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Evaluating Your Options

Any good consumer defense strategy involves a serious evaluation of your financial situation. If you are facing a mortgage foreclosure lawsuit, there are multiple strategies available to you. The best strategy depends on the specifics of your finances and your individual goals. For example, you may have legal claims against your creditors that can offset some of what you owe. If you are considering filing for bankruptcy, there are non-bankruptcy options that may work better for you. In some situations, there are hybrid strategies that might better serve your needs and assist you in achieving your long-term financial goals. Underneath all of this is the power of being informed. Informed decision making requires evaluating several strategies, dissecting the pros and cons of each, and arriving at a decision that reflects the most cost-effective and predictable solution.

When you make informed decisions, you act from a position of strength. The uninformed may panic when they receive robo-dialed collection calls and threatening letters from debt collectors. In fact, the reason for the barrage of calls and threats is to keep the consumer scared and making bad decisions. For example, Ocwen Financial, Inc. employs social psychologists to aid its employees in collection efforts.[i] Armed with the knowledge of your rights and the tools available to you, you can confront these situations without fear. This is why it is critical to have a dedicated, experienced, and compassionate professional assist you in determining a strategy that is best for you. When you are in the middle of a difficult situation, it is often hard to see a way out. Taking the time to get informed is the first, most important step. Finding and securing good advice from a professional is the second. Attorneys, accountants, debt management counselors, friends, and family will all give you conflicting opinions. The best way to filter these opinions and make the best choice for you is to get informed. Once informed, you can take the path with the most predictable outcome. There is no greater luxury than being informed. Before leading troops into battle, where each decision is measured by the lives lost or saved, a general first secures information about the battlefield. Being uniformed and allowing fear to dictate and influence your actions will inevitably lead to more stress and, ultimately, financial ruin. The goal of this publication is to replace fear and unpredictability with information and methodically researched strategies for achieving financial freedom.

Non-Bankruptcy Debt Relief Options

There is no shortage of debt relief gimmicks. While some of these methods may work for certain people, they tend to lack predictable outcomes. It is important to note that the debt relief industry is not immune to the presence of scammers. Always thoroughly investigate any professional you hire to assist you with your financial affairs. Searching an organization or person’s name on Google or another search engine can often yield a wealth of knowledge, but that is only a start. If you are investigating a licensed professional, the state’s licensing body will provide unbiased information about that professional.

Debt Settlement Companies

Debt settlement companies work with borrowers to settle debts with their creditors. In general, a debt settlement company will tell borrowers to stop paying their creditors and instead make monthly payments to the debt settlement company. Once enough money is built up in the borrower’s account, the debt settlement company will attempt to work out a settlement amount for the borrower’s debts.[ii]

This method is typically utilized for unsecured debts like credit cards, but does not work for secured debts like mortgages and auto loans. This is because secured debts allow the creditor to essentially repossess the asset (the house or car) if the borrower fails to make the required loan payments. The debt settlement process does not protect borrowers from being sued by their lenders. If you stop making payments to your creditors, then they will likely pursue you in court for the balance due. Before the lawsuit is filed, you will also incur serious negative credit reporting as your lenders will begin to report your accounts as delinquent. Remember, most debt settlement companies will not make periodic payments to your creditors; their goal is to pay one lump sum to each creditor. This means that your creditors will not be paid until you have given the debt settlement company a large sum of money. In the meantime, you will be incurring interest and late charges on your unpaid accounts.

If you decide to hire a debt settlement company, watch out for companies that want to charge you large fees up front. Not only is it a red flag for a debt settlement scam, but you may end up paying money to the company while never settling any debts. The most reputable companies should only charge you after a settlement is made; the charge should be no more than 20% of the amount by which the debt’s balance was reduced. Debt settlement is unpredictable because it depends on several variables such as the ability of the debt settlement company and the creditor’s willingness to reduce the debt owed. These types of negotiations rely heavily on human to human interactions that are out of your personal control.

