Past Due?—What You Gonna Do When They Come for You?

Hopefully you will never have to experience the consequences of credit default, but if you do, what follows may prove helpful. Debt collectors come in all varieties … some are empathetic, some try to help, and others are just garden variety horses’ asses. Yeah—you read that right.  Think of the debt collector as the moral equivalent of the post pubescent male … one thing on his mind and a willingness to do almost anything to get it … in this case, not to get in your pants, but, your pants pocket. The different approaches collectors employ are not unlike the clever (and not so clever) pick-up lines post-pubescent boys use in pursuit of their, uh-hum, goal.

3 Worst Consequences of Default

The most severe consequences of default are:

  1. Foreclosure
  2. Repossession
  3. Litigation / Referral to a Collection Agency

Handling the Big 3

Don’t panic … stay calm and continue reading …

FORECLOSURE

Yep, a nightmare scenario for sure but, you do have some options. Most lenders employ law firms that specialize in mortgage foreclosures. They operate much like a factory’s assembly line, processing the required legal documents with inexperienced attorneys, often fresh out of law school.

They make money based on the sheer volume of foreclosures they process. These firms count on debtors that don’t put up a fight. Consequently, debtors that fight back disrupt the process and slow the income stream of the firm. Because they have hired inexperienced attorneys, these foreclosure factories are vulnerable to a challenge, so suffice it to say that it is preferable not to take this lying down.

Here some tactics that can slow the process and buy you the time necessary to resolve the default, sell your home or make other living arrangements.

  • Pursue forbearance with your lender. This is an agreement that allows you to catch up on your past due payments over several months.
  • Negotiate a loan modification. If you can demonstrate you have the ability to handle a lower monthly payment, you may be able to persuade the lender to re-write the loan, effectively rolling your past due payments into the new loan.
  • Challenge the lender to produce the note. A lender filing foreclosure proceedings must be able to produce the original note for the court. Although this is a long shot, mortgages are traded with such frequency that it is possible the original document has been misplaced or lost. In any event, demanding the lender produce the original note can buy you additional time if not a free pass.
  • Bankruptcy is the final option. A Chapter 7 or Chapter 13 filing will serve as an automatic stay against any further action until your bankruptcy proceedings come before the court. This could be months. You will probably want an attorney for this option.

REPOSSESSION

If you are more than 3 months behind on your auto loan, you are almost certainly at risk for repossession. Self-help repossession is the law in most states which means the lender (usually through a subcontractor) can take your car at any time, as long as there is no breach of the peace. This “no breach of the peace” law is why these things usually happen in the middle of the night, when you are at work, or while you are grocery shopping.

Many debtors try to outfox the repo man by trading cars with a friend or family member, keeping it in the garage when not in use, hiding the vehicle identification number, blocking it in with other vehicles, etc.—while these things may work for a while, they won’t work forever. The repo man WILL get your ride sooner or later.

Try these tactics instead …

  • Contact your lender and see if they will defer/extend your past due payments. You will need to convince the lender that you can make payments on-time going forward.
  • Seek to have your loan rewritten to lower the payments to an affordable level.
  • Sell your vehicle. If you have some equity, you may find a dealer that will arrange to trade down for something you can afford.
  • The nuclear option is bankruptcy, Chapter 7 or Chapter 13, depending on your personal financial circumstances. For example, to file a Chapter 13, you must have a verifiable source of income. As with foreclosure, bankruptcy will serve to stay all efforts to repossess your vehicle. Even if your vehicle has been repossessed, in most cases it will be returned to you. Of course, you will need an attorney for this option.

LITIGATION / COLLECTION

If your account has been litigated, bankruptcy is your only remaining option. If it has been referred to a collection agency, you have a wider range of options. Your account is probably with a collection agency because the lender has made the decision not to file a lawsuit to recover the balance due. Maybe the cost of suing you exceeds the balance you owe, maybe you are a skip or maybe you have an income insulated from garnishment.

Whatever the reason, take heart! There is a federal law that offers you a range of protections from rogue collectors and the agencies employing them known as the Fair Debt Collection Practices Act (FDCPA). The law prohibits debt collectors from lying, from harassing you, from violating your privacy, and from contacting you if you ask them to stop to name a few. Here are a few things you might consider …

  • Offer to settle the debt for a lump sum cash payment. Chances are high that your debt was purchased for pennies on the dollar. Settling the debt for 25% to 50% of its face value is a real possibility.
  • Negotiate a repayment plan that fits your budget. One plus of dealing with a collection agency is the degree of flexibility they usually have in recovering the amount due.

There are other tactics available, and our readers should be encouraged to share from their own experiences as well. The best advice I can offer is to avoid default by keeping your debts to a manageable level, creating an emergency fund and living below your means.

What about You?

Have you defaulted on any obligations? How did you handle the default?  Do you have any suggestions for our readers?

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