Sunday, February 17, 2013

Can a Collection Agency Sue After the Statute of Limitations Expires?

You can end up in court after the SOL passes.
A debt collection lawsuit is of the most frightening outcomes for debtors struggling with collection agencies. You are responsible for the debt until you pay it, but each state places a limit on the amount of time a collector has to sue you via the debt collection statute of limitations  Unfortunately, the statute of limitations does not provide you with absolute protection, and you could still face a collection agency lawsuit after the statute of limitations passes.

Lawsuits After the Statute of Limitations

When a collection agency sues you, it must send you a summons. The summons notifies you that you're being sued, contains the date, time and location of the hearing and gives you an opportunity to respond and claim a defense. The vast majority of people who are sued by collectors do not respond to their summons. In most cases, this is simply a matter of fear. They either know that the debt is theirs and believe that because the debt is legitimate they cannot fight it or don't know what to do – so they do nothing.

When you don't respond to a summons and claim a defense, the collection agency wins its case by default. Because no one is there to contest their claims, they don't have to prove a thing to the court and the judge awards the collection agency a default judgment.

Don't assume just because the statute of limitations has passed that a collection agency will not sue you. Because so few debtors bother to defend themselves, the collection agency's game of legal roulette has excellent odds. You see, the statute of limitations is an affirmative defense. That means that you can have the case dismissed but only if you bring up your defense in court. If you don't appear in court and defend yourself, the judge has no way of knowing that the statute of limitations on the debt has expired – and the debt collector certainly isn't going to volunteer the information.

Surprise! You Owe a Default Judgment!

The judge doesn't know the SOL expired unless you appear
A collection agency cannot file a lawsuit against you without sending out a summons. You must be notified of the lawsuit. If you aren't aware that a collection lawsuit is underway, you aren't able to defend yourself. If the statute of limitations has already expired on your debt, the collection agency knows that you have an affirmative defense. Thus, its in the collector's best interests to ensure that you never receive a summons.

Collection agencies get away with this in different ways. Some don't mail out a summons at all while some intentionally send the summons to an old or incorrect address (the collection agency can view your old addresses on your credit report). Unless you live in a state that requires you to be served with a summons in person, don't be too surprised to check your credit report one day and find a collection judgment.

Filing an Appeal to Remove Judgment

Although state laws regarding judgment appeals differ, you usually have a set amount of time to appeal a judgment. One of the grounds under which you can appeal is improper service. Because you weren't able to defend yourself in the original hearing, the court may schedule a new hearing and make a new ruling.

You don't have the ability to appeal a collection judgment indefinitely. Most states have a time limit for appeals. Let's say, for the sake of argument, the window of opportunity for filing an appeal is six months. If you aren't aware of the judgment, the collection agency may wait seven months before it garnishes your wages or freezes your bank accounts. Once this occurs, you know without a doubt that the collector has a judgment against you. Had the garnishment occurred earlier, you could have appealed, but the collector has waited just long enough to ensure that you no longer have the right to appeal before enforcing its judgment.

Protecting Yourself After the Statute of Limitations Runs

Got a surprise judgment? Kiss your money goodbye
Your goal in protecting yourself after the statute of limitations runs is to make sure the collection agency can't do anything sneaky to nail you with a garnishment, bank levy or property liens. Subscribing to a credit monitoring service is one way to do just that. I am a big, big fan of credit monitoring services. When anything changes on your credit report or something new gets added, the credit monitoring service will automatically notify you. This prevents the collector from keeping a default judgment a secret until you can no longer contest it. Although the credit bureaus each offer credit monitoring, a third party company that provides you with a tri-bureau report gives you more bang for your buck.

And whatever you do, never ever ignore a summons just because the statute of limitations on the debt has expired. You'll regret it dearly when the collector uses a default judgment to drain you financially and destroy your credit.

Related Articles:

How to Respond to a Bill Collector's Lawsuit

Can You Reset the Statute of Limitations on a Debt?

Collection Lawsuit Statutes of Limitations By State

Saturday, February 16, 2013

Identity Theft By Family Members: When a Loved One Runs Up Debt in Your Name

There are certain stories I hear over and over and over again. Here's the most common one:

My daughter/son took my credit cards and ran up a debt of xxxx. I can't pay it. Now collection agencies are hounding me for money and my credit is ruined. How can I get this debt off my credit report? What do I do?

Sound familiar? Believe it or not, this is a clear cut case of identity theft. When most people think of identity theft, they picture a stranger digging through their trash for banking or credit card information and then using that information to make purchases. Many cases of identity theft, however, aren't strangers but the people we love the most. Swiping a credit card from a parent, sibling or other family member and using it to make unauthorized purchases constitutes identity theft, and its illegal.

