Take charge of your debt and get a fresh financial start
Feeling overwhelmed by your debts? Here is the detailed legal and practical information you need to get back on your feet and make a fresh start. Whether you are over your head in debt, or are being hounded for debts you don't believe you owe, this book is the tool you need to regain your financial sanity. Find out how to:
stop collector harassment
negotiate with creditors to reduce debts
prioritize your debts
challenge wage garnishments
contend with repossessions
respond if you get sued
obtain and correct your credit file
decide if bankruptcy is right for you
get government help to avoid foreclosure
create a budget you can live with
This new edition of Solve Your Money Troubles is completely updated and includes sample letters to creditors, state-specific legal information, and worksheets that will help you create a repayment plan.
“This book is a must-have, even for people who don’t have debt problems.” -Los Angeles Times
“One of the best books you can buy on all aspects of personal debt.” -Michael Pellecchia, Nationally Syndicated Columnist
“This book will give you strength and the skills needed to respond to bill collectors and to rebuild your credit….” -New Orleans Times-Picayune
Attorney Margaret Reiter was a consumer investigator with the Los Angeles County Consumer Affairs Department for four years and worked for 20 years as a consumer prosecutor with the California Attorney General's Consumer Law Section. She has investigated or prosecuted businesses engaged in consumer fraud including foreclosure "consultants," mortgage lenders, debt settlement companies, vocational schools, living trust mill/annuity sellers, prepaid phone card companies, and tax refund anticipation loan providers. She has drafted consumer protection legislation, advocated for stronger consumer protection before regulatory agencies, trained other prosecutors and investigators, and prepared consumer alerts and spoken to the public on Truth-in-Lending, telephone slamming and cramming, truth in phone billing, bankruptcy, and vocational schools, among other consumer topics.
Robin Leonard is a former attorney who gave up the law to become a rabbi. She is the author of many Nolo books including Solve Your Money Troubles: Debt, Credit & Bankruptcy and Credit Repair. She also helped write How to File for Chapter 7 Bankruptcy and A Legal Guide for Lesbian and Gay Couples.
Table of Contents
Your Legal Companion to Solving Your Money Troubles 1
Chapter 1 How Much Do You Owe? 3 How Much Do You Earn? 5 How Much Do You Owe? 5
Chapter 2 If You're Married, Divorced, or Separated 9 Community Property States 11 Common Law States 14
Chapter 3 Debts You May Not Owe 19 You Are the Victim of Misrepresentation or Other Fraud 20 The Seller Breached a Warranty 23 Your Car Is a Lemon 26 Home Mortgage Contracts 28 You Canceled a Contract 28 You Received Goods You Didn't Order 32 Canceling Automatic Deduction Payments 33
Chapter 4 Prioritizing Your Debts 35 Secured and Unsecured Debts 36 High-Priority Debts 38 Medium-Priority Debts 40 Low-Priority Debts 42 Review Your Worksheets 43
Chapter 5 Finding Money to Pay Your Debts 45 Cut Your Expenses 46 Increase Your Income 50 Get Some of Your Tax Refund Early 50 Get Your Tax Refund Fast 51 Sell a Major Asset 51 Sell Smaller Items 52 Withdraw Money From a Tax-Deferred Account 53 Apply for Government and Agency Help 54 Consider a Home Equity Loan 58 Use the Equity in Your Home If You Are 62 or Older 61 Borrow the Money 64 What to Avoid When You Need Money 65 Avoid Bank and Credit Union Prepaid Cards With Advances 70
Chapter 6 Negotiating With Your Creditors 73 Prepare a Negotiating Plan 75 Communicate With Your Creditors 75 Tips for Negotiating With Creditors 78 Rent Payments 79 Mortgage Payments 80 Utility and Telephone Bills 82 Car Payments 83 Secured Loan Payments 85 Insurance Payments 85 Medical, Legal, and Other Service Bills 87 Child Support and Alimony Payments 88 Income Taxes 88 Student Loan Payments 89 Credit Card Payments 89 Negotiating When the Creditor Has a Judgment Against You 92 Pay Off a Debt for Less Than the Full Amount 92 Don't Write Postdated Checks 96 Beware of the IRS If You Settle a Debt 97
Chapter 7 What to Expect When You Can't Pay Your Debts 101 Eviction 102 Repossession 103 Tying Up Property Before a Lawsuit 110 Lawsuits 112 Lawsuits Against Third Parties Who Hold Your Assets 112 Liens on Your Property 113 Jail 114 Bank Setoff 115 Intercepting Your Tax Refund 115 Loss of Insurance Coverage 116 Loss of Utility Service 116
Chapter 8 Reducing Mortgage Payments and Dealing With Foreclosure 119 Foreclosure 120 Nonjudicial Foreclosure 121 Judicial Foreclosures 122 Right to Cure Default 122 Right of Redemption 122 The Sale 124 Defenses to Foreclosure 125 Watch Out for Deficiency Balances 126 Alternatives to Foreclosure 126 Short-Term Informal Payment Plans 128 Federal Programs for Homeowners Facing Possible Foreclosure 129 Mortgage Workouts 133 Refinancing 135 Selling Your House 137 Short Sales and Deeds in Lieu of Foreclosure 137 Other Programs to Help Homeowners 140
Chapter 9 Dealing With Debt Collectors 141 Creditor or Debt Collector? 142 Negotiating Secured Debts 144 Before Your Debt Is Sent to a Debt Collector 144 When Your Debt Is Sent to a Debt Collector 145 Illegal Debt Collection Practices 157 How to Fight Back If a Debt Collector Violates the Law 160
Chapter 10 Choosing and Managing Credit Cards 165 Avoiding Credit Card Traps 167 Consumer Credit Card Rights 167 Use Credit Card Disclosure Forms to Identify Traps 167 Trouble Paying Your Bill 175 Should You Get Rid of Unnecessary Credit Cards? 175 How to Close a Credit Card Account 177 Shopping for a New Card 178 Using Credit Cards Wisely 179 Cards You Didn't Request 181 Rejected and Blocked Cards 181 Liability If Your Credit Card Is Lost or Stolen 182 Unauthorized Use of Your Card by an Acquaintance 184 To Dispute a Credit Card Bill 185 Debit Cards 190 Prepaid Cards 191
Chapter 11 Understanding Loan and Other Credit Documents 193 Credit Disclosures 194 Common Terms in Credit Agreements 195
Chapter 12 Student Loans 205 What Kind of Loan Do You Have? 207 Figuring Out Who Holds Your Student Loan 209 Canceling Your Loan 209 Postponing Payments 212 Changing Your Repayment Plan 214 Getting Out of Default 219 Filing for Bankruptcy When You Can't Pay 220 Consequences of Ignoring Student Loan Debt 221 Where to Go for Help 222 Private Student Loans 222
Chapter 13 Child Support and Alimony 225 How Child Support Is Determined 226 Modifying the Amount of Child Support 228 If Paternity Is Disputed 232 Enforcement of Child Support Obligations 232 Alimony 240 Bankruptcy and Child Support or Alimony Debt 240 Taxes, Child Support, and Alimony 241
Chapter 14 If You Are Sued 243 How a Lawsuit Begins 245 Negotiate 248 Alternative Dispute Resolution 251 Defenses and Claims 254 What to Expect While the Case Is in Court 259 When the Creditor Gets a Judgment Against You 261 Stopping Judgment Collection Efforts 272
Chapter 15 Bankruptcy: The Ultimate Weapon 275 Chapter 7 Bankruptcy 276 Chapter 13 Bankruptcy 277 The Automatic Stay 278 Bankruptcy Exemptions 279 Will Bankruptcy Solve Your Debt Problems? 280 Getting Help With Bankruptcy 282
Chapter 16 Property Creditors Can't Take 285 Property Subject to Collection 286 Types of Exemptions 291 Is Your Property Exempt? 292 Claiming Exemptions 299
Chapter 17 Rebuilding Your Credit 301 Avoid Overspending 302 Understand Credit Scores and Credit Reports 307 Clean Up Your Credit Report 310 Your Credit Score 317 Rebuilding Credit Without Getting New Credit 320 Rebuilding Credit by Getting New Credit 323 Avoid Credit Repair Organizations 327
Chapter 18 Help Beyond This Book 329 Looking Up the Law 330 Lawyers 336 Debt and Credit Counseling Agencies 341
G Glossary 347
Appendixes A Where to Complain 351
B Contact Information for Useful Agencies, Organizations, and Other Entities 355
Sample Letters and Forms Sample Letters Dealing With Fraud, Warranties, and Unordered Goods Sample Letter Asking for Refund Because of Misrepresentation or Fraud 22 Sample Letter to Stop Paying After Failure to Repair on Warranty 25 Sample Letter to Landlord Sample Letter to Landlord 80 Sample Letters to Creditors or Debt Collectors (Negotiation or Debt Settlement) Sample Letter to Creditors 76 Sample Letter to Creditor Confirming Agreement to Reduce Payments Temporarily 77 Sample Letter Offering to Give Back Secured Property in Exchange for a Written Agreement Waiving Deficiency 86 Sample Letter: Cashing Check Constitutes Payment in Full on Disputed Amount (Outside of California) 93 Sample Letter: Cashing Check Constitutes Payment in Full on Disputed AmountÑFirst Letter (California) 94 Sample Letter: Cashing Check Constitutes Payment in Full on Disputed AmountÑSecond Letter (California) 95 Sample Letter: Cashing Check Constitutes a Release of All Claims When You Send Check for Less Than Full Amount Owed 96 Sample Letter to Creditor or Debt Collector to Make Lump Sum Payment If Negative Information Removed from Credit Report 156 Sample Letters Regarding Debt Collection Sample Letter to Collection Agency Requesting Verification of Debt 149 Sample Letter to Collection Agency to Tell It to Cease Contacting You 151 Sample Letter to Creditor or Debt Collector to Make Lump Sum Payment If Negative Information Removed from Credit Report 156 Sample Letter to Creditor About Debt CollectorÕs Improper Collection Tactics 162 Sample Letters to Credit Card Issuers Sample Letter Confirming Telephone Notice of Lost or Stolen Card 184 Sample Letter to Notify of Credit Card Billing Error 186 Sample Letter Raising Claim to Credit Card Bill 189 Sample Letters and Court Documents Dealing With Lawsuits Sample Settlement Agreement or Release 249 Sample Letter to Creditor Requesting Mediation 253
How Much Do You Owe?
How Much Do You Earn?.................................................................... 5
How Much Do You Owe?.................................................................... 5
“There can be no freedom or beauty about a home life that depends on borrowing and debt.”
—Henrik Ibsen, Norwegian poet and dramatist, 1828–1906
To successfully plan your strategies with your creditors, you need to come to terms with your total amount of debt. This may make you shudder.
But happily, most credit counselors will tell you that people tend to overestimate their debt burdens.
To figure out your financial situation, you need to compare what you bring in each month with what you owe on your monthly expenses (such as food, housing, and utilities) and your other debts (for example, student loan payments).
Having a ballpark idea of the amount of your income and debt burden is not enough to tackle your debt problem. Getting precise numbers is a crucial part of the process—don’t skip it. In addition to laying out how much you earn and owe, this process will help you prioritize your debts, which will then help you decide which strategies to use to solve your money troubles.
To figure out how much you earn and how much you owe (both in monthly payments and overall), follow the instructions on the next pages and use the worksheets in Appendix D. If you are married or have jointly incurred most of your debts with someone, fill out the worksheets together.
Warning Signs of Debt Trouble
If you have panic attacks when you try to figure out your total debt burden, you’ll feel better if you skip this chapter and come back to it when you are better able to confront the information. Before doing that, however, ask yourself the following questions. If you answer “yes” to any one of them, you are probably in or headed for serious debt trouble:
• Are your credit cards charged to the maximum?
• Do you use one credit card to pay another?
• Are you making only minimum payments on your credit cards while continuing to incur charges?
• Do you skip paying certain bills each month?
• Have creditors closed any accounts on you?
• Have you taken out a debt consolidation loan? Are you considering doing so?
• Have you borrowed money or used your credit cards to pay for groceries, utilities, or other necessities (for reasons other than convenience or to get perks on a credit card)?
• Have you bounced any checks?
• Are collection agencies calling and writing you?
How Much Do You Earn?
Start by figuring out how much you earn each month. Grab a calculator, your pay stubs, and complete Worksheet 1 in Appendix D, by entering your monthly income from each listed source. If you are paid more often than monthly, see the instructions in Worksheet 1 to convert your pay to a monthly amount. If you have income that doesn’t fit into one of these categories, list it as “other.”
How Much Do You Owe?
In Worksheet 2 in Appendix D, you list your debts. Gather the documents that show payments on all your debts, the total amount owed on each debt, and any amount past due, including any interest or fees that have been added. Be as thorough and complete as possible. The completed Worksheet 2 will tell you exactly how much you should be paying each month (to be current on your debts) and how far behind you are. Here’s how to fill it out.
Column 1: Debts and other monthly living expenses. In Column 1, enter the type of debt. Don’t enter a debt more than once. So, for example, if you already deducted from your income in Worksheet 1 a debt that is paid out of your paycheck, such as child support, don’t deduct that same debt again here.
If you are married, you may not be certain which debts are yours and which belong to your spouse. If your marriage is intact and you’re having mutual financial problems, approach your debt problems as a team. That is, enter all your debts in Column 1. If, however, you are separated or recently divorced, or are married but having financial problems of your own, see Chapter 2 for help on figuring out the debts for which you are obligated. If you generally share expenses and maintain a household with someone else, consider combining your income and paying all of your debts with joint funds, regardless of who actually incurred the debt. Enter both partners’ debts in Column 1.
Column 2: Outstanding balance. In Column 2, enter the entire outstanding balance on the debt. For example, if you borrowed $150,000 for a mortgage and still owe $125,000, enter $125,000. If you don’t want to contact the creditor until you are ready to negotiate (and that will only be after you’ve determined how much you can pay), you have a few options. Your latest account statement might list the entire outstanding balance. If not, the creditor’s automated telephone system or online account information might provide the information you need. If you can’t get the balance and you prefer not to talk to the creditor, use your best guess for now.
Columns 3 and 4: Monthly payment and total you are behind. In Columns 3 and 4, enter the amount you currently owe on the debt. If the lender has not established set monthly payments—for example, for a doctor’s bill—enter the entire amount of the debt in Column 4 and leave Column 3 blank. If the debt is one for which you make regular monthly payments—such as your car loan or mortgage—enter the amount of the monthly payment in Column 3 and the full amount you are behind (monthly payment multiplied by the number of missed months, plus any fees or charges that have been added, like over-limit fees or late payment charges) in Column 4.
For credit card, department store, and similar debts, enter the monthly minimum payment in Column 3 and your entire balance in Column 4. But keep in mind that eventually you should make more than the minimum payment on your credit cards. (Chapter 10 discusses the danger of making only minimum payments each month.)
Column 5: Is the debt secured? In Column 5, indicate whether the debt is secured or unsecured. A secured debt is one for which a specific item of property (called “collateral”) guarantees payment. The most common type of secured debt occurs when you sign a credit agreement (sometimes called a security agreement) that allows the creditor to take a particular item of property under certain specified conditions—without suing you first. Examples of conditions that might allow the creditor to take your property include your failure to make a payment, your failure to maintain insurance on the property, or your failure to comply with the payment agreement in some other way. Typically you sign a credit agreement, giving the creditor a security interest in your property when you finance a car purchase; get a mortgage; get a second, third, or additional loan on your home; or buy an appliance or piece of furniture with store credit.
A creditor may also be able to secure its debt without your agreement by filing a lien against your property. This can happen in two circumstances. First, the creditor can file a lien if the law specifically allows for it. An example is a mechanic’s lien—the law specifically states that a worker or material supplier may file a lien against your real property if you or the contractor fail to pay them. Second, a creditor can file a lien against your property if it has sued you and obtained a judgment against you. This is called a judgment lien.
Unsecured debts are typically bank credit card debt; bills owed for utilities, medical, or legal services; student loans; and spousal or child support.
Secured property is usually something very important, like your car or house. Because it can be taken quickly, without the delay of a lawsuit, secured debts are usually a high priority for you to pay.
Specify the collateral the creditor is entitled to grab if you default. (After you have read more about whether a debt is secured or not in Chapter 4, you can come back and review Column 5 to see if you need to make any changes.)
Column 6: What priority is the debt? Leave Column 6 blank until you read Chapter 4. It will help you prioritize the debts.
Add it up. When you’ve entered all your debts in the worksheet, total up Columns 2, 3, and 4. Column 2 represents the total balance of all your debts, even though some of it may not be due now; Column 3 represents the amount you are obligated to pay each month; and Column 4 shows the amount you would have to come up with to get current on all your debts.
Don’t forget your other expenses. None of us have monthly expenses consisting entirely of loan or credit payments. We also have to pay rent and buy groceries, pay for movies and restaurants, buy clothing and household goods, and so on. These other expenses are covered in Chapter 17. Now might be a good time to review the information in Chapter 17’s “Figure Out Where Your Money Goes.” By listing your non-debt-payment expenditures, you will get a more complete picture of your finances.