Consumer Debt – What Should You Do?

Typically, we write a short article for our individual clients in our newsletter, as well as a separate article for our business clients.  We post those articles on our firm’s website as a blog so that folks can ask follow up questions or make comments.  This month, the same topic applies to both types of clients, but the approach for each may be quite different.

We often get calls from people about collection issues on credit cards and other consumer debt.

These calls come from both the consumer, as well as business which are owed money.

Our firm does not handle consumer debt cases, which is what personal credit cards are. We only handle commercial collection matters, so if you do need legal assistance in the consumer area, you will need to find another law firm that can help you.  However, I might be able to give you a few general pointers, for both the consumer and for businesses that extend credit to consumers.

Consumer:  You have just been served with a law suit claiming that you owe money on a credit card.  What do you do?

If you DO NOT owe the debt, or if you have a reasonable defense as to why you do not owe the debt, then it is worth fighting the case.  For example, the credit card company is suing the wrong person.  You never had the credit card with them, so owe them nothing.  Maybe you paid the balance in full, or at least a portion of it, and you have the cancelled check as proof. If you do have a defense, then you should find an attorney to help you with it if you have been sued.

However, if you DO owe the money but just don’t have the funds to pay it, filing an Answer or making an appearance in the law suit may not be the best thing.  Sometimes doing nothing is the best thing.

Filing an answer to a lawsuit causes the credit card company’s attorney to have to prove their case, which if there is no real defense, does nothing but increase the amount of attorney’s fees.  If you do nothing after you are served with the law suit, then they may get a default judgment against you, but the attorney’s fees will be less than if you make them prove up their case.  Understand that doing nothing may be the best thing to do ONLY if you owe the money and have no defense that you can raise as to why it is not owed.

The fact that you don’t have the money to pay the debt, or you lost your job, or you have medical bills, etc., is a REASON why you can’t pay.  It is NOT a defense.  That just says why you can’t pay it now; not that you don’t owe it.

If you have some funds, it may be beneficial to call their attorney and see if you can settle the matter.  The credit card company is not required to work with your or to even try to settle.  However, if they take a judgment against you, collection against an individual in Texas is very difficult with our homestead laws and strong exempt property laws.  They may have a worthless judgment if all of your assets are protected or exempt.  If so, then it may be in their best interest to take what they can.  A judgment will hurt your credit, but chances are that if you can’t pay the bill, your probably don’t have the best credit either.  However, no one wants to be looking over their shoulder all the time looking to see if the judgment creditor or their attorney might have found an asset that they could attach and take to help pay the judgment.

If you do reach a settlement with their attorney, make sure that you get it in writing.  That is the only way that you can prove what was agreed to.  Make sure that you comply with what you have agreed to as well, since a day late or a dollar short and you have broken the agreement.

Business: You have extended credit to a consumer, perhaps by credit card, and they have not paid you.  What do you do?

Businesses should establish internal procedures to follow up on outstanding accounts receivable if they are past due by a certain number of days, such as 30 or 40 days.  The sooner you pursue outstanding receivables, the better your chances of collection.  Old or “stale” claims can be very difficult or impossible to collect.

You should try to contact the consumer to see if there is any reason why they have not paid the debt.  Are they dealing with a cash flow issue, or is there some dispute?  Perhaps the goods or services shipped were defective or never received.  Maybe the customer did not get what they ordered or were expecting.  This is the point where you can resolve most issues, and usually maintain a good relationship with the customer.  If there was a mistake or a problem, you have an opportunity to fix it.  If done promptly and courteously, this can be a great way of maintaining a loyal customer and building good will.

If your customer does not dispute the debt, then you should try to see if a payment plan can be worked out.  Often times customers faced with financial difficulty are embarrassed and will not contact the business to say they are having problems.  However, if you are respectful and let them know that you are willing to work with them, within reason, you can often reach an agreement to get the debt paid, and maintain a good client relationship.

However, sometime the customer will not respond to you or will not follow through with agreed payments.  Then what should you do?

If you are in the business of selling goods or services, and not in the business of debt collection, then the Texas and Federal Fair Debt Collection Practices Acts do not apply to you.  However, if you hire a collection agency to assist with collections, it does apply to the collection agency.  Since the collection agency is acting as your agent, anything that they do wrong in violation of collection laws is imputed to you.  In other words, your agent’s wrongful actions will be treated as if you did them yourself.  Be very careful to make sure that you are dealing with a reputable agency if you want to try to pursue collections through a collection agency.

One other drawback with using a collection agency is that if they are not able to collect on the debt, the claim is that much older or more stale and by this time the customer is probably tired of the calls and even more willing to ignore you and your debt.

As mentioned above, collection against an individual in Texas on consumer debt is very difficult given our state’s strong homestead and exempt property laws.  For this reason, it is very difficult to find an attorney that will handle consumer collections on a contingency fee basis, where you don’t pay any attorney’s fees, and the attorney only collects payment on what they recover.  So unless you have information to show that the consumer has non-exempt assets available to pay a judgment, you might need to pay an attorney straight time or consider handling the collection yourself.  In Texas, Small Claims Courts have jurisdiction of up to $10,000.  If your damages are less than that, you can bring suit yourself, without an attorney.  Corporation and LLCs are able to be represented through an officer or a member/manager, and do not need to hire an attorney.

As discussed above, collection in consumer cases is pretty difficult in Texas.  For that reason, if you are able to reach a settlement with a customer, if may be in your best interest to do so.  If you have concerns that they may not make agreed payments after suit is filed, you can usually ask the Court to put your case on hold to give the customer a chance to pay.  That way, you are not dismissing the case until all the settlement payments have been made if the customer required a payout.  Make sure that all agreements are written so that everyone is clear on what has been agreed to.

If you have not been able to settle the case and have to take a judgment against a customer, make sure that you order an Abstract of Judgment and file it in the county where your customer lives or where you know they may own real property.  This will put a lien on all non-homestead real property in that county, if any, and will have to be paid off if they want to sell the property.  Judgments are good for 10 years, so if you want to keep the judgment “alive”, make sure that you talk with an attorney about what needs to be done before those 10 years are up and the judgment becomes dormant.

So what you do and how you handle the debt will depend upon whether you are the creditor or the debtor, whether you have any defense or not, how collectible any judgment might be, and how willing the other side is to cooperate with you to get the matter resolved.

For more information regarding debt collection on Consumer Debt and the Texas and Federal Fair Debt Collection Practices Act, or to file a claim through the Texas Attorney General’s Office, click: https://www.oag.state.tx.us/consumer/debt_collection.shtml.

f you believe that you may be the victim of Identity Theft and want to know what you should do, please take a look at this link to the Federal Trade Commission on what to do to recover from identity theft: http://www.ftc.gov/bcp/edu/microsites/idtheft//consumers/defend.html.

I hope that some of these pointers will help!

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