proper notice or failed to provide other required information, such as a full description of the deficiency balance, the lender may not be able to collect a deficiency judgment.

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Creditors will often need to address situations where debtors do not pay the debts they owe. While creditors can often take action to recover what is owed through debt collection practices, they may be concerned about their ability to collect debts when a debtor files for bankruptcy. In these cases, creditors will need to understand how different types of debts are prioritized and when they may be able to recover what is owed.

Bankruptcy and Priority of Claims

A creditor’s ability to recover debts during a bankruptcy case will depend on their type of claim and whether the debtor is filing for Chapter 7 or Chapter 13 bankruptcy. When a debtor files for Chapter 7, the bankruptcy trustee will liquidate their non-exempt assets, and the proceeds will be distributed among the creditors. When a debtor files for Chapter 13, they will submit a proposed repayment that will last for a period of three to five years, and these payments will be distributed among the creditors whose debts are included in the plan.

Debts are repaid to creditors in the following order:

For most of 2020 and 2021, mortgage lenders have been unable to pursue foreclosures in cases where homeowners have federally-backed loans. The CARES Act placed a moratorium on foreclosures, and it also allowed borrowers who have been affected by the COVID-19 pandemic to receive a forbearance of mortgage payments. This moratorium ended on July 31, 2021, allowing lenders to pursue foreclosures in certain cases. However, the Consumer Financial Protection Bureau (CFPB) has created new rules requiring lenders to meet certain requirements before initiating foreclosure proceedings, including providing loan modification options for borrowers.

Requirements for Mortgage Loan Servicers

Under the CFPB’s rule, mortgage lenders and servicers will need to meet certain requirements before they can initiate a foreclosure prior to January 1, 2022. A borrower must be given the opportunity to complete a loss mitigation application, and after an application has been submitted, a lender can only pursue foreclosure if the borrower is not eligible for loss mitigation, rejects all loss mitigation options, or does not meet their requirements to complete a loan modification. Foreclosures can also be initiated if a property has been abandoned or if a borrower does not respond to a lender’s loss mitigation outreach attempts for 90 days.

For borrowers who have received a forbearance due to hardship related to COVID-19, the lender must contact the borrower at least 10 days but no more than 45 days before the end of their forbearance period and advise them of their loss mitigation options. Lenders are required to use reasonable diligence to help a borrower complete a loss mitigation application. Even if a borrower does not fully complete an application, a lender may offer loan modification options. However, certain restrictions apply to these modifications:

When a borrower defaults on a loan, a creditor has the right to repossess the collateral used to secure the loan. This option may be used by auto lenders or other creditors, and a vehicle or other property may be repossessed if a borrower fails to make the required payments. However, a debtor may attempt to avoid repossession by hiding a vehicle or other property, keeping it locked inside a garage, or moving it to a location where it cannot be accessed. In these situations, a creditor may be able to file a detinue complaint against the borrower, asking the court to require the debtor to turn over the property or face consequences.

When Is Detinue Appropriate?

Typically, creditors use the legal process of replevin to repossess property. In these cases, a creditor will be required to post a bond, and a court order will be issued giving the sheriff the authority to seize the property. A representative of the creditor will usually need to accompany the sheriff when executing the repossession order. However, if the property cannot be located, a replevin action may not be appropriate. 

Detinue differs from replevin in that it will seek recovery of property that is wrongfully held or retained by a borrower rather than property that has been wrongfully taken. When pursuing a detinue complaint, a creditor will ask the court to issue an order requiring the borrower to turn over the property in question or repay the creditor for the value of the property that has been wrongfully sold or destroyed. If the borrower refuses to comply with the court’s orders, they could be held in contempt of court and face penalties such as fines or jail time.

One of the most frustrating issues a creditor faces is when a customer stops paying their bills and their past due balance begins to accumulate despite the creditor’s attempts at collecting. That frustration can rise even more if the customer files for bankruptcy. When a person files for bankruptcy, the courts issue an injunction, referred to as an automatic stay, that halts all debt collection activity. Creditors who face this situation should speak to a Chicago debt collection attorney to find out what rights they have when it comes to collecting what the customer owes them.  

Bankruptcy Options

When an individual files for personal bankruptcy, they usually have two options, Chapter 7 or Chapter 13. A Chapter 7 bankruptcy is often recommended for people who do not own a home since it involves selling off any property the person has in order to pay off debts, although there are some exemptions to what type of property can be sold. It is often referred to as liquidation bankruptcy.