Your Rights As an Identity Theft Victim

Did a loved one slip away with your credit card?
Not only does identity theft leave you facing a mob of snarling, angry creditors, it can also destroy your credit history. There are numerous protections in place for identity theft victims. For example, the credit bureaus must block any information on your credit report that appeared as the result of identity theft. For example, if the thief ran up a credit card debt, the credit card company will report your lack of payments to the credit bureaus. Unless you make the credit bureaus aware of what happened, your credit scores will plummet through no fault of your own. You also have the right to be absolved of any responsibility for paying the debt. After all, you weren't the one who ran up the bill and didn't pay.

When Identity Thieves Are Family Members

In order to property report a case of identity theft, the victim must first notify the police and obtain a police report detailing the incident. This is the part that trips up victims who suffered identity theft at the hands of a loved one. They don't want to be at fault for getting their loved on in trouble with the law. To illustrate my point, here are two actual cases I have dealt with: I have changed the names, of course.

Situation #1: John contacted me a few years ago looking for help cleaning up his credit. His credit report was littered with unpaid debt and collection accounts. The damage was severe. While I was trying to draw up a plan that would help him improve his scores, he offhandedly mentioned that the debts were a result of his ex-wife applying for credit cards in his name, maxing them out and leaving him stuck with the debts.

I was delighted. At the time, there wasn't much I could do. Credit repair, in John's case, would take years. I told John that his revelation was great news. He could clean up all of the damage quickly. All he needed to do was file a police report and start the process of reporting the debt and clearing his name. He was appalled that I would even suggest such a thing. According to him, he couldn't do something so heinous to the mother of his children.

Situation #2: Paul and his wife came to me for help getting a collection agency off their backs. The collection agency was demanding payment on an $18,000 debt for a loan that Paul never received. They finally admitted, reluctantly, that the debt wasn't a random identity theft. Paul's nephew had impersonated him to get the money. Even though Paul was facing a lawsuit and the possible loss of his home and other assets, he refused to "get my nephew involved."

These aren't the only cases I've seen. This is common enough to be frightening. Usually the thief is a child, however, and I have yet to run across a single parent who had been the victim of a child's identity theft that was willing to force that child to suffer the consequences of his or her Really. Stupid. Decision. These family members seem to think that they would be doing something harmful to the other person, whereas a debt is just money. In the big scheme of things, family relationships tend to take priority over protecting oneself.

Reporting Family Members for Identity Theft

What I need you to understand is that reporting a family member who has stolen your identity isn't a strike against that person. The individual in question is the one who made the decision to run up debt in your name and must take on responsibility for that. If they get arrested, sued, etc., those consequences are the result of the choice they made to steal your identity, not the result of the choice you made to set the situation right.

Put a stop to fraudulent shopping sprees
In the case of parents, its even more vital that you report the theft. If the identity thief gets away with the crime, he or she WILL strike again. The cycle won't stop. Any consequences the thief suffers as the result of his behavior are his consequences. I cannot stress this enough. Make your family member face the music. Not only does it save you from the legal perils of unpaid debts, it teaches the individual a strong lesson that he desperately needs.

Consequences of Not Reporting Identity Theft

If you decide that its a better choice to protect your thieving loved one rather than protect yourself, consider the fact that until these creditors know you aren't liable for the debts they will continue to viciously pursue you. If the creditor sues, you could face wage garnishment or the creditor could drain your bank account repeatedly. In some cases, creditors even seize property. Thus, it becomes a case of either protecting the thief or the other innocent victims under your roof that will suffer as a result of your silence?

Report identity theft. Always.

Related Articles

Can a Collection Agency Take My House?

Removing Collections That Aren't Yours From Your Credit Report

Make Yourself Judgment Proof

Tuesday, February 12, 2013

How to Settle Your Tax Debt With the IRS Via an OIC

Depending on your circumstances, tax season could bring with it an exciting financial windfall or the horror of  discovering that you owe a tax debt to the IRS. If you fall into the latter category, the good news is that you don't have to pay your tax debt in one lump sum. You can apply for a tax debt settlement arrangement with the IRS known as an offer in compromise or, more often, an "OIC."

How the Offer in Compromise Works

When you owe a tax debt, the IRS will send you written notice of your debt. When you receive your IRS bill, you have three options:
  1. Pay the debt in one lump sum. 
  2. Pay the debt in installments
  3. Settle the debt with an OIC
Like other forms of debt settlement, an offer in compromise allows you to pay less than the amount you actually owe. You can pay an OIC either through a lump sum settlement or by making periodic payments on your delinquent taxes until you satisfy the debt. 