Dave Jones, Lombard, Illinois: A Typical Debt Settlement Strategy

Dave has $45,000 in credit card debt spread across five cards ($9,000/card). His monthly minimum payments are higher than he can afford. He signs up with DebtSettlers, Inc.[iii] to help him settle his debts. Instead of paying his creditors, Dave begins to send his monthly disposable income to DebtSettlers. In six months, Dave has amassed $10,000 in his DebtSettlers account. Dave is receiving daily calls from his creditors, even though the creditor knows that DebtSettlers is representing Dave. DebtSettlers attempts to negotiate a small settlement amount for each of his credit cards, using the $10,000 to pay them all. At the end of the process, Dave still has a mortgage on his underwater home, and DebtSettlers has managed to settle three out of five of his credit card debts. The remaining two credit cards have filed lawsuits against Dave.

In this scenario, Dave may have been better served by filing a Chapter 13 bankruptcy or a Chapter 7 bankruptcy, depending on the equity in his home and car. For instance, if Dave only has $5,000 of equity in his home, he could likely file a Chapter 7 bankruptcy and use the Illinois homestead exemption to protect his home from liquidation. The Illinois homestead exemption allows every person with an ownership interest in a home to protect up to $15,000 in equity from liquidation. A married couple would have a $30,000 exemption. However, if Dave’s home is deeply underwater, and it seems that he could complete a Chapter 13 plan, a Chapter 13 may provide more tools to restore some equity in his home and potentially eliminate his credit card debt by paying a fraction of the debt owed over time. If his disposable monthly income is low enough, he can settle his debts for less than 10% of the total amount owed.

Debt Consolidation Companies

Debt Consolidation is basically the practice of taking out one loan to cover all of your outstanding debts. Instead of settling with each creditor separately, debt consolidation companies will generally pay off the debts you wish to consolidate, leaving you with one payment to make as opposed to many payments to make.[iv] The main risk with debt consolidation is finding a company that is reputable. Some debt consolidators will purchase outstanding debts from creditors at a discount. The better ones will pass some of the savings along to the borrower. It is also risky to convert unsecured debts (like credit cards) into secured debts (like a mortgage). While it may seem attractive to many borrowers, these loans end up costing more money over time – if a typical mortgage lasts 30 years, the debts consolidated into that mortgage are paid off over that time period while interest accrues. Consolidation loans replace one debt with another; they are inherently unsustainable. The authors have never advised a client to consolidate debt because it is simply the financial equivalent of kicking a can down the road.

Mike Thompson, Joliet, Illinois: A Typical Debt Consolidation Strategy

Mike owes MasterCharge $3,000 at 29% interest. He also owes Gracy’s Department Store $5,000 at 30% interest and Big Box Electronics $10,000 at 18% interest. Mike shops around and finds a debt consolidation company that will put him into an $18,000 consolidation loan at 20% interest. Although he is increasing the interest rate on his largest debt by 2%, this is largely offset by the savings on his MasterCharge and Gracy’s debts. However, Mike may be better served by a bankruptcy – it all depends on what he purchased from Big Box Electronics. If the items are no longer worth much money, a Chapter 7 trustee may not attempt to liquidate what Mike cannot exempt. Other factors come into play as well. When did Mike purchase the goods at Big Box Electronics? If the purchases were relatively recent, his behavior may appear to be an abuse of the bankruptcy code if he files. This is why it is highly important to evaluate your financial situation before rushing to file a bankruptcy – there may be actions you have taken that must be remedied before you can successfully file for bankruptcy. Those who make full disclosure of their financial affairs rarely need to worry about abuse.

What If I Do Nothing?

Doing nothing is the worst-possible option. Ignoring debt won’t make it go away. Assuming that a debt is too small to be pursued is asking for trouble. Many credit card companies are taking advantage of Illinois’s streamlined small claims court process to pursue debts that are small enough to qualify for small claims court. In some areas, small claims courts will hear cases up to $10,000 in value, so even an $8,000 credit card debt can be a risk. In small claims courts, it is possible to obtain a default judgment on the first court date if the defendant has been served with a summons and the time to respond has lapsed.

What Happens When a Creditor Sues You

Once a creditor determines that collection calls and letters are not working, it will generally proceed to litigation to collect the debt. To begin a lawsuit, creditors hire a collection attorney to file a lawsuit. The attorney will draft a document called a “complaint.” The complaint will set forth the facts necessary to assert, among other things, a claim against you. In some cases, the complaint will set forth multiple claims as separate counts. Once the complaint is drafted, it is filed with the Clerk of Court, likely in the county where you live. The Clerk generates a document called a “summons.” This document is attached to the complaint and is delivered to the county sheriff or, in some cases, to a person known as a “special process server.”

In order for the lawsuit to proceed, you must be served with the summons. If the sheriff is unable to locate you to serve you with the summons, a special process server will be hired. These people tend to be licensed personal investigators and will do more than the sheriff to locate you. If you still cannot be served, the creditor will obtain the judge’s permission to publish a notice of the lawsuit in the local paper. After you have been served, you have 30 days to file your appearance and respond to the complaint, either by answering or by filing one of several motions. If you are sued in Federal court, you only have 21 days to file your appearance and respond. In small claims court, the summons will include a date at which you must appear. On that date, you will have an opportunity to file your appearance and either file an answer or set the case for trial.

If you fail to respond within the time allowed, or miss the first hearing date in a small claims case, the creditor will bring a motion for default judgment against you. This happens every day. Although the law gives you the right to defend yourself against a lawsuit, this right is not without a time limit. If you fail to respond to the lawsuit at all, the creditor will be entitled to a judgment by default. This means that all the facts alleged in the complaint will be taken as true and most of your defenses to the lawsuit will be waived. You will also be liable for the creditor’s court costs and attorney’s fees. This can turn a $2,000 debt into a $3,500 debt or more. In addition, many judgments accrue interest while they are pending. If a judgment is large enough, it may increase by hundreds of dollars a month.

Once a judgment is entered, the creditor is free to begin collecting that judgment. Judgment liens can be filed against your home. Creditors can garnish your wages. This means that your take-home pay can be docked until the debt is satisfied. Given that the debt continues to earn interest post-judgment, particularly large debts are mathematically impossible to pay off via wage garnishment. Creditors can also come after your bank accounts or other assets if they cannot garnish your wages. For example, if you are paid in cash or are self-employed. Many borrowers discover that their accounts are frozen when auto-draft payments return declined or when their debit card no longer works. When a creditor attempts a non-wage garnishment on your bank account, the account will be frozen up to twice the value of the judgment until the garnishment is approved. In the meantime, the borrower has limited or no access to his funds. Even if you manage to avoid all collection attempts, judgments can be renewed every 7 years. This means that determined creditors, and they are typically determined, can keep judgments alive and collecting interest for a very long time. In Illinois, judgments accrue interest at a rate of 9%.[v]

Quite simply, doing nothing is a great way to create more problems than you had before. The rest of this guide is designed to assist you in making informed choices regarding your financial affairs. Knowing the best way to exercise consumer defense to create more predictable outcomes is the luxury of the informed.

Strategic Default

Many people have read about the concept of strategic default. Sometimes, this idea is referred to as the “just walk away” movement. Home owners who owe more on their home than it is worth may want to get rid of their bad investment. One method is to perform a strategic default.

In some states, like California, lenders are generally not allowed to pursue home owners for extra money after foreclosing on their homes. California is what is referred to as a “non-recourse” state. Some Californians have chosen to stop paying their mortgages, find alternative living arrangements, and move out of their homes. Although their credit suffers the negative reporting of the defaulted payments and the foreclosure, they generally are not liable if their home is worth less than their loan balance.

Illinois, on the other hand, is considered a “recourse” state. This means that lenders can pursue home owners for the difference between the value of the foreclosed property and the loan balance. This is also known as a deficiency. When the lender chooses to hold the home owner liable for the deficiency, it requests that the foreclosure court enter a deficiency judgment against the home owner. This concept will be discussed further in the foreclosure defense sections of this book.

For Illinois residents, a truly strategic default is one where the home owner develops an informed, predictable strategy for gracefully exiting an underwater property. There are many ways to do this, but none of them involve simply walking away. In Illinois, a strategic default truly requires a strategy.

Consumer Defense Strategies

The rest of this book will discuss the various elements of a well-planned consumer defense strategy. Which elements a specific strategy may include will vary depending on your individual situation. For example, some people may determine that a foreclosure defense and loss mitigation strategy provides the most predictable outcome given their goals. Others may determine that a consumer bankruptcy best fits their goals. Some individuals may find that their rights are best protected by filing a lawsuit against an abusive creditor. In most cases, a well-planned consumer defense strategy will include elements of foreclosure defense, bankruptcy and general consumer defense litigation. The remainder of this book will discuss those elements in more detail.