Chapter 13 bankruptcy provides bankruptcy filers the opportunity to restructure their debt, allowing them to keep their home and other property. It is usually the choice for people who have secured assets (home, vehicles, etc.). The court approves a repayment plan that allows the person to repay their debt over a period of three to five years. Once the repayment period is complete, any remaining debt is charged off.

At one time or another, most businesses will find themselves dealing with a client or customer who – for whatever reason – refuses to pay a bill. No matter what attempts the business makes to collect what is due them, the debtor still will not pay. There are several options a company has at this point, including hiring a collection company or retaining the services of a debt collection attorney.

Given the state and federal laws that have been put in place to protect debtors, it is important for creditors to make the right choice when turning to a third party for assistance.

What Is the Difference Between a Debt Collection Attorney and a Collection Agency?

When deciding which is the best choice, a business needs to determine how far they are willing to go to collect the debt. Is this debt something your company will pursue in civil litigation, if necessary? Although both a collections attorney and a collection agency have the same end goal, there are several critical differences to be aware of on their ability to reach that goal.

We have all heard the saying “money is not everything” at some point in our lives. While the phrase is a classic adage for a reason, there are situations in which money is, in fact, the most important thing. It is not uncommon for people to borrow money for a variety of purposes, such as purchasing a home or buying a vehicle. However, when they do not follow their promise to repay that money, they can find themselves in trouble. As a creditor, you have the right to take action against anyone who does not abide by the terms of your repayment agreement. In some cases, this may lead to filing a lawsuit against the debtor. If you are successful, you can then have a judgment entered against your debtor, providing you with several options for collecting the money owed to you.

Citations to Discover

In most cases, the first step taken to recover payment is filing a citation to discover, which is a tool that allows creditors to uncover, freeze, and recover assets from a debtor. A citation to discover creates a continuing lien or freeze on all of the debtor’s eligible property, preventing them from using or disposing of the assets. The main benefit of the citation to discover is that it can uncover all of the assets a debtor has. You will determine which assets you can and cannot focus on recovering to satisfy the amount owed to you.

When you file a citation to discover, you must also serve your debtor with these forms. However, you cannot personally do so -- you must use the county sheriff or you must hire a private process server to deliver the forms. Once the forms have been delivered, your debtor will be required to appear in court. If they do not appear, the judge may find them in contempt of court. If they do appear, you will be permitted to ask the debtor questions about his or her income, property, and other assets. You can ask the debtor if they will agree to a payment plan for their debt owed. If they do not agree to the payment plan, you can ask the judge to award you certain assets from the debtor’s estate to satisfy the judgment. 

For many people who are struggling with overwhelming debt, one of the things that holds them back from filing for bankruptcy is the myth that they will lose everything that they own as a result. While it is true that there may be some assets that must be given up during the bankruptcy process, many of these assets are considered exempt property, or property that is not able to be included in the bankruptcy estate. As a creditor, you should know which property is and is not able to be used to repay debts.

Illinois Property Exemption

When a person files for bankruptcy, they will be assigned a bankruptcy trustee who is responsible for gathering, overseeing, distributing, and/or protecting the debtor’s property that is contained in the bankruptcy estate. The bankruptcy estate contains nearly everything that the debtor owns and is used to pay back creditors in some situations. However, certain property is excluded from being used to repay creditors. This is called exempt property and varies from state to state, in addition to federal exemptions.

In Illinois, however, residents are only able to use the state’s set of exemptions, instead of being able to choose between the state’s and federal exemptions. When looking at a debtor’s bankruptcy estate, some of the applicable exclusions may include:

The COVID-19 pandemic has affected the world in horrific ways. Many people are still experiencing financial difficulties because of the pandemic. Various types of businesses across the country were shut down for months at the height of the pandemic, leaving millions of people without a job and without income. Now, a year later, the economy is slowly starting to pick back up, but many people are still struggling financially and missing payments on debts they owe. As a lender, not receiving payments can also be financially burdensome, forcing you to take action. In many cases, a lender will send an individual’s debt to a collection agency. However, sending a debt to collections is a big decision to make that could greatly affect the borrower and have an impact on the amount you receive. How do you know if sending a debt to collections is the right call?