Offer in Compromise Restrictions and Guidelines. 

The IRS has overwhelming collection power
When you request a settlement from a creditor or collection agency, whether or not your settlement offer gets approved often rests on who you happen to be talking to. Debt collectors have quite a bit of leeway when deciding to grant or deny your settlement request. This is not the case for the IRS. The IRS has specific criteria you must meet in order to be eligible for an OIC. One of the following three requirements must be met in order for the IRS to approve your OIC request: 

1. Possible Billing Errors – If any doubt exists as to whether or not you actually owe the debt, the IRS will accept your offer in compromise. The same is true if doubt exists about whehter or not the tax debt the IRS demands is accurate. Unfortunately, doubt on your part alone isn't enough to convince tax officials that you deserve a settlement. Personally, I find it chilling that if there is a chance that the debt isn't even yours, the IRS will grant you a settlement, but you still have to pay the debt – even when the IRS knows it may not be yours. Scary, eh?

2. Debt Not Collectible – Some consumers get a tax bill only to discover that the amount they owe exceeds their assets. The IRS has extensive collection rights and can generally seize almost all of your assets when attempting to collect a debt. If the sum of your tax debt exceeds the total value of your assets, its much easier on the IRS to grant you a tax settlement than expend time and resources to collect a debt that isn't fully collectible anyway.

3. Economic Hardship – The IRS wants the delinquent taxes you owe, but it doesn't want to leave you so broke that you can't continue paying taxes in the future. Thus, if you can demonstrate that paying your tax debt would leave you and your family completely destitute, the IRS will generally approve your application for a tax settlement.

How to Apply for an OIC

You'll need to use different forms to apply for an OIC depending on which criteria you meet. If, for example, you are applying for a tax settlement based on possible billing errors, you must fill out and send in Form 656–L. If, however, your OIC request is based on a possible economic hardship or a lack of assets, you must fill out and send in Form 656 and Form 433-A.

Unlike debt collection settlements, there is no negotiating your settlement for a federal tax debt. You are responsible for including your offer in your OIC paperwork. The IRS then either accepts or rejects your offer. Before acceptance or rejection takes place, expect the IRS to request extensive paperwork from you to validate your income and assets. The IRS will continue to apply penalties and fees to your tax debt during the evaluation process.

OIC Application Costs

The IRS charges a fee of $150 to evaluate your OIC request. The $150 fee is nonrefundable, regardless of whether the IRS approves or denies your tax settlement. This fee does not apply if you are requesting an OIC based on possible billing errors or if your income falls below 250% of federal poverty guidelines.

When you submit your settlement offer, you have the option to pay your delinquent taxes via a lump sum settlement or installments. If you select the lump sum option, you must include a good faith payment of 20% of the proposed settlement offer with your OIC application. If you select the option to pay your tax debt in installments, you must include the first payment with your OIC request. Like the application fee, the initial good-faith payment is nonrefundable. If the IRS denies your OIC application, it will apply the payment you made to the tax debt you owe.

A settlement via an offer in compromise is a good option for those with overwhelming amounts of tax debt. If you don't qualify for an OIC, however, keep in mind that the IRS will provide you with a payment plan that allows you to pay off your delinquent taxes over time. 

Saturday, February 2, 2013

A Collection Agency Sent Me a 1099 MISC Tax Form, Now What?

For collection agencies, tax time is the best time of year to collect. Tax season brings with it extra cash for millions of Americans, and its no great feat for a debt collector to scare that cash right out of a debtor's wallet. For some, however, tax time also brings a 1099 MISC from the collection agency. This means trouble.

What is a 1099 MISC From a Debt Collector?

You have to include your 1099 debt when you file taxes
All business have the right to write off bad debt as a loss at the end of the tax year. Collection agencies are no exception. If the collector considers your debt uncollectable, it will claim that debt as a loss and send you a 1099 MISC form. The 1099 serves two purposes: it notifies you that the debt has been written off as a loss and it also notifies you that the IRS is aware of it.

Those with outstanding debts aren't the only ones who might discover they're subject to a collection agency's 1099. If you paid a settlement to a collector, the collector has the right to claim the unpaid portion of the debt – the portion is supposedly "forgave" – as a tax loss. And there's that 1099 again.

The law says that when you receive a 1099 for bad debt, you must claim the debt as income when you file your taxes. Not only could this cut into your tax refund, it could leave you owing the IRS. The collection agency doesn't have to pay taxes on the bad debt because it constitutes a business loss, but somebody has to pay. In this case, that somebody is you.

A 1099 Doesn't Stop Collection Activity

For many debtors, worn down by aggressive debt collectors, a 1099 is a sigh of relief. They'll include it in their income, pay taxes on it and then it will disappear. Gone. Poof. Freedom. Right?

