Can I wipe out tax debt in bankruptcy?

This post describes how to deal with tax debt in bankruptcy.  Tax debt is one of the hardest kinds of debt to shake. First of all, the IRS knows where you are. Also, they have special enforcement powers to collect their debt. They can put a lien on your house or your property without suing you. They can take money in your bank account without a judgment. They can seize tax refunds. They can take you social security. And they can also garnish your wages, often for a lot of money. But contrary to popular belief, tax debt can be wiped out in bankruptcy , especially if it's old. Here's how it works.

1. The rules: For income tax debt to be wiped out in bankruptcy, the following three rules must apply:

Rule 1: The income tax return must have been due more than three years ago. The first question we ask to figure out income tax dischargeability is whether the tax return was due more than three years before the date of bankruptcy filing. 2008 income taxes were due on April 15, 2009. Today is February 8, 2012. These taxes are not dischargeable today, but they pass this test if we wait until April 16 to file. But there's one wrinkle. If you filed for a six-month extension that year, your tax return wasn't due until October 15, 2009. So if you're looking to discharge income taxes, we can't file your bankruptcy case until October 16, 2012.

Rule 2: The income tax return must have been filed more than two years ago. This one seems easy. If the return was filed more than two years before today, this test is satisfied. In some cases, the taxpayer never actually files a return, and so the tax agency files one for them (sometimes called a "substitute return."). When that happens, the two-year clock never starts running, and until the taxpayer actually files his/her own return, this test can never be met.

Rule 3: The tax must have been assessed more than 240 days ago. This means that the tax agency's determination that you owe a debt must have been made more than 240 days ago. The "determination" can be a few different things--wither you filed your return and acknowledged you owe a balance. That's an assessment. Or the IRS changed your return to say that you owed a balance. That's an assessment too. Finally, if you were audited, and the IRS added a balance based on the results of the audit, that's an assessment too. This part of the test is the most confusing, and you might want to see a tax professional (tax accountant or attorney) to figure out the assessment date.

2. Other factors add time to the clock. If you've filed bankruptcy before, the amount of time your case was open, plus six months, are added to all the time limits above. Also, filing an Offer in Compromise with the tax agency can stop the clock.

3. Some kinds of taxes are never dischargeable. Income taxes can be discharged if they meet all the above tests. There are other kinds of debts, such as sales taxes or payroll taxes collected on behalf of an employee, that will never be dischargeable. See a tax attorney if you're facing these types of debts.

4. If a tax debt can't be discharged, you still may be able to stop collection by filing Chapter 13. Chapter 13 bankruptcy stops all collection efforts by a tax agency, and allows you to spread the tax debt over a three to five-year period. This can be a big relief when the tax agency is looking to put liens on your property or garnish your wages, sometimes up to 90 percent of your income.

Common credit report errors to look for on your report

Your credit report is becoming increasingly important in our data-driven society. Lenders use it to determine your eligibility and terms for all types of credit. Employers may use it to determine whether to hire you. It's therefore critical to review your credit report on a regular basis to make sure it doesn't contain any incorrect information. Studies have shown that nearly 80% of credit reports contain a mistake of some kind. Here are some of the common credit report errors:

• Incorrect name. Make sure your name is right, especially if your name is relatively common. An incorrect middle name or nickname may be a sign that someone else's information is incorrectly on your report. For example, if your name is Samuel and you sometimes go by Sam, make sure that the name Samantha isn't showing on your report.

• Inaccurate biographical info. Similarly, make sure that the correct social security number and address appears on your report. Most reports will also list previous addresses. Make sure these are accurate too. If an address you never lived at shows up on your report, that's a sign that someone else's info may be on your report.

• Mistaken account status. Review each account to be sure that current accounts are not reported as delinquent and that open accounts aren't showing as closed.

• Duplicate reporting. Make sure that accounts aren't mistakenly listed twice on your credit report. This could lead a lender to believe that you have more debt than you actually do.

• Accounts that aren't yours. Any accounts that don't belong to you should be an immediate red flag. This mistake is often caused when your file is mixed with another person's file. It could also be a sign that someone has stolen your identity and fraudulently opened accounts in your name.

If your credit report contains these, or other mistakes, your next step is to notify the credit reporting agency of the errors and ask it to correct them. This dispute will trigger the agency's duties under the Fair Credit Reporting Act. Normally, credit reporting agencies have 30 days to investigate credit report errors and correct them. Unfortunately, these agencies don't always take consumer disputes seriously and you may have to dispute multiple times to get the mistake corrected. If you've sent multiple disputes and the credit reporting agency still hasn't corrected your credit report error, you may want to consult with an attorney who handles credit reporting issues. An attorney can advise you about your options to get your inaccurate credit report corrected.

How does Chapter 13 work?

How does Chapter 13 work? Clients are asking us about Chapter 13 Bankruptcy, and while it has some similarities to Chapter 7, it's also way different. Chapter 7 fits best where you can't pay your debts and don't have many valuable possessions, but Chapter 13 makes sense if you have substantially more income (you can pay a portion of what you owe over time) and/or you own property that is not covered by the bankruptcy exemptions.

Chapter 13 can stop foreclosure

We often use Chapter 13 to stop foreclosure. Chapter 13 can allow a homeowner to catch up on missed mortgage payments, pay tax debts over time, or to wipe out an underwater second mortgage.

How Chapter 13 works

We figure out your disposable income, which basically means your take-home pay minus your actual living expenses.

How much do I have to pay to creditors? Once we know your disposable income, that may be close to what your "plan payment" will be. Your plan payment is the amount of money you will pay to your creditors over a three-to-five-year period. In general, your plan payment goes to pay off your secured debt (like a car loan) in full, as well as your priority debt (overdue taxes, government penalties, etc.) A portion of your general unsecured debt (credit cards, medical bills, legal judgments) is paid out of the rest of your plan payment, but that doesn't have to be paid in full, and lots of times, can be paid at pennies on the dollar..

How do I make my plan payments? You make plan payments directly to the Bankruptcy Trustee, who tacks on an additional fee (in Minnesota, the fee is about 7 percent of your payment) and spreads each payment out to your creditors. You need to have steady enough income to stick to payments, because if you miss them your case will almost certainly be dismissed.

How much does Chapter 13 cost? The filing fee is currently $310, which is 25 bucks less than the Chapter 7 filing fee. The total attorney's fee for Chapter 13 is usually more than Chapter 7, but most times you end up paying the same or even less, since we have the ability to take some of our fees from the plan payments, meaning that it comes out of your creditors' pockets, not yours.

How do we know which chapter you should file? There are a few common scenarios where you might choose a Chapter 13 bankruptcy.

• Your net income is too high for Chapter 7 (you don't pass the means test)

• You own a home but you're behind on your mortgage or facing foreclosure

• You're way underwater on a second mortgage

• You are behind on your debt payments, but you can catch up if you just had more time

• You have valuable property which is not exempt, but you can afford to pay your creditors over time

How do I stop foreclosure?

The most common problem people come to see about is foreclosure. Knowing you might lose your home in foreclosure is scary, but there are a lot of ways we can help you get back into good standing on your mortgage so we can keep you in your house. In this post I run down some of the options out there:

1. Try for a loan modification. In our opinion, most of the loan mod programs out there are nearly worthless. HAMP can be a good fix for a homeowner behind on payments, since it reduces monthly payments AND puts your loan back into good standing. But since there's no way to force lenders to comply with HAMP, most people are left out in the cold (and pushed into foreclosure). It's been very rare to see a homeowner get a HAMP modification, but that doesn't mean you shouldn't try it, hoping to catch the right person on the right day and catch a lucky break.

As for the lenders' "internal" modification programs, your guess is as good as ours whether you'll qualify.  Since the criteria and terms of these mod programs are usually secret, you're at the lender's mercy. So if you go this route, negotiate and negotiate hard. Even though the customer service rep on the phone might not realize it, the bank is probably going to lose a lot of money if they foreclose on you. Show them why. It might be helpful to order an appraisal--if the lender knew your house was $100,000 underwater, they might not think it's such a good idea to kick you out of it.

2. Don't hire loan modification sleazeballs. If foreclosure is the number one problem we see in our office, 1A is people who have paid sleazy loan modification outfits to help them stay out of foreclosure. These programs are expensive, and most of the time they just don't work. In particular, stay away from: 1) out-of-state companies (it's harder to get your money back), 2) companies that tell you to stop making your mortgage payments; and 3) for-profits that ask for a large up-front fee without telling you what they can do for you or how they can do it. So many people get caught up in these scams, and it only creates a bigger mess to clean up once the scammer runs away with the money and leaves you right where you started or worse.

3. Consider Chapter 13 reorganization. Chapter 13 is a way to force a lender to accept repayment of your arrears over time. It's ideal for the person who missed a bunch of payments, but now has the income not only to make the payments, but also to catch up and stop foreclosure. Chapter 13 allows you to pay your mortgage arrears in equal installments over a three- to five-year period. It can be surprising when a lender refuses to let you catch up on your mortgage, even when it knows you have the income for it. This way you can call the shots and force them to accept your money.

4. Strip off your second mortgage. If you didn't have to pay your second mortgage, could you afford to catch up on your mortgage? As of earlier this year, in a Chapter 13 reorganization we can strip second mortgages (and third mortgages, and fourth...) where the value of the house is less than the balance of the first mortgage. It's called lien stripping. To do this, we need an appraisal to prove the value of your home. Once we can prove that your second mortgage is fully unsecured, we can strip the lien in Chapter 13.

5. More people have just been moving on. If you can't afford your mortgage payment, can't qualify for a modification, and bankruptcy won't help your situation, it's time to make some hard choices. If you have an underwater house, meaning you have no equity, what do you really own? And if you have to pay $10,000 just to get back into good standing, is it really worth it? If you decide to abandon a home to foreclosure, you can usually live in the house mortgage-free for at least six months while the foreclosure runs its course. For many of our clients, this is just enough time to save up some money to make the transition to a new place to live comfortably. And if you have a second mortgage that won't go away in the bankruptcy, well we can usually wipe that out in Chapter 7.

Fair Credit Reporting Act (FCRA): an overview

The Fair Credit Reporting Act is a federal law that regulates consumer credit reporting agencies, such as Experian, Equifax, and TransUnion. The FCRA also regulates those who provide information to the credit reporting agencies and those who use the information in a consumer credit report.

Studies have shown that nearly 80% of consumer credit reports contain errors of some kind. Examples of the type of errors found include accounts mistakenly listed as delinquent, loans listed twice, and inaccurate personal information. As the credit reporting industry has increased their use of automated procedures, additional problems have arisen. One common such problem is when information for one person is listed on another person's report (known as a merged or mixed file). A similar problem arises when someone's identity is stolen and accounts are opened fraudulently. These fraudulent accounts then show up on the identify theft victim's credit report and can be difficult to get removed.

There are a couple of reasons why inaccurate information ends up on a credit report. First, the information provided to the credit reporting agency may itself be inaccurate. Second, the CRA might assigned the reported information to the wrong consumer's file. Whatever the reason, these mistakes may lead to a person being denied for credit or receiving credit on less favorable terms. And increasingly, many employers are reviewing a job applicant's credit history when making employment decisions, which creates the possibility of a person being denied a job based on incorrect credit report information.

Unfortunately, the FCRA does not require credit reporting agencies to report accurate information. It merely requires them to use reasonable procedures to ensure the maximum possible accuracy. The Act is a bit toothless in this regard. Where the FCRA does have some teeth, however, is in its investigation requirement. Under the FCRA, if a person disputes information in her report to a CRA, the agency must investigate the dispute and correct the disputed information. Despite this clear-cut obligation, many consumer disputes do not result in the inaccurate information being removed from their report. One possible reason for this is that the CRA's customers are lenders, not consumers. For this reason, reporting agencies have an incentive to over-include items at the expense of accuracy.

Fortunately, the CRA's failure to conduct a reasonable investigation runs afoul of the FCRA and the person may bring a lawsuit to enforce the law and hold the CRA accountable. If the consumer proves that the CRA willfully failed to conduct a reasonable investigation of the dispute, she is entitled to $1,000 in statutory damages or her actual damages (such as loss of credit, higher interest rates, or even provable emotional distress). If, however, the credit reporting agency was merely negligent in failing to conduct a reasonable investigation of the dispute, the person is only entitled to her actual damages. If no actual damages are suffered, the consumer will lose the suit. In addition, the FCRA requires the credit reporting agency to pay successful consumer litigant's reasonable attorney fees and costs.

