Settling Collections Before the Statute of Limitations Expires

Hi Lee,

I currently have an account with citi and another with usaa at $4000 each which were just charged off. I would like to get a paid for delete for both at most 50%. I plan on buying a house in a year. A CA is managing the Citi account but Citi still owns it. What do you suggest is the best way of handling both of these debts. I live in Florida SOL is 4 years and I am no where near that. I realize that settling without a PFD would not help my credit score.. Help!! Thanks..

- SA


SA,

I appreciate your enthusiasm. Unfortunately, your odds of getting a pay for delete from either of these creditors is slim to none. Let me explain:

The credit card companies want the full amount. The collection agencies also want the full amount because they collect a percentage of whatever they can convince you to pay. Even if the collection agency were to agree to a pay-for-delete for a debt this young, they only have control over their own trade line. The original creditors' trade lines that illustrated the charge offs are still going to be there unless that pay-for-delete comes from the credit card companies themselves.

I see what you're trying to do. You want to negotiate a pay-for-delete with the original creditors. Doing so would require them to pull the debts out of collections – effectively eliminating the collection agencies' trade lines – and delete their own charge offs as part of the arrangement. You then get a clean credit report and the ability to qualify for a mortgage while only paying half of the debt. 

These days, however, pay-for-delete's are a rare beast and you'll almost never be able to negotiate one with an original creditor. You may be successful in getting the debt settlement you want, and you may be successful in getting it from the original creditors instead of the collection agencies, just don't expect a pay-for-delete to be a part of that agreement. Most of the time, there's really no point to paying anything on a debt if the creditor in question won't delete it from your credit report. 

Buying a house in the future isn't an immediate concern. The potential for a lawsuit is. Although a lawsuit is more likely when you owe more than $1000, collectors in this tough economy are often suing for much less – and you're sporting two debts with a $4000 price tag each. 

Whatever you do, tread carefully. If you start making calls and asking for a settlement, that's going to show your creditors that you have some extra cash on hand that you could be using to pay the debt. Why should they agree to settle the debt with you for half of what you owe when its much cheaper for the credit card company or collection agency to simply sue you and force you to pay the whole thing? Collection agencies often don't have a leg to stand on when it comes to lawsuits, but your debt is relatively recent and there's a fair chance that the paperwork to back up your debt in court is still easily attainable – especially if its the original creditor who opts to sue. 

Don't get me wrong, I'm not saying its not a good idea. I'm just saying its not a good idea right now. If you wait until the SOL has expired on both debts before starting negotiations, the collection agencies have no choice but to work with you if they want to get paid (and if you're offering 50% of a $4000 debt, they'll want to get paid). Do it now however, and its akin to waving a red flag in front of a bull. If you think collections will hurt your chances of qualifying for a mortgage, wait till you see what a civil judgment and garnishment will do. You can certainly try, but in my opinion it simply isn't worth the risk. 

What Happens to a Second Mortgage During and After Foreclosure?

If you own a home and find yourself in a financial bind, taking out a second mortgage can alleviate your money woes. Granted, that home equity loan or HELOC (we're going to lump HELOCs into the "second

Do you really need that second mortgage?

mortgage" category for simplicity's sake) will cost you the equity you worked so hard to build, but most people end up selling their homes long before they pay off that 30-year mortgage anyway. While beneficial under the right circumstances, your second mortgage loan becomes a serious complication should your home fall into foreclosure.

Second Mortgages, Liens and the Foreclosure Process

When you take out a first mortgage, you must use your home as collateral. Your first mortgage lender attaches a lien to your property preventing you from selling the home without paying off your debt in full. The same is true for home equity loans or lines of credit. Because your home serves as the security interest for the debt, both lenders hold valid real estate liens and either lender can initiate foreclosure proceedings when you default on its loan.

During a foreclosure, loans are paid in order of priority. The first mortgage lender gets paid first because it filed its lien first. Any other lien holders are paid in the order their liens were filed – including the second mortgage lender. It often happens, however, that the home doesn't sell for enough money to pay off all of the liens the home carries – leaving some lien holders unpaid. To make matters even worse for junior lien holders, a first mortgage foreclosure wipes out all junior liens. Thus, your second mortgage lender could end up losing its security interest – your home – and getting no proceeds from the foreclosure sale.

Your Responsibility for Paying a Second Mortgage After Foreclosure 

After your first mortgage lender forecloses, your second mortgage lender's security interest – its real estate lien – no longer exists. Unfortunately for you, your contract with the second mortgage lender is still valid. You still owe that home equity loan or HELOC, and the lender isn't going to just forget about it and let you waltz away into the sunset debt-free. Not a chance.

All banks policies differ, and your second mortgage lender may allow you to continue making payments on your loan. This scenario is more likely if you continued paying your second mortgage when your first one fell into default and, eventually, into foreclosure. If you defaulted on your second mortgage along with the first, however, the lender may not give you the chance to pony up the dough voluntarily. It may just sue you.

Consequences of Second Mortgage Debt Lawsuit

Mortgage companies are not collection agencies. I advocate fighting collection agencies in court because they are sloppy, unorganized and often have no paperwork to back up outrageous financial claims. This is not the case with mortgage lenders. If a mortgage company sues you, you aren't likely to come out on top.

Stopped paying? Get ready for a lawsuit 

When the second mortgage lender wins its lawsuit, the court gives the company a civil judgment. Armed with a civil judgment, the lender can levy your bank accounts, garnish your wages, seize certain items of personal property and attach liens to other property you own, such a a car or second home. Even worse, the judgment itself is a public record. It appears on your credit report and can devastate your credit scores. Unlike most other negative credit report entries which only remain on your credit report for seven years, civil judgments stick around for the same amount of time that they are enforceable. Depending on the state you live in, a post-foreclosure civil judgment could stick around for a decade or more.

Statute of Limitations for Second Mortgage Lawsuit

Your lender knows that your finances are shot immediately after a foreclosure. Trying to collect from you at this point would likely be futile. You clearly don't have the assets to pay the debt because, if you did, you wouldn't have lost your home. Bank reserves are also at an all-time low immediately after foreclosure.

Does this stop the second mortgage lender from suing you? Absolutely not. It just stops the lender from suing you immediately  The lender wants to collect your defaulted loan balance, and the best way to do that is to hang back and give you the opportunity to get back on your feet financially before snatching the rug out from under you.

How thoughtful.

Every state, however, has a statute of limitations after which you have an airtight defense against your mortgage lender in court. Should the lender sue after the statute of limitations expires, it cannot obtain a judgment against you if you use the expired SOL as a defense in court. At this point, it doesn't matter if you owe the debt or not. All that matters is that the debt is too old and the creditor cannot take legal action past this point.

I'd like to think the lesson in our little cautionary tale is simply this: Avoid second mortgages. Just say no to HELOCs and home equity loans. Run, run, run from using your home to acquire even more debt for things you property don't need in the first place lest your efforts end with a foreclosure.

Related Articles:

Collection Lawsuit Statute of Limitations By State

Make Yourself Judgment Proof

Funds Exempt From Bank Account Garnishment

Salary Overpaid--Employer Suing for Wage Overpayment

Hello Lee,

 I hope you can help me. I received a notice from Linebarger Goggan Blair & Sampson, LLP (Attorneys at Law) stating that I owe $11,300 to their client Los Angeles County. I used to work for LA County and quit in 2008. They overpaid me for a couple of months and I personally let them know so that they could stop. I wanted to return all the extra money they'd paid me but they wanted all the gross amount. I disputed but my dispute went nowhere. Now I'm in collections with Linebarger Goggan Blair & Sampson, LLP . I sent a Letter requesting Debt Verification within 30 days. It has been 90 days and they haven't replied. Should I send them another DV letter? I'm scared, I read that these lawyers are tough to beat because they work collecting debt for the government, so they don't care about going to court. I'm not working but I've been told that if they win in court they can garnish my husband wages. I live in California. I read that the SOL for public employees is 3 years, do you know if this is true? It's been more than 3 years since I quit working for the LA county(I was a public employee) Also, this is an overpayment debt, is the law different with this type of debt? 
Please help.

---Pat


Dear Pat,
   
Your situation is clearly unusual. This is the first time I've encountered a debt collection for the overpayment of one's paycheck.

Let me see if I've got this straight. You say you offered to return the overpaid wages. Instead of accepting the money, the city demanded that you return your gross pay which is pre-tax. Assuming that they taxed you as usual, that would mean you would be returning the overpaid funds but also the money you legitimately earned in addition to taxes that had already been withheld, correct? This would leave you with no income whatsoever for two months of work that you performed simply because of their payroll error, yes?

As far as collection activity goes, a law firm is considered to be bound by the Fair Debt Collection Practices Act if that law firm is hired to collect a debt on behalf of the original creditor. Assuming that this law firm is attempting to collect a debt (and I don't see how they'd argue otherwise) they would be considered a third-party collector and bound by federal debt collection regulations. Thus, their initial contact with you should include a dunning letter containing the mini-Miranda ("This notice is intended to collect a debt and any info obtained will be used for this purpose") and notifying you of your right to dispute the validity of the debt. Provided you do so within 30 days, and it sounds as if you did, the law firm must provide you with proof of the debt they claim you owe. Continuing to conduct collection activity without honoring your validation request is a violation of the FDCPA. I'm going to assume that, since these guys are lawyers, they haven't broken the law and thus you haven't heard from them since you sent your DV letter. 

I can tell you the statute of limitations for general debt collection in California, but I have a feeling that isn't going to matter. I've heard the same thing in regards to the statute of limitations for recovering an employee's overpaid wages being 3 years but I haven't yet been able to verify that information as accurate. The standard SOL is four years. 

My recommendation to you is to schedule a free consultation with an attorney to determine the best course of action for defending yourself in this situation. This isn't something you're going to be able to fight on your own. If you try, they'll find a way to railroad you – even if you have a laundry list of FDCPA violations. If the SOL has indeed passed, the attorney will be well worth the cost. Depending on your situation, you may even have grounds for a countersuit that will cover your attorney's fees. I cannot stress enough how important this is. 

And as far as your husband's wages go, yes, they can garnish them. California is a community property state. Community property laws are intended to protect both spouses should a couple divorce, but debt collectors use them to force one spouse to pay another's debts. Not only can they garnish your husband's wages, they can levy his bank accounts and place liens against personal property and real estate he owns. They need to win a lawsuit against you (or your husband. They have the right to sue your husband for the debt instead of you) before they can go after your/his assets. 

If you haven't already, start creating a paper trail NOW. Try to stay off the phone. Instead, force all parties involved (except for your lawyer) to communicate with you in writing only. This gives you a clear paper trail of all events. If you've received emails, print those out and keep them as well. Create a timeline of events and place all of your paperwork in a file to hand over to your attorney. Remember, they need to sue you and win in order to force you and your husband to pay. If you and your attorney can prove the SOL has expired, suing you should no longer be an option. 

If you have a chance, let me know how this goes for you and what your attorney says. Best of luck. 

Lee