The Consumer Financial Protection Bureau (CFPB) recently sanctioned two of the largest debt collectors for deceptive and abusive debt collection practices. The two entities are Portfolio Recovery Associates and Encore Capital Group, Inc. Encore’s subsidiaries are Midland Funding LLC, Midland Credit Management, and Asset Acceptance Capital Corp. These entities buy delinquent or charged-off debt from banks and other companies, usually for pennies on the dollar, and then try to collect the debt from the consumer.
The CFPB determined that these companies engaged in numerous illegal and deceptive practices, including: attempting to collect on unsubstantiated or inaccurate debt, suing or threatening to sue consumers after the statute of limitations had expired, pressuring consumers to make payments using misrepresentations, disregarding consumer disputes, making harassing collection calls, and relying on robo-signed documents to file tens of thousands of lawsuits against consumers, often without any intention or ability to prove the debt.
The CFPB imposed a number of sanctions. Encore was ordered to pay up to $42 million in refunds, a $10 million penalty, and to stop collection on $125 million of debt. Portfolio Recovery must pay $19 million in refunds, an $8 million penalty, and must stop collection on $3 million of debt. Among other penalties, the two companies were ordered to reform their debt collection practices, and are prohibited from reselling the debt they buy to other debt collectors. Read more on How to Avoid Debt Collection Scams in Arizona.
Real estate bankruptcy has risen. With the financial downturn of the last several years, and the corresponding deterioration of lease rates for real estate, many real estate investors have found themselves in the unenviable situation of owning residential or commercial real estate that does not generate sufficient revenue to cover the debt service. Faced with such a situation, the real estate investor usually sees two alternatives: (1) to hold on to the real estate and try to minimize losses by continuing to lease it out, in the hopes that eventually the market will recover, and the investor will be able to offset the current losses with future gains derived from increased rents, or (2) to cut the losses short and let the lender foreclose on its collateral.
The first of these options is not very attractive, because the investor’s financial situation may not allow him/her to continue to take losses for years in the hopes of a market recovery. This is especially true if the investor’s primary source of personal income is the lease or rental of real property. The second option can be even more unattractive because, at least when it comes to commercial property or multi-unit residential property, allowing the lender to foreclose will likely expose the investor to personal liability for the deficiency balance of the debt. Even where the mortgage is non-recourse (as is usually the case with single-family or two-family residential real estate), the investor may still wish to avoid the foreclosure route, either because of the unique characteristics of the specific piece of real estate, or because the investor cannot obtain financing for a new or alternative investment, or for a number of other possible reasons.
There is, however, a third alternative, which is often not considered because the investor is not aware of it—the adjustment of debt through bankruptcy. A Chapter 11 bankruptcy (or Chapter 13 bankruptcy where appropriate) is a unique mechanism that allows a real estate investor to modify secured debt in a number of different ways. First, the secured portion of the mortgage or loan can be reduced to the value of the property securing the debt. So, for example, if the mortgage balance is $150,000, but the market value of the property is $100,000, the mortgage can be reduced to $100,000, with the remaining $50,000 being treated as unsecured debt. Second, the interest rate on the secured debt can be modified to more accurately reflect current market conditions. Third, the amortization (or repayment) term for the secured portion of the debt can be extended or otherwise modified. Together, these techniques can often allow the investor to both keep the investment property and to reduce the monthly debt service to well below the amount of monthly rent, making the continued rental or lease of the property profitable again.
There are additional benefits of bankruptcy to a real estate investor, such as the ability to terminate unfavorable leases or contracts.
As a bankruptcy attorney, I am used to counseling individuals and families who are struggling with debt. But what I still cannot get used to seeing is how well-meaning people, who want to do what they can to pay off their debts, end up making their debt problems much worse by using incorrect debt management methods. And this is almost always avoidable.
Or, as often happens, you get so inundated with the credit card company’s collection calls and letters, that you are willing to pay them just to make it stop. So you skip a mortgage or car payment to pay the credit card company, hoping that you’ll catch up later. If you can’t catch up, or fall even further behind, you now stand to lose your house or car. And because of accruing interest, you probably still owe the credit card company as much as you did to begin with.
Second, you want to protect your exempt assets. Exempt assets are those that your unsecured creditors cannot touch, regardless of how much you owe them. What assets are exempt varies from state to state. Arizona law provides many different exemptions, including an exemption for your car and an exemption for many items of your household goods and furniture. However, most people’s biggest exempt asset is a retirement or 401(k) account (although a house in which a person lives can also be claimed exempt, in most cases the house will be encumbered by a mortgage). If you are struggling with debt, there is a natural tendency to want to use your retirement account or other exempt assets to pay down the debt. Unfortunately, oftentimes this tactic will not resolve your debt problems but only prolong them. Ultimately, you may still end up having to seek debt relief through bankruptcy, but if you deplete your exempt assets before filing for bankruptcy, you will make your road to financial recovery that much more difficult.
Third, do not incur secured debt to pay off unsecured debt. Secured debt is debt that, if not paid, will result in the loss of the collateral that you pledged to secure the debt. On the other hand, unsecured debt, if not paid, does not automatically result in the loss of any property. More importantly, unsecured debt is dischargeable in bankruptcy. So, to use the example from earlier in this article, if you take out a home equity line of credit (“HELOC”) to pay off a credit card, you have converted what was an unsecured debt (credit card) into a secured debt (home equity loan). If you had difficulty paying the credit card, you will probably have difficulty paying the HELOC. But now that the debt is secured, if you are unable to pay it, you are likely to lose the property securing the debt, i.e. your home in our example. In addition, if you end up seeking debt relief through bankruptcy, you can, with some exceptions, eliminate unsecured debt. However, in most cases, you cannot eliminate secured debt unless you are willing to get rid of the property securing the debt.
The short answer is yes. I see this situation all the time: parents co-sign loans for their children, family members co-sign for each other, and friends co-sign for friends. Then, when the primary debtor stops paying, the creditor tries to collect from the co-signer. At that point, there are four basic ways for the co-signer to handle the debt: (1) dispute it (e.g. because the debt is too old, or because it is unenforceable for some other reason), (2) try to settle with the creditor, (3) file for bankruptcy, or (4) not do anything. The last option should only be used after careful consideration of all alternatives, and generally only if the co-signer is judgment-proof (meaning the co-signer does not have assets that could be taken by the creditor). Of course, there is also a fifth option—to get the primary debtor to pay the debt—but oftentimes the primary debtor simply does not have the resources to pay. Afterall, the likelihood of non-payment by the primary debtor is probably why the creditor required a co-signer in the first place.
Co-Signed For a Loan?
bankruptcy (chapter 7 cases tend to be simpler than the other two), and the type of assets and debts you have. Still, bankruptcy by its nature is a complicated process, where a small mistake can have significant negative consequences. For example, not completing the required credit counseling before filing will cause your case to be dismissed. As another example, if you have 
suggest strategies for protecting your assets or eliminating debt that you would not think of on your own. The need for a good bankruptcy lawyer also increases if you are filing under