If you learn of a mistake on your credit report, your first step is to dispute it with the credit reporting agency. If the CRA fails to correct the error after receiving your dispute letter, you may consider talking to an attorney who handles FCRA cases. The attorney will be able to recommend next steps to get the mistake fixed and will be able to advise you if a FCRA lawsuit is an option.

How taxes can be wiped out in Chapter 13

Many of our Chapter 13 clients are struggling with tax debt. Tax debt can be tricky in Chapter 13 bankruptcy, but here are a few advantages and disadvantages you'll want to know about if you have significant tax debt.

• Get your tax transcripts. To diagnose and fix your tax problems, you'll need to get account transcripts from the IRS for each year you owe a balance. These documents are a history of when your tax was due, when the return was filed, and when each charge was added to your account. You'll can get account transcripts on the IRS web site. If you have trouble getting these before you make your appointment, we can get transcripts for you if you give us power of attorney and pay a transcript fee.

• Priority claims must be paid in full. A priority tax claim is an income tax debt that is recent (generally speaking, less than three years old, but the actual calculation is complex and you should speak to an attorney). For the most part, these are the same tax debts that can't be discharged in bankruptcy (with some exceptions), and so you'll want them to be paid off by your bankruptcy. In Chapter 13, a priority tax debt must be paid in full over the life of your Chapter 13 plan (three to five years). So if you owe $10,000 in priority tax debt, you can generally pay that debt in Chapter 13 in roughly $200 a month payments.

• The benefit of priority tax claims in bankruptcy is that they must be paid before non-priority debt, like credit cards or medical bills. So if your disposable income is $250 a month and you owe $10,000 in priority tax debt, the first $200 of each payment will go to taxes, which need to be paid anyway, and only $50 will go to credit cards. The higher your priority debt, the less you'll pay in non-priority debt and the more you can discharge at the end of your bankruptcy case. One thing to remember is that even if you pay priority tax debt in your Chapter 13, you may have to pay some accrued interest (currently four percent) after your plan is over.

• Tax liens must be paid off, but can be modified. If you have a tax lien filed against you, this can present some new problems. Tax debts with liens on them are classified as "secured debts" in bankruptcy. This means that, like priority debts, they need to be paid in full over the life of your plan. What makes secured debts tricky is that the IRS can classify a tax debt as secured even when that debt would otherwise be dischargeable in bankruptcy. This means that by getting a lien, the IRS is preventing you from discharging certain debts in a Chapter 13 case. The good news about tax liens is that they can be "crammed down" in bankruptcy. To determine the secured claim created by a tax lien, you count up all the assets you have. Your secured claim is the lesser of the dollar amount of the lien, or the value of all your property put together. Contact a bankruptcy attorney if you have tax liens, because there are sometimes other creative things we can do to save you money.

• Some tax debts are neither priority nor secured, and these can be discharged in Chapter 13. Some older tax debts can be discharged in Chapter 13. This means that sometimes, when you come to see an attorney about your tax debts, we may advise that you wait to file, in order to age out certain debts and make them dischargeable. If they're dischargeable, this means they get thrown into the pot with all your credit cards, medical debts and personal loans, and they're paid out of your disposable income. Whatever can't be paid out of disposable income after all the other higher-priority debts are paid, are wiped out at the end of a successful Chapter 13.

The Bankruptcy Means Test: Is it going to stop me from filing Chapter 7?

The means test is one of the bankruptcy mysteries our clients ask about most often. The means test was created by the 2005 bankruptcy amendments, and was meant to make it harder for high-income folks to file bankruptcy.

To decide whether clients qualify to discharge their debts in Chapter 7, the courts are concerned with two major questions: 1) Does a consumer have enough assets to pay off their debt? and 2) Does a consumer have enough income to pay off their debt? The means test helps the court answer the second question.

Your attorney will compile the last six months of all income your household has received, and compare it against the median household income of a family your size in your state—for example, as of this post, the median household size for a family of two in Minnesota was $72,734. This information is available on some handy tables on the U.S. Trustee's web site. If your household income is less than the median, congratulations—you've finished the form and you can file Chapter 7!

If your household income is more than the median, you may still be able to file Chapter 7, but there are a whole set of other calculations that your attorney will need to go through involving your monthly expenses to find out. These include some standard expenses that can be found on the U.S. Trustee's web site, as well as some actual monthly expenses. Once you deduct these expenses from monthly income, the goal is generally to have a very low number for your leftover—or disposable—income.

But filling out the means test form requires a whole lot more than just looking up some numbers and plugging them into a chart. First of all, some of the deductions are backward-looking over the past six months. Some are forward-looking. And some are hypothetical (an expense is allowed if you should be spending on it). Also, many of the expenses have rules--you can't take the expense unless certain criteria are met. These rules are based on the Bankruptcy Code and court cases interpreting the bankruptcy law. This is why you'll need a good attorney who knows the ins and outs of bankruptcy, not just someone who will fill out your bankruptcy forms without much legal analysis.

Some cases are exempt from the Means Test, for example, cases where most of the debt is business debt rather than consumer debt, or where the debtor is a disabled veteran or military reservist/guardsman.

These are just the basics. In other articles, we've gone more in-depth so you can understand more about the means test and how you can qualify for Chapter 7 bankruptcy.

Who is National Collegiate Student Loan Trust?

Over the last few years, National Collegiate Student Loan Trust has brought hundreds of debt collection lawsuits against Minnesota citizens. If you've been sued by National Collegiate Student Loan Trust, here's what you need to know.

Who is National Collegiate Student Loan Trust?

NCSLT doesn't lend money. It's merely a series of trusts that contain a pool of hundreds of private student loans. The loans have been packaged together and sold as investment vehicles. If this sounds similar to the way mortgages are handled, it should.

There are several National Collegiate Student Loan Trusts. They are typically named with the year the loan was originated. For example, most of the cases I'm seeing lately involve National Collegiate Student Loan Trust 2007.  I've also seen loans held by National Collegiate Student Loan Trust 2005 and 2006.

How do the student loans get into these trusts?

First, a bank issues a student loan to help someone pay for college. The bank then sells the loan to an entity called National Collegiate Student Loan Funding. This entity is merely a holding company that deposits all of the student loans into the individual trusts. Once the loans are packaged into trusts, bonds are sold to investors. The investors receive money based on the amount of money collected from student loan borrowers.

The trusts themselves don't actually service the loans and collect the payments. They hire someone, called a servicer, to do that for them. In most of the cases I've seen, the servicer is U.S. Bank.

Another interesting element of these trusts is that the loans are partially guaranteed. This means that the investors basically have an insurance policy when student loan borrowers aren't able to make payments. If the borrower defaults, the guarantor steps in and covers the payment.

What should I do if I'm sued by National Collegiate Student Loan Trust?

In my experience, it's difficult to negotiate a reasonable payment plan with National Collegiate Student Loan Trust. They demand that the borrower hand over a bunch of sensitive financial documents, such as tax returns and pay stubs before they'll even consider a settlement offer. And the offers that they make are rarely affordable. To avoid this frustrating experience, I've been advising people to fight back against the lawsuit by answering it and challenging NCSLT's proof in court.

National Collegiate Student Loan Trust can usually prove that they acquired a pool of loans from the originating bank. But, in my experience, they rarely have sufficient proof that they own your loan. There are other ways to challenge the sufficiency of their evidence and, depending on the specific facts involved, you may have other defenses as well. We've been successful getting NCSLT cases thrown out of court and have negotiated very favorable payment plans by pushing back.

How car dealers fraudulently manipulate the interest rate of a loan

Another type of auto fraud related to the vehicle's financing is when the dealer incorrectly discloses the financial terms of the loan. This dishonest practice is designed to dupe the buyer into thinking that the loan is more favorable than it really is.

Under the Truth in Lending Act, the dealer must accurately disclose the amount financed, the finance charge, and the annual percentage rate. Federal law requires that these terms be disclosed in the so-called Truth in Lending box (pictured above). The main point of the Act is to require transparent and consistent disclosure of finance terms so that buyers can easily compare multiple loans and decide which one is best.

Here's what the key terms mean:

Amount Financed. This is the total amount of money you are borrowing from the lender.

Finance Charge. These are all of the charges imposed as a result of the extension of credit. This obviously includes interest, but should also include any other charge that a buyer would not have to pay if it was a cash transaction.

What a shady dealer might do is to manipulate these disclosures to distort the true cost of the credit. The most common way a dealer does this is add a finance-related charge to the "Amount Financed" total rather than the "Finance Charge" total. This little trick will make the interest rate look lower than it really is.

Here's an example. Let's say you're buying a used car for $10,000. The annual interest rate is 10% and you will pay it off over 5 years (60 months). So the $10,000 would go in the Amount Financed box because it's the amount you're borrowing. And the interest amount ($2,621.25) would go in the Finance Charge box.

Because you're financing the transaction, the dealer requires that a GPS unit be installed so that it can locate the vehicle for a repossession if you fall behind on payments. The dealer charges you $500 for the GPS unit. Because the dealer allows you to roll this $500 charge into your loan, it goes in Amount Financed box right? Wrong. The GPS fee should be a Finance Charge because the dealer only requires these GPS units for buyers that finance. It doesn't require them for cash buyers. By fraudulently putting the GPS fee into the Amount Financed box, the dealer keeps the APR at 10%. But if the GPS fee was put in the Finance Charge box where it belongs, the APR jumps to 12.33%. You can verify my math if you like by using this online APR calculator.

The takeaway? Make sure you carefully review the terms of your loan to make sure the dealer isn't trying to scam you. Review every charge and ask yourself would the dealer charge this in a cash transaction? If the answer is no, then it should be a finance charge and disclosed accordingly. If the dealer improperly discloses the financial terms or misstates the interest rate, it likely has violated the Truth in Lending Act. This would give rise to claims for statutory damages, actual damages, and the dealer would have to pay your attorney fees and court costs.

What happens to my car loan when I file bankruptcy?

In this post we discuss what happens to a car loan when a borrower files bankruptcy.

Options in Chapter 7 bankruptcy

In Chapter 7, you have three options for dealing with a car loan. These options are to surrender the car, reaffirm the loan, or "retain and pay."

• Surrender: If you file Chapter 7 and you wish to get rid of your car with a loan, you have the option of surrendering the car to the bank. The upside to this is that you can walk away from the loan, without having to pay any deficiency (i.e. the difference between the amount of the loan and the value of the car that you would generally owe if you walk away form a car loan.) The deficiency is wiped out in a Chapter 7 case.

• Retain-and-pay: This is the most common option for car loans in Chapter 7. You get to "discharge" your car loan, which means they can never come after you personally for any unpaid amount on the loan. However, instead of surrendering the car, you keep the car, and continue making the payments for as long as you want. Both the borrower and lender act as if the bankruptcy had never been filed. Once the loan is paid off, you can get the lien released, and own the car free and clear, just as if you hadn't filed bankruptcy. Some lenders won't go for this, typically credit unions and some banks, and instead they'll demand a "reaffirmation agreement."

• Reaffirmation: Some lenders don't want to let you discharge your personal obligation on the loan, and instead demand a reaffirmation, which is a legal process where you renew your promise to pay the loan, and unfortunately you keep your personal liability. Typically, it's credit unions that tend to demand reaffirmation agreements, and a few banks out there. Ask your attorney if your lender will accept retain-and-pay or demand a reaffirmation. If you choose reaffirmation, you will likely have to go to bankruptcy court so that the judge can explain the consequences to you and make sure you understand.

Chapter 13 tools for car loans

In a Chapter 13 case, you can reduce the principal of the car loan, reduce the interest and catch up on arrears.

• Reduce principal: In Chapter 13 you can "cram down" a car loan, but only if you took the loan out more than two and a half years ago. To do this, we find the current value of the car. Then we can reduce the principal of the car loan from the current balance, to just the value of the car. So if you owe $9,000, and the car is worth $5,000, cram down reduces the balance of your loan from $9,000 to $5,000.

• Reduce interest: For many car loans in Chapter 13, you can reduce the interest rate on the car loan from an exorbitant rate to something more reasonable. In past cases we have reduced interest rates to somewhere between 4 and 6 percent, typically. This can be a big help for subprime car loans.

• Catch up on arrears: In Chapter 13, if you're behind on a car loan, you can use bankruptcy to force the lender to accept catch-up payments. So if you're $1,000 behind on the car, you can take those arrears and stretch them over a three-to-five year period, pay a small monthly payment to catch up (say, $20-35 a month in this scenario), and then resume making your regular monthly payments. This is a good option if you're facing repossession.

If you're struggling with a car loan or facing repossession, and don't know what to do, you have plenty of options inside or outside bankruptcy. Get in touch with a lawyer to learn more about the tools available.

How to stop collection calls from a harassing debt collector

The Fair Debt Collection Practices Act gives you the right to stop collection calls. All you have to do is send the debt collector a letter telling them to cease all communications. There is no magic language required--just say in plain-English that you don't want them to contact you anymore. Keep a copy of the letter for your records and mail it certified with a return receipt so you can prove that the collector received it. Once the collector receives your letter, they must stop contacting you immediately. There are a few caveats here, though:

• If you want to resolve the debt, you may not want to stop all calls. If your goal is to work something out with the debt collector, you probably want to keep the lines of communication open. But if you can't afford to pay or if the debt collector harasses you, it may make sense to cease all future calls.

• The cease request will not stop any legal action. The FDCPA only requires that the debt collector cease communications with you. Courts have found that a person's cease request does not require a collector to stop or forego any collection lawsuits or garnishments.

• The cease request only applies to the collector you send it to. Many debt collectors will respond to a cease letter by transferring the account to a different debt collector. In most cases, your cease request to the first debt collector won't apply to a subsequent debt collector. You will likely have to send that subsequent collector another cease letter.

• Debt collection scammers may not honor your letter. Unfortunately, there are a few debt collection scammers out there. These fraudsters are just trying to get your money--there may not even be valid debt. Compliance with the FDCPA is not a high priority for a scammer, so they probably won't honor your cease request. The best thing to do with these scammers is to make it clear to them that you refuse to pay.

• If a debt collector receives your cease letter and continues to contact you, they've probably violated the FDCPA. One of the most important rights the FDCPA gives a person is the right to stop collection calls. If a collector violates this right, they should be held accountable for their illegal conduct. Consider talking to a lawyer in your area who sues debt collectors under the FDCPA.

You can sue under the FDCPA even if you owe the debt

I'm often asked whether a consumer can sue a debt collector under the Fair Debt Collection Practices Act (FDCPA) if they owe the underlying debt. The answer is a resounding YES! The main purpose of the FDCPA is to protect all consumers against debt collection abuses, whether they owe the underlying debt or not. In fact, most people who sue debt collectors under the FDCPA owe the debt.

The FDCPA prohibits abusive, deceptive, and unfair debt collection practices. Some of the more common debt collection practices prohibited by the FDCPA are:

• informing third parties that you owe a debt;

• contacting you at inconvenient times or contacting you at work after you've told the debt collector not to;

• threatening you with violence;

• using abusive or profane language;

• threatening to take legal action when the debt collector has no intent to do so;

• falsely implying that you committed a crime by not paying the debt.

If a debt collector violates the FDCPA, you have the right to sue the debt collector and recover damages. You are entitled to $1,000 in statutory damages and compensation for actual damages, such as emotional distress. And if your case is successful, the debt collector must pay your attorney fees. Because of this, most consumer lawyers will accept a FDCPA case on a contingency fee arrangement. This usually means you will not have to pay any attorney fees, unless your case is successful.

Can I remove negative, but accurate, info from my credit report?

Generally, you don't have the right to remove negative accurate information from your credit report. Under the Fair Credit Reporting Act, creditors and credit reporting agencies are free to report negative information about you as long as that information is correct. This accurate, negative information can remain on your credit report for seven years in most cases. An exception to this general rule is when your credit report shows accurate, but negative, information multiple times. For example, let's say you have a delinquent credit card account. After a few months of delinquency, the credit card company sells the account to a debt-buyer. If both the original creditor and debt buyer are reporting that you owe money, that's something you could dispute in good faith. Otherwise, it might look like you owe twice as much as you actually owe.

Beware of any company that promises that it can remove accurate negative information. It's likely a credit repair scam. These scams usually prey on people with poor credit. They demand large, up-front fees and promise to get all negative information removed, even if the info is accurate. They try to game the error dispute process by sending repeated and shallow dispute letters in an effort to overwhelm the credit reporting agency into removing the information by mistake. However, the credit bureaus have caught on and this sort of gamesmanship is no longer successful. Save your money and work to rebuild your credit the right way.

How to get your credit report and credit score

Federal law allows you to get one free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and Trans Union) every 12 months. Use the website AnnualCreditReport.com to get your free copy. This is the only website to get your free report. Beware of imposter websites. You can also order your free report over the phone by calling (877) 322-8228 or by mail by filling out this form and mailing it to Annual Credit Report Request Service; P.O. Box 105281, Atlanta, GA 30348. You can order all three reports at once, or you can stagger the reports every couple of months so that you can monitor your credit reports throughout the year. Consider using this staggering technique before you pay for a credit monitoring product.

Your credit report won't contain your credit score, but there are a couple of easy ways to get it. First, many credit cards provide your credit score on each billing statement. If you have credit cards, check your billing statements to see if your score is provided. Another way to get it is to buy it from one of the credit bureaus. You can also buy your credit score at any time from MyFICO.com. Keep in mind that your credit score may be different depending on who you buy it from.

If your credit score seems low, it's possible that errors on your credit report are dragging your score down. That's why it's critical to review your credit reports carefully for some of the most common inaccuracies, as well as signs of identity theft or a mixed credit file. If there are mistakes on your credit report, you should write a dispute letter. If your dispute letter doesn't clear up the problem, or if you've been denied credit due to a mistake on your credit report, you should talk to an attorney who handles Fair Credit Reporting Act cases.

Credit denial due to your credit report? What to do next.

If  your loan application has been turned down, or if your interest rate is higher than it should be, the first thing you should do is find out why. Under federal law, a lender is required to tell you certain things if it denied your credit application or took "adverse action," such as increasing your interest rate. These things include:

• The name, address, and telephone number of the credit reporting agency that provided the report the lender used;

• The credit score it used in making its lending decision and the key factors that affected this score;

• Inform you of your right to obtain a free copy of your credit report from the credit reporting agency that provided the report; and

• The process for fixing mistakes on your credit report.

This information will most likely be provided to you in a letter, called an adverse action notice. Once you have this letter, you should follow the instructions for obtaining a copy of the credit report that the lender used. It can usually be obtained online through the credit reporting agency's website.

Once you have your credit report, you should review it for common errors. If you see accounts that don't belong to you or accounts showing a balance that you've paid off, the next step is to dispute these errors with the credit bureaus.

It's important to note that you must dispute the errors with the credit reporting agencies (ie. Experian, Equifax, or Trans Union) not the creditor (ie. Capital One, Wells Fargo, etc.) to protect your rights.

When the credit reporting agency receives your dispute, they are required to investigate. They are also required to communicate your dispute to the creditor that is reporting the inaccurate information. The creditor is also required to investigate your dispute. Generally, these investigations must be completed within 30 days and the credit reporting agency must notify you of the results of the investigations within 5 business days of the day the investigations were completed.

If the credit reporting agency hasn't corrected the inaccurate information after completing its investigation, you might consider writing a more detailed dispute letter and providing additional documents or information to support your dispute. You may also consider talking to a lawyer who handles credit reporting cases for advice about what to do next. If the credit reporting agency or creditor didn't conduct a reasonable investigation of your dispute, you may have legal claims against them under the Fair Credit Reporting Act. An attorney can advise you about these possible claims and help you with the next steps.

Recovering from identity theft

Identity theft happens when someone uses your personal information to open new accounts or makes unauthorized charges on your existing accounts. According to the most recent data from the Bureau of Justice Statistics, 17.6 million people were victims of identity theft in 2014. That's approximately 7% of all U.S. adults, age sixteen or older. Here are some tips on how to spot identity theft and what to do if you've become a victim of it.

How to spot identity theft

Get in the habit of regularly reviewing your credit reports. The Fair Credit Reporting Act (FCRA) gives you the right to one free credit report every year from each of the three main credit reporting agencies: Equifax, Experian, and Trans Union. You can obtain these free reports from the website AnnualCreditReport.com. This is the only website where you can get your free report. Watch out for imposter websites. If you request the three reports separately and stagger them every four months or so, you can monitor your credit throughout the year at no charge. Consider using this staggering technique before paying for a credit monitoring service.

Once you have your credit report, look for incorrect personal info, such as addresses you never lived at, inaccurate social security number, or incorrect middle names or nicknames. These may be signs of identity theft. You should also look for accounts that you didn't open or for credit report inquires from companies you never applied for credit from. Any accounts you don't recognize should be red flags. Also, if the balances on your existing accounts appear to be much higher than you think they should be, that could be a sign of unauthorized or fraudulent charges.

In addition to reviewing your credit reports, you should get in the habit of checking the monthly billing statements for all of your existing accounts for suspicious charges. It's also important that you don't ignore bills for accounts you don't recognize or debt collection letters or calls for debts you don't think you owe. While it's tempting to assume that these bills or collection efforts are a mistake and will go away, they may very well be a signal that someone has stolen your identity.

Call the companies where you know fraud has occurred

If you spot unauthorized charges on your existing accounts or fraudulently-opened new accounts, you should contact those creditors immediately. It's best to contact the company's fraud department and ask them to freeze or close the account. Make a note of who you talked to and the date you talked to them and keep it for your records.

Place a fraud alert on your credit reports

The next step is to place an initial fraud alert on your credit reports. All three of the main bureaus--Equifax, Experian, and Trans Union--allow you to do this online. A fraud alert is free and it makes it more difficult for someone to open new accounts in your name. An initial fraud alert lasts for 90 days and requires creditors to take reasonable steps to confirm your identity before opening a new account. If you provide a phone number with an initial fraud alert, creditors will contact you before opening a new account.

You may also consider placing an extended fraud alert on your credit reports. An extended fraud alert lasts for seven years and requires lenders to contact you in person before opening a new account. You may also think about a credit freeze. A freeze stops anyone from accessing your credit report until you lift the freeze. Under Minnesota law, victims of identity theft can place a credit freeze for free. Non-victims must pay a fee of $5.

File an Identity Theft Report with the Federal Trade Commission (and consider filing a police report)

You should also file an Identity Theft Report with the FTC, which can be done online at IdentityTheft.gov. After filing the report, the website will create a recovery plan for your situation. You should print the Identity Theft Report and recovery plan for your records. You can also create an account after you file the report, so that you can access your report and recovery plan later.

After you file the report with the FTC, you should consider filling a police report too because identity theft is a crime. Contact your local police department and tell them you want to report that someone stole your identity. You should give them proof of identity, proof of your address, a copy of your FTC report, and all of the information you have about the identity theft. Make sure to get a copy of the police report and keep it for your records.

Close fraudulently-opened accounts and remove unauthorized charges to existing accounts

Make a list of all the accounts opened by the identity thief and any suspicious charges to your existing accounts. Call the fraud department for each of these creditors and provide them with a copy of the FTC Identity Theft Report and police report (if you have one). Ask that all fraud accounts be closed immediately and that any unauthorized charges be reversed. Ask for confirmation in writing that the account is closed or charges are reversed and that you don't have any liability for these accounts or charges. Keep copies of these letters.

Write dispute letters to the credit bureaus for all fraud accounts showing on your credit report

Write a letter to each of the big-three credit bureaus (Equifax, Experian, and Trans Union). Tell them about every single account that was opened through identity theft. A good way to do this is to send them a copy of your credit report and circle or star all the fraudulent accounts. Include a copy of your FTC Identity Theft report and police report if you have one. Make sure to request in your letter that they block all of these accounts from your credit reports. A good sample letter can be found at the FTC website. Keep copies of these letters, as well as copies of the responses you get from the credit bureaus.

If you get collection calls for letters for fraud accounts, notify the debt collector of the identity theft

It's no surprise that most identity thieves don't make payments on the debts they rack up in your name. As a result, many identity theft victims receive collection calls and letters from debt collectors. If this happens, notify the debt collector in writing that you are a victim of identity theft and that you don't owe the money they are trying to collect. Send them a copy of your FTC Identity Theft Report, police report, and any letters from the creditor confirming that you don't owe money. Keep a copy of your letter and any collection letters you get in response. It's also a good idea to keep a call log of all the collection calls and messages you get.

Contact an attorney if the fraud accounts aren't removed from your credit reports after you dispute them, or if a debt collector keeps contacting you after you've told them about the identity theft

If the credit bureaus don't remove the fraud accounts after you dispute them in writing, or if debt collectors continue to hound you after you've told them about the identity theft, you should contact a consumer attorney in your state to discuss the situation in depth. There are powerful laws, such as the Fair Credit Report Act and Fair Debt Collection Practices Act, that can be used against credit reporting agencies, creditors, and debt collectors who don't follow the law. A consumer attorney can help clean up your credit report and stop collection calls, as well as discuss any legal claims that you may have to hold wrongdoers accountable for breaking the law.

What is a "mixed file" on my credit report?

Unfortunately, many credit reports contain errors. One common type of credit report error is the mixed file. A "mixed file" is a term used to describe a credit report when credit information for one person is placed on the credit report of another person, creating a false description of the person's credit history.  Occasionally, this problem is caused by the "furnisher" of credit information (ie. a bank or credit card company). For example, a bank may incorrectly report that a spouse is responsible for a mortgage loan that was only in his wife's name.

More often, a mixed file is caused by the way credit reporting agencies match data to a consumer's file to create his credit report. Credit reporting agencies get mountains of credit data from creditors and public records. This data is then matched to an individual consumer's credit report through identifying information such as name, address, and social security number. Mixed files occur when the credit reporting agency's computer doesn't correctly match the identifying information in the credit data to the identifying information in the credit report. The credit reporting agencies closely guard their exact matching criteria and process, but it appears that commons reasons for mixed files include:

• Mismatches between generations with the same name (ie. Jr./Sr.)

• People with similar names (ie. Jon Smith / Jonathan Smith)

• People with similar social security numbers

Mixed files are a big problem. According to one study, 44% of consumer complaints to the FTC involved mixed files. It's a particularly serious problem with the other person's accounts are delinquent or in collections. This can torpedo your credit score and lead to debt collection calls for a debt you don't owe. And mixed files are often very difficult to fix because it can be difficult to prove a negative--that the account isn't yours. You may have to submit birth certificates, social security cards, or sworn statements in order to prove an account doesn't belong to you.

If your credit report appears to have been mixed with someone else's, the first step is to write a detailed dispute letter to the credit reporting agency. You may have to follow up with additional information if the credit reporting agency requests more details or documents. Unfortunately, many mixed files are not resolved through the informal dispute process and only a lawsuit can get the credit report cleaned up. If you've disputed your mixed file and haven't gotten it fixed yet, your next step should be to talk to an attorney who is familiar with credit reporting issues and can advise you of your rights under the Fair Credit Reporting Act.

Collectors are liable for emotional distress caused by illegal collection tactics

The Fair Debt Collection Practices Act prohibits debt collectors from using false, misleading, abusive, and harassing tactics to collect debts. Under the FDCPA, any person who has been subjected to illegal debt collection practices may sue the debt collector to hold it accountable and enforce the law. If successful, the plaintiff is entitled to $1,000 in statutory damages and the collector must pay her reasonable attorney fees and costs. More importantly, the collector may also be responsible for compensating the person for any emotional distress that she has suffered from the illegal collection tactics. Commons symptoms of emotional distress caused by illegal collection practices include:

• Crying

• Loss of sleep

• Loss of appetite

• Headaches, vomiting, or stomach pain

• Martial problems

• Problems concentrating at work

While many debt collectors profess cold-hearted skepticism that a person could be so upset by collection efforts, I've worked with many clients who suffered from emotional distress symptoms. I had one client who spent many sleepless nights crying in her bedroom because a collector was pursuing her for a debt she already paid. Another client suffered from severe anxiety, nausea, and headaches because a collector pursued her for a debt she didn't owe. So I know for a fact that  illegal debt collection practices cause emotional distress.

The law says that a collector has to pay for the emotional damage their harassing or abusive collection tactics caused. While medical evidence is usually helpful in proving the extent and cause of the emotional distress, most courts don't require it. In most cases, it is sufficient for the person to testify in detail about their emotional distress symptoms. Often, a witness, such as a spouse, co-worker, or friend has seen the symptoms and can corroborate the plaintiff's testimony.

Depending on the severity and duration of the emotional distress, the amount of damages awarded can be significant.

For example, in Fausto v. Credigy, the collector made repeated calls and false threats of credit reporting over a Wells Fargo account. The Faustos believed that they had already paid off the account and told the collectors to stop calling. The collector continued to call--over 90 times in total. At trial the Faustos testified that they had many sleepless nights, an inability to eat, and the stress caused problems within their family. Ultimately, a Northern California jury awarded the Faustos $100,000 for emotional distress caused by the collector's harassment.

In another case, McCollough v. Johnson, Rodenburg & Lauinger, a collection law firm filed a lawsuit that was barred by the statute of limitations. The law firm, JRL, had information from its client that the suit was time-barred, but continued to prosecute it for 8 months. At trial, McCollough testified that JRL's wrongful lawsuit caused him anxiety, pain, increased temper, and conflict with his wife. Although McCollough already suffered from a disabling pre-existing condition due a traumatic brain injury, he characterized JRL's suit as the straw that broke the camel's back. A Montana jury awarded McCollough $250,000 for the emotional distress caused by JRL.

In another case, Yazzie v. Law Offices of Farrell & Seldin, a collection law firm tried to garnish the wages of Lucinda Yazzie, despite repeated notice that the debt was actually owed by someone else with the same name but with a different social security number. The law firm had changed the social security number in its files from the SSN of the correct account holder, to Ms. Yazzie's. Farrell & Seldin's collection attempts continued for three years. The New Mexico jury awarded Ms. Yazzie $161,000 for her emotional distress suffered during the three years of being wrongfully pursued for a debt that wasn't hers.

Similarly, in Mejia v. Portfolio Recovery Associates, a debt buyer sued the wrong person for a $1,000 credit card account. Ms. Mejia repeatedly told them it wasn't her debt, but the debt buyer persisted with the lawsuit. Ms. Mejia testified that the lawsuit terrified her and that she feared she would lose her house or be arrested. A Missouri jury awarded Ms. Mejia $250,000 for emotional distress.

Of course, these cases all involved particularly egregious collection conduct and severe emotional distress. Obviously, not every case results in these kind of damages.

But if you've endured illegal collection practices that caused you stress, anxiety, fear, or other symptoms of emotional distress, the law may require the collector to be accountable for your suffering.

How to stop collection calls to your cell phone

Few things are more annoying than repeated debt collection calls to your cell phone. Often, these calls are made by an automatic dialer. It's not unheard of for people to get 10 or more of these robocalls per day. This is incredibly frustrating if you rely on your cell phone for work or to keep tabs on your children. The good news is that there are a couple ways to stop these annoying robocalls.

Verbally tell the collector to stop the robocalls

You should first figure out if the collection calls to your cell phone are being made by an autodialer. You can usually spot a robocall if there is a pause or click before a person comes on the line. An automated message is also a clear sign of an autodialed call. If the collection calls are robocalls, there is a powerful federal law called the Telephone Consumer Protection Act that protects you. The TCPA forbids anyone from using an autodialer to call your cell phone without your consent. In most debt collection situations, consent is given in the fine print of the terms and conditions of the credit agreement. Most credit agreements have language buried in them that gives the creditor your consent to robocall your cell phone. This consent is then passed on to the debt collector if you fall behind on your payments.

Fortunately, the TCPA gives you the right to revoke your consent to autodialed calls at any time and in any reasonable way. This includes revoking your consent verbally over the phone. All you have to do is tell the collection representative that you are revoking your consent to robocall your cell phone. Under the TCPA, they have to stop the autodialed calls immediately.

Write a letter demanding that the collection calls to your cell phone stop

Even though you can make the autodialed calls stop by verbally revoking your consent, there are two drawbacks to that approach. First, it can be difficult to prove a verbal statement. Second, the TCPA only allows you to revoke your consent to autodialed calls. The collector is free to continue calling your cell phone as long as they manually dial the calls.

Thankfully, there is another federal law that regulates debt collection calls: the Fair Debt Collection Practices Act. Under the FDCPA, you have the right to stop all calls from a debt collector by writing the collector and requesting that they stop calling you. This letter doesn't have to be fancy. Just make sure to include your full name and your account number if you have it so that the collector can properly identify your file. All the letter has to say is that you want the collection calls to stop. You should list the all of the phone numbers that you no longer wish to receive calls on. If you want to continue to get collection calls on a certain phone number, you should say so. If you want to only get calls at a certain time, you should say that too. Under the FDCPA, the debt collector has to comply with these requests or face possible legal action.

In some cases, you can sue the collector to make the robocalls stop

Although not all collection calls to your cell phone are against the law, some of them are. And the penalties for illegal autodialed calls are significant. Under the TCPA, the collector must pay you between $500 and $1,500 per call for each offending robocall. The court will also issue an injunction against the collector forbidding further autodialer calls. Here's how you know if debt collection robocalls are illegal:

• The collection calls were made with an autodialer. Under the TCPA, an autodialer is anything that "has the capacity to store or produce telephone numbers to be called, using a random or sequential number generator; and to dial such numbers." The Federal Communications Commission has made it clear that this definition is very broad and covers most, if not all, of the popular dialing software used by debt collectors.

• As technology advances, though, this issue is becoming more complex. Some courts have said that even if an autodialer is involved, if it requires some human intervention to make the call, then the calls aren't barred by the TCPA. It's no surprise, therefore, that debt collection industry vendors are currently designing software that requires some human intervention in an effort to evade the TCPA. The FCC, however, has signaled that it doesn't approve of these efforts to exploit the spirit of the law, so future rule making may be coming.

• The robocalls were made to your cell phone. The TCPA only prohibits robocalls to wireless phones. Most autodialed debt collection calls to a landline are permitted.

• You've revoked your consent OR you never consented in the first place. Robocalls to your cell phone are only illegal if you didn't consent to them. As noted above, in the context of debt collection consent is typically given in the credit agreement. That consent, however, can be revoked verbally or in writing. Once you've revoked your consent, all future robocalls to your cell phone violate the TCPA and you're entitled to $500 to $1,500 for each illegal call.

It's also possible that you've never given consent for the collection calls to your cell phone. This most often happens when the collector is trying to reach the previous owner of your cell phone number. Because you never consented to any of these wrong-number calls, you can enforce your rights under the TCPA without first revoking your consent.

Can a debt collector call you at work?

Jen is an administrative assistant at a small dental clinic. She recently got divorced and is struggling to keep up with her bills on just one income. She's missed a few credit card payments and got a couple collection notices in the mail.

One day, while she was sitting at her desk, a debt collector called. The collector made Jen confirm her social security number and date of birth and then asked how she planned to take care of her unpaid credit card bill. Worried that her co-workers would overhear the conversation, Jen quickly told the collector that she was at work and couldn't take personal calls.

A few days later, the same debt collector called Jen again on her work phone. This time, he threatened to garnish Jen's wages if she didn't set up payment arrangements immediately. Jen again told the collector that she was at work and couldn't talk, and said she would call him back when she was at home.

Was the debt collector's first call illegal? What about the second?

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The Fair Debt Collection Practices Act doesn't expressly forbid a debt collector from calling the workplace. But once a collector knows that someone can't take calls on the job, further calls are prohibited.

So in Jen’s case, the first call wasn’t illegal because, until that point, the collector didn’t know that Jen couldn’t talk at work. But once Jen told the collector that she couldn’t take personal calls, the collector knew not to call anymore. Therefore, the second collection call violated the Fair Debt Collection Practices Act.

Collection calls to someone else at your work are almost always illegal

What if instead of calling Jen’s direct line, the collector had called the receptionist and asked to speak to Jen about an unpaid bill?

Illegal. Big-time. Virtually every collection call to a co-worker is illegal, especially if the collector mentions the debt. There is an exception, though, if the collector calls to enforce a court judgment. For example, a collector may call your human resources department to discuss the logistics of a pending wage garnishment against you.

How to use the FDCPA to stop illegal collection calls to your workplace

The FDCPA gives you the power to sue a debt collector that violates the law. It's a great way to stop illegal collection calls to your work and to hold the debt collector accountable for its illegal conduct. Under the FDCPA, a successful claim gets you:

• Up to $1,000 in statutory damages (even if you've suffered no monetary loss);

• Provable actual damages (including for emotional distress);

• Your attorney fees and court costs must be paid by the collector

Most consumer lawyers handle FDCPA lawsuits on a contingency fee. This means that you don't pay any fees unless your attorney recovers money for you and those fees come from the collector's pocket, not yours. Congress wrote the FDCPA this way to incentivize people to enforce the FDCPA and help the government regulate debt collectors and ensure compliance with the law.

Did a debt collector illegally call you at work? Get a free consult now.