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Seniors and the Law - Dealing with Debt

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Seniors and the Law: A Guide for Maturing Californians
Dealing with Debt

Perhaps your debts have become unmanageable now that you are living on a fixed or more limited income. Maybe the unexpected costs of medical treatment or prescription drugs have pushed you to the brink, or maybe you're facing the foreclosure of your home in tough times. How you deal with the situation will depend on your particular circumstances.

  • What should I do if I am having trouble paying my bills?
  • What will happen if I simply don't pay my debts?
  • Should I file for bankruptcy if I cannot pay my debts?
  • Is there anything I can do to stop bill collectors from hounding me?
  • If I am receiving Social Security income, can my creditors get ahold of it?
  • Can I lose my home if I fall behind in my mortgage payments?

What should I do if I am having trouble paying my bills?

You could contact your creditors and ask for more time to make payments. It might help to call a credit and debt counseling agency as well. Check with the California Department of Corporations to find out the agency is licensed by calling 800-275-2677 or contact the Better Business Bureau (www.bbb.org). If you wind up filing for bankruptcy, you will be required to get counseling from an agency approved by the U.S. Trustee Program. (See bankrupcty question on the next page.)

Be cautious about obtaining a debt consolidation loan to pay off your debts. If the interest is too high, you could wind up with an even bigger problem. If you do get a loan, make sure that the financial statements turned over to the lender are true and complete. For information on credit and loans, go to ftc.gov/credit. or call 877-FTC-HELP.

What will happen if I simply don't pay my debts?

If you signed an agreement putting the property up for collateral--securing the debt--when you bought it, the creditor could repossess the item. But even in the case of unsecured purchases (purchases made with credit cards, for example) the creditor can obtain a court judgment in which property can be repossessed, your wages attached and your bank accounts seized. (CCP §§ 487.010-487.030, 706.050) In addition, if you own a home, a lien could be placed on your property for an unpaid debt. You may, however, be able to file a claim of exemption for your home. In addition, if you have very little income or assets, you may be judgment-proof, in which case your creditors may not take further legal action.

For more information on handling debt, get a free copy of the State Bar pamphlet What Can I Do if I Can't Pay My Debts? (See Resources.)

Should I file for bankruptcy if I cannot pay my debts?

It depends. If you have few assets and little or no income, bankruptcy may not be your best option. It will seriously damage your credit for 10 years and will not necessarily wipe out your debt. For seniors with greater assets and income, however, filing for bankruptcy might make sense if your creditors will not agree to an extended payment schedule. Seek an attorney's advice before making such a decision.

There are two types of personal bankruptcy: Chapter 13 and Chapter 7. In general, if you have a steady income, Chapter 13 allows you to stop most debt collection in exchange for a promise to pay your available funds to creditors as part of a three-to-five-year repayment plan. With a repayment plan, you may be able to keep certain property--such as your car or home--even if it was used to secure a loan. If you fulfill your obligation, most remaining debt would be canceled at the end of the repayment period.

Under Chapter 7, however, you ask the bankruptcy court to cancel most of your debts because you don't have enough money or property to pay them off. (To qualify for a Chapter 7 plan, you would have to meet specific criteria related to your income and future ability to pay.) Certain assets would be sold to help pay off your creditors. With this type of bankruptcy, you generally would not be able to keep property that was used as collateral for a loan.

Before filing for either type of bankruptcy, however, you will need to undergo credit counseling from a U.S. Trustee Office-approved agency. And before your bankruptcy case ends, you would have to complete personal financial management counseling as well. For lists of approved counselors, visit usdoj.gov/ust (go to Credit Counseling and Debtor Education).

Is there anything I can do to stop bill collectors from hounding me?

Graphic of a person peering out their windowYes. The law sets some boundaries for bill collectors. For example, with debts involving car loans, medical care or charge accounts, such collectors cannot contact you before 8 a.m. or after 9 p.m. without your permission. Generally, they cannot contact you--or someone else--at work regarding the debt. Nor can they harass, threaten or mislead you with lies, and they must identify themselves when they call. In addition, bill collectors must include "debtors rights" information with their first written notice to the debtor. (CC §§ 1788 et seq, 1812.700) For information or to file a complaint, contact the Federal Trade Commission at 877-FTC-HELP or ftc.gov.

If I am receiving Social Security income, can my creditors get ahold of it?

No. In general, your Social Security income is protected from creditors. It may be even easier to protect such income if you have your checks deposited directly into your bank account. Social Security income can, however, be garnished for court-ordered child support, alimony or unpaid federal taxes.

Can I lose my home if I fall behind in my mortgage payments?

Yes. However, you may be able to work out a plan with the lender to lower payments or even suspend them temporarily. You may be able to refinance your home with an affordable, government-backed mortgage, and in light of the recent home mortgage crisis, other options may soon be available. But you must take action immediately. Do not ignore notices from your lender saying you are in default on your payments. The lender could foreclose and sell your home in just months. Under the new California Howeowner Bill of Rights, if you are eligible and have completed a loan modification, the foreclosure process must stop while the lender reviews your application. (CC § 2923.5) Call your mortgage company and contact HUD at 800-569-4287 for a referral to a free counseling agency that can help you find a solution. Call the Homeowner's Hope 24-hour hotline at 888-995-HOPE.

Be cautious in your search for help. Avoid falling victim to a loan modification scam. Recently, California has seen an explosion of such scams. It may start with a call or knock at the door and an offer to renegotiate your loan--for an upfront fee. You may be told to avoid contacting your lender. Then, while little or nothing is done to modify your loan, you unwittingly lose precious time and slip closer to foreclosure.

Foreclosure consultants and mortgage servicers are, by federal and state law, prohibited from collecting fees upfront and asking the homeowner to sign any wage assignment, real or personal property lien or power of attorney. (CC § 2920.5, 2944.7, 2945 et al) Look out for other foreclosure rescue scams. For example, you could wind up paying a high fee for a "forensic loan audit" to help prevent your foreclosure--and then receive no service at all..

Some seniors face foreclosure because a predatory lender has lured them into a home equity loan that they cannot possibly repay. The interest rate and fees may be much higher than those of a standard loan, may require a large "balloon" payment at some point or may be illegal. The lender may avoid explaining the loan's terms or offer misleading information (seeking, instead, to take advantage of the senior who could be facing a cash crunch). Seniors--who may have little income but greater equity in their homes than many younger homeowners--are primary targets in this type of scam. If you fall behind in your payments, take action immediately. For more guidance, go to ForeclosureInfoCa.org, www.hud.gov, 995hope.org (888-995-HOPE) or www.oag.ca.gov. You can also contact the Federal Trade Commission at 877-FTC-HELP or www.ftc.gov, or the Consumer Financial Protection Bureau. (See Resources.)

To next section Staying on the Job. Or back to Table of Contents.

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