Reasons to Consider Debt Collection

Before you decide to send a debt to collections to attempt to receive the money you are owed, there are several things that you should consider. Here are a few factors that may indicate that it is time to use a collection agency:

• It has been more than 90 days since your debtor’s payment was due. You cannot just immediately refer a borrower to a collection agency if their payment is late. Many people make late payments, but they do so consistently. However, when a payment is more than 90 days late, this should raise red flags, especially if the borrower typically pays on time.

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This past year has been difficult for many people because of the ongoing COVID-19 crisis. Across the country, people and businesses alike have had trouble making ends meet, with many comparing this situation to the Great Recession in the late 2000s. According to the American Bankers Association (ABA), consumer credit delinquencies rose at the end of 2020, despite those numbers decreasing in the prior two quarters. All 11 loan categories saw an increase in the number of delinquent accounts, with home equity and mobile home loans seeing the largest increase. Nobody likes a late-paying customer, but there are ways banks can help keep the number of your delinquent accounts to a minimum. 

Be Proactive With Your Customers

The best way to deal with delinquent customers is to try to prevent them from becoming past-due. You can do this by implementing a number of practices, like email communications, notices through the mail, or phone calls. Giving your customers multiple reminders about upcoming payments may help prevent their accounts from going delinquent.

Clear Communication Goes a Long Way

Try to prevent any confusion about how much your customer owes on their account. You should take a second look at how you invoice and bill your customers. Make sure your invoices are not too cluttered or confusing. The focus of the invoice should be on the payment amount that is due, the date it is due, and what types of payment you accept. You can also use your invoices as a way to restate your payment policy and ensure debtors understand late payment penalties. 

Those who always pay off their credit card balances at the end of every month and pay all of their other debts on time may never come into contact with a debt collection agency. A debt collection agency is a separate company that many lenders and creditors use to facilitate the retrieval of unpaid debts from consumers. Most of the time, hiring a debt collection agency is used as a last resort, after a creditor has already tried and failed several times to recover the payments themselves. A debt collector can be a good choice for some lenders and finance companies, but there are federal rules and regulations that they are subject to. Before hiring a debt collection agency, you should be aware of the limitations they have.

Rules for Debt Collection Agencies

Debt collection agencies will typically try various methods to retrieve past-due debt, including calling the debtor, mailing delinquent notices to the debtor’s address, and even visiting the debtor’s residence in extreme circumstances. The Federal Trade Commission (FTC) is the governing body that oversees the practices of debt collection agencies to ensure everyone is in compliance with the Fair Debt Collection Practices Act (FDCPA). According to the FDCPA, forbidden actions by debt collection agencies include:

• Harassing debtors about their debt: This means a debt collection agency cannot do certain things that a person might find harassing or abusive. Things such as threatening violence toward the debtor or their property, using obscene language when talking with the debtor, or repeatedly calling after a debtor has requested calls to stop all qualify as harassing behaviors.

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For many people, one of the fairly attractive parts of filing for bankruptcy is the automatic stay that takes place when they file a bankruptcy petition. This automatic stay will require creditors to cease all collection activity while the bankruptcy case is ongoing. This means that you, as a creditor, can no longer contact the debtor in any way or have another agency or individual contact them on your behalf for purposes of collecting debt. The discharge of debt through bankruptcy typically results in some sort of financial loss, which can put stress on any business. If your debtor has filed for bankruptcy, there are certain cases in which you can file for a motion to lift the automatic stay with the bankruptcy court, which would allow you to continue collection practices.

What You Should Include in Your Motion

To lift the automatic stay during a bankruptcy case, you must file a motion to do so. This motion must contain certain information for the court to consider before it will make its decision. Before you file your motion to lift the stay, you should be sure it includes:

• A clear and concise statement that sets forth all of the alleged facts that are grounds for relief specific to the case.

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Whether you are from a bank, a credit union, an auto lender, an equipment lender, a truck lender, or another financial institution that might be involved in bankruptcies or other debt collection activities, you might find that sometimes you need more assistance with judgment enforcement. Simply having a judge declare that money or other assets are owed to you or whoever you represent might not be enough to repossess or recover the assets from the debtor. For instance, the debtor might be ignoring your phone calls and letters or the debtor might be hiding the assets you are trying to repossess. Whatever the case may be, using the full power of the law at your disposal is a good idea to recover what the courts determine is yours. That is when you should call upon a professional judgment enforcement attorney to learn what they can do for you. 

4 Ways a Judgment Enforcement Attorney Can Assist You

Among the many ways a judgment enforcement attorney can help you with your court-enforced debt collection case are: