Charged Off, Zombie Debts and Bankruptcy

Someone recently wrote me and asked whether he had to pay a debt that was charged off years ago and sold to a debt collector. Of course, the answer is it depends, but this is what it depends on. The key points:

1. The tough news is that after a debt is charged off, you still owe it. Charging off a debt is an accounting practice meant to give a fair picture of the value of a business (by taking bad debt off its books). Charging off an account does not affect the legal obligation to pay it, and the business must account for money they earn once they sell the debt to a debt buyer to collect the defaulted debt. Often there will be a gap between when the debt is charged off and when a debt buyer emerges to contact you for payment. This is where the "zombie debt" term comes in, i.e. you think the debt is dead, but then it resurrects and attacks you.

2. The (possible) good news is that the gap is sometimes too long, and the debt too old, to make it collectible in court. Just because a debt is sold to a zombie debt buyer, it doesn't mean that the statute of limitations is revived if it already has lapsed. Generally, the statute if limitations in Massachusetts for debt collection is six years from the date of the original default. If you make any partial payments later, this will usually re-start the clock, but if you don't the six-year rule usually applies.

3. If the debt is still good once it's in the hands of a debt buyer, you must pay it, settle it, or file bankruptcy. We specialize in affordably accomplishing the last two options for Massachusetts consumers and small to medium-sized businesses. Give us a call or send us an email if you would like our help with your debt problem.

Threats During Car Repossession

I have written about the special Massachusetts rule against trespass during vehicle repossession, but I wanted to say something about threats. When there is a confrontation during a repossession attempt two things are almost always true: (1) there's a trespass and (2) the repo agent makes threats. I see the threats as fitting in two categories: (1) threats against financial interests and (2) threats of violence against persons or property. Although the first type of threat can sometimes be actionable in a court of law, it is the second type of threat that almost always constitutes a breach of peace and creates the entitlement to the sometimes-sizable breach of peace damages.

*Note: If your car has been repossessed in Massachusetts, we might be able to help. However, due to high call volume after I posted information here about Massachusetts car repossession, we must first receive the completed form found here. We will review your matter confidentially and free of charge.

Massachusetts Repossession and High Interest Car Loans

As I have written elsewhere on this blog, the minimum damages under the Massachusetts Commercial Code for a breach of peace during a car repossession are the finance charge for the loan plus 10 percent of the amount of the total loan. When repo agent comes onto your property without your permission and demands and takes your car over your strong objections, you likely have a breach of peace. We get emails all of the time from people with this situation. Often these people are just looking for information and some assurance that the law has been broken. I really do not know why. This knowledge means nothing by itself. Laws do not enforce themselves.

If you've been subject to a car repossession involving a breach of peace, here's the smart thing to do: submit this form to tell us your story. However, the point of the form is to see if you have a good case, and if you do, to bring a lawsuit for wrongful repossession. There are two key points to keep in mind about this:

1. If you do not sue, you will likely be pursued for a car repossession deficiency debt. If the balance of your loan is more than $2,000 when the repossession occurs, you are liable for any deficiency debt.

2. If you do sue, you can likely wipe out the deficiency debt. Moreover, if there is a breach of peace you can recover the minimum damages (noted above). For a high interest car loan, this sum can be substantial. For example, we now have a case involving a $30,000 car loan at a 14 percent interest rate. The car was repossessed. If we are able to show that a breach of peace occurred, the consumer will be entitled to almost $18,000. There are most likely thousands of consumers who unwittingly are entitled to substantial damages based on a wrongful car repossession in Massachusetts.

Bottom line: If you have a case, pursue it diligently. It can mean the difference between you paying money and getting paid money.

Notes:

* We do not charge you fees. If we agree to take your case, we get paid from the proceeds of settlement or judgment.

* Just coming onto your property without your permission to take the car when you are behind on the loan is usually not enough. To be a good case, normally there must be a confrontation of some sort on your property.

The Dave Ramsey Mistake

Recently I received a call from a woman in her 70s seeking information about bankruptcy. This woman, a widow, had tried just about everything to deal with her debts: credit counselors, direct negotiations with creditors, and drawing down her savings to keep up with payments. With that savings quickly approaching zero, she finally reached out to a attorney to explore bankruptcy.

I've always had a soft spot for older people with debt problems. They often take it very hard, perhaps because they come from a generation where debt problems and bankruptcy were more stigmatized. So, we spoke about her options. Given her low income and meager assets, she qualified easily for Chapter 7, which would result in a discharge of about $40,000 in consumer and medical debt. However, our conversation wasn't just about money. She told of me of her great emotional reluctance to file bankruptcy. Only one inescapable fact made her consider it at all, that she would soon have nothing left and be unable to even eat without some serious debt relief. Then she mentioned that she listened to the Dave Ramsey radio show.

I don't really listen to Dave Ramsey, but I've seen him on TV a few of times, and I am familiar with his message. Mr. Ramsey is well known as a fierce anti-bankruptcy crusader despite famously filing bankruptcy himself several years ago and discharging about $4,000,000 in debt. Despite this small mercy that allowed him to move on with his life, he now counsels people to avoid bankruptcy at all costs and does everything he can to re-stigmatize the process.

Behind the scaremongering, Mr. Ramsey's makes two basic wrong points. His first avenue of attack is that bankruptcy damages credit. Bankruptcy does damage credit for several years. However, the simply truth is that people considering bankruptcy already have or shortly will have severely damaged credit. Not paying debts on time severely damaged credit. When this is inevitable, very little additional damage is done by filing bankruptcy. In fact, bankruptcy can even clean up the cluster bomb of multiple debt defaults by replacing the credit balances on a report with zeros. In any event, a Google search of "credit after bankruptcy" will quickly illuminate the well-trod path to rebuilding credit after bankruptcy--something that is not an option while you're still mired in debt.

The second avenue of attack is more insidious. Mr. Ramsey lays it on thick about the psychological cost of bankruptcy, comparing it to the death of a loved one and having the nerve to suggest that it might be one of the worst experiences of your life. This is just insane. I've been practicing bankruptcy law since 2002 and I can say without any reservation that the reverse is true. People are so relieved after getting a debt discharge after struggling with it for so long. Permission to move on with your life is freeing and cathartic. By way of an example, check out this message board I found tonight discussing Dave Ramsey and people's real experiences with bankruptcy. You can also read my site to read about people's experiences with us and the bankruptcy process.

The truth is that Mr. Ramsey did what many rational and intelligent people do when faced with an insurmountable debt problem: He sought refuge in the legal system created to help him. Counseling people to do otherwise is irresponsible. I usually don't mind anti-bankruptcy posturing, but when it affects someone in their 70s, it does bother me. I say live what life you have left for yourself and your family, and not for the credit card companies. The credit card companies--the beneficiaries of Mr. Ramsey's rhetoric--can take care of themselves and have had plenty of influence on the bankruptcy laws on the books today. One should pay their debts if they can, but if someone simply cannot pay and qualifies for bankruptcy, they are doing themselves and their family a great disservice by not taking the help that the law provides.

U.S. Supreme Court Decides Ransom

The U.S. Supreme Court just decided an important bankruptcy controversy. The question was whether you could take an "ownership" deduction for a paid-off car on the bankruptcy means test. The answer is now, no.

The case is Ransom v. MBNA et al (link opens .pdf version of opinion).

This decision means a slightly higher Chapter 13 payment for some consumers and more consumers having to file Chapter 13 instead of Chapter 7. However, like most things, it will not affect the bottom line for the overwhelming majority of people who need bankruptcy relief. That bottom line is this: If you cannot afford to pay dischargeable debts (like credit cards), you will not have to if you file bankruptcy. If you can afford to pay some, you will have to in an orderly Chapter 13 partial repayment plan.

Massachusetts Governor Signs Exemption Bill

Days ago, Massachusetts Governor Deval Patrick signed the personal property exemption modernization bill into law. I previously wrote about the bill here and provided a list of the updated exemptions that will apply outside of bankruptcy and within many bankruptcy cases.

The Globe's coverage of the signing can be viewed here.

This is a solid victory for consumer advocates and Massachusetts consumers.

Massachusetts on Verge of Modernizing Exemptions

Massachusetts has some antiquated exemptions ($700 for a car!). These exemptions allow people to keep certain property when they are in debt. The Massachusetts legislature this week passed a long-awaited update. The bill now awaits the governor's signature. These changes will affect many people but, off the top of my head, two groups will most immediately benefit:

(1) People who have home equity and other property (such as paid-off cars) who need to file for bankruptcy.

(2) And people who own a car, are subject to debt judgments, and do not want their car to be seized by creditors.

Congrats to NACA and NCLC! They worked hard to lobby for these changes.

The full list of the new Massachusetts exemptions in the bill are here:

Property	Current	New
Money for utilities	$75	$500
Furniture	$3000	$15,000
Books	$200	$500
Tools	$500	$5000
Stock in trade	$500	$5000
Provisions for family	$300	$600
Fishing equipment	$500	$1500
Sewing machine	$200	$300
One computer & one TV	none	no stated dollar limit
Rent money	$200	$2500
Cash or savings (execution)	$125	$2500 on any day
Wages (execution)	$125	greater of 85% of gross wages or 50 times min. wage per week
Automobile	$700	$7500 wholesale, $15000 for disabled or elderly
Personal property	none	$1000 to $6000
Jewelry	none	$ 2500
Wages (trustee process)	$125	greater of 85% of gross wages or 50 times min. wage per week
Bank account (trustee process)	$125	$2500