As ludicrous as it sounds, the collection agency has the legal right to continue attempting to collect the debt, even after claiming your account as a tax loss. Whether or not you've paid taxes to the IRS on the debt is of no consequence to the collector. Should the collection agency successfully collect the debt, it must report this fact to the IRS and pay taxes on the money. Neither the collection agency nor the IRS will refund the tax you paid after receiving the 1099 form.

This sounds so unfair that few people are willing to accept it. Those with some legal knowledge will often argue that the Code of Federal Regulations prohibits businesses from selling a debt or continuing collection activity after sending the consumer a 1099 and writing off the account as a loss. And that's true – if you happen to be a corporation. This regulation only applies to business debt, not private consumer debt. When it comes to debt owed by private individuals, the collector can continue collection activity without restriction. It can even sell your debt to another debt collector.

What Do I Do When I Get a 1099 From a Collection Agency?

I wish I had better news for you but, in this case, the best thing to do is to grit your teeth and pay the piper. The IRS is a whole heck of a lot more dangerous than even the most aggressive collection agency. In the event of an audit, the IRS can and will slap you with a whole host of fees should you "overlook" income (even though the debt is clearly not income, the IRS doesn't see things that way). It's crucial to keep records of the 1099 and the fact that you paid taxes on it, lest another debt collection agency send you a 1099 in the future for the same debt.

Related Articles:

Can a Collection Agency Take My Tax Refund?

Friday, February 1, 2013

Does Being Debt Free Help or Hurt Your Credit Score?

Debt free? Don't cut up those cards just yet.
Common sense dictates that the less debt you have, the more disposable income you have available to pay for things you want or need. If you think your debt-free lifestyle increases your chances of getting an auto loan, mortgage loan or credit card however, you'd be dead wrong. Oh, don't be so shocked. Since when has any American financial system worked the way it was supposed to?

Completely Debt Free? You May Not Have a Credit Score

A common mistake I keep running into again and again is this: Consumers tend to think that their credit scores start out at the maximum level and only drop when they start misbehaving with debt. This is a dangerous misconception. 

Here's how it really works: You start out with NO credit. When you do manage to get a credit card or loan, your lender reports the account to the credit bureaus. If there is no individual in the credit bureaus' database whose information matches yours (such as your name, SSN, etc.), the credit bureaus "create" a brand spanking new credit report. You only receive a credit score after you've made or missed several payments. 

If you never use debt, no creditor ever tries to report an account to the credit bureaus in your name. This results in you not having a credit report. Should you ever need a loan or credit card, your lender will attempt to pull your credit report and scores and will come up empty handed. 

No Credit = Bad Credit 

Lenders don't just look at your credit reports to see how much debt you carry, but also to determine how you've managed your previous debts. The way you've managed debt in the past is a strong indicator that you'll continue the same behavior in the future. If you have no credit history and no credit score, you don't fit into the lender's neat, orderly little box. You're a wild card. Perhaps you're excellent with money, but there's just as good a chance that you're completely irresponsible and you'll default on the loan or credit card. More than just your approval rides on your credit report. Your credit report and scores also determines your interest rate. If you have no credit, you're lucky just to be approved for something. And in the unlikely event that approval takes place, your interest rate will likely be through the roof. 

Limited Credit Can Result in a Lower Score

Don't assume that you're safe just because you have a credit report and the information it reflects is positive. If the accounts on your credit report are closed because you're living the debt-free life, they will eventually age off your report. Most bad information only hangs around for seven years while positive closed accounts will remain on your credit report for ten years. 

A portion of the credit scoring formula looks at the age of your accounts. The older each debt gets, the less impact it has on your overall score. Thus, you may have a good credit score today, but if your new debt-free lifestyle doesn't take credit management into consideration, your credit scores are in a steady state of decline. 

"But I'll Never NEED Credit. I Pay In Cash."

This is what they always say...those debt free people with no credit or limited credit. They are secure in the fact that they can continue paying cash for everything they need indefinitely. And if you are a multi-millionaire, you go right on ahead with your bad self. If you're a regular Joe like the rest of us, you're in the trouble pit.

Cash is king...until its beheaded and overthrown

Unless you keep a crystal ball tucked away under your jacket or married a psychic, you have no way of knowing what the future will bring. No matter how much you don't want to play "the game" or how dedicated you are to paying only in cash, the time may come when you'll need a credit card or loan. Don't sacrifice your good credit on a gamble. Take the time to build and maintain your credit like a vintage muscle car. It's worth it. You may be secure in your debt-free life, but have a little extra security in the form of a great credit score never hurt anybody. 

Related Articles: