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Can Debt Collectors Repossess My Car?

If you're like many of us, you need your car to get to work or school, carpool kids or grandkids, or to do your shopping. But what happens if you are getting