Millions sued, wages garnished–often by shady tactics that leave courts unable to help ignorant consumers; fueled by recession, student-loan rates rise nearly 50% since 2007

April 15th, 2010 by Mike Hinshaw

From The New York Times (Apr. 2), we see that creditors are increasingly reaching out and tapping alleged debtors’ bank accounts via wage garnishment.

“One of the worst economic downturns of modern history has produced a big increase in the number of delinquent borrowers, and creditors are suing them by the millions.

“Concern is mounting in government and among consumer advocates that the debtors are not always getting a fair shake in these cases.”

The NYT says national stats are not kept, but that such seizures are up 30 per cent in Cleveland from the past year to this; 55 per cent in Atlanta since 2004; and 121 per cent in Phoenix since 2005.

Phony paperwork

Sometimes the creditors are able to sneakily grab the dough: “Some consumers do not even know they are being sued; the people who are supposed to serve them with formal notice have sometimes been caught skipping that step and doctoring the paperwork.”

Anyone lucky enough to realize that their bank account is being targeted should definitely take notice and appropriate action. Often the creditors instigating the action can’t even prove up on the debt, hoping instead to bully their way to a favorable judgment, via the ignorance of the individuals being sued–or the courts’ lack of recourse when the individual mounts no defense.

“In far more cases, consumers are served but still do not offer a defense. Few can afford lawyers; others are intimidated or confused. In their absence, judges can offer little relief.

“In the rare event that a consumer battles back, creditors frequently lack the documentation to prove their claim, and cases are dropped.”

As the article mentions, filing for bankruptcy protection can help, despite the restrictions in the law that the banking-and credit lobby got passed in 2005.  A Chapter 7 filing can discharge many debts, and Chapter 13 protection offers a structured repayment plan. Both will stop harassment and lawsuits from unsecured creditors and debt collectors.

When defendants don’t show, creditors win by default

Still, it’s imperative to be proactive because some states “allow creditors to charge high interest rates for years after a lawsuit is decided in their favor. In others, creditors can win lawsuits by default and seize wages and bank accounts without a case ever appearing before a judge.”

One example from the article cites a case that “shows how punishing the system can be. In January 2001, a Mr. [Casey] Jones, 45, a maintenance worker from California Crossroads, Va., took out a $4,097 personal loan from Beneficial Virginia, a subprime lender now owned by HSBC, the big bank.

“He fell behind, and Beneficial sued. Mr. Jones did not appear in court.”

By not appearing in court, Jones virtually guaranteed Beneficial of winning a default judgment, resulting in an award of “$4,750, plus $900 in lawyers’ fees, with the debt accruing interest at 27.55 percent until paid in full. The bank started garnishing his wages in March 2003.

“Over the next six years, the bank deducted more than $10,000 from Mr. Jones’s paychecks, but he made little headway on his debt.”

But only $134 applied to principal

By the spring of 2009, Jones still owed “$3,965, a sum nearly equal to the original loan amount.” He finally got an attorney, who discovered  “that all but $134 of his payments had gone toward interest, fees and court costs.”

The bank finally stopped once Jones got a lawyer, which saved him nearly four grand–but by then, he had already paid more than double the original loan.

Student loans up to $56 billion

On another front, a Reuters piece posted at CNBC (Apr. 1) rings an alarm bell about increasing levels of student loans, saying the “unprecedented number of loans . . .[has]negative long-term implications for the housing and auto markets.”

The Great Recession has taken a chunk from the rate of bank-backed credit cards, both in apps submitted and in apps approved. Meanwhile,  however, Equifax told Reuters that outstanding student loans total $56 billion, a rise of “about 50 percent since 2007.”

The news service quoted Dann Adams, president of Equifax’ U.S. Consumer Information Solutions: “This generation of students will be less able to buy their first home given their debt load. Their largest payment will be their student loan.”

Here’s something to keep in mind, though: Even though the recent changes to student-loan law include upper limits on the size of payments to service the loan (10 per cent of discretionary income versus the current 15 per cent), the bankruptcy code offers very little protection regarding student loans.

Hardship exemption

Basically, the only relief through bankruptcy court is obtaining a ruling that repayment of the loan represents an extreme hardship. It’s not impossible, but it is difficult. Here’s a site that offers a pretty good rundown of the process, including guidelines for both Chapter 7 and Chapter 13, along with some “case-study”-type examples.

(Note: For a good summary of the student-loan changes, see this April 8 post at the San Francisco Chronicle’s Web site, via Ivestopedia. Oddly enough, there’s also an Investopedia link to a slideshow “The Top 5 Reasons why People go Bankrupt,” listed as medical expenses; job loss; poor/excess use of credit; divorce/separation; unexpected expenses such as loss through theft or catastrophes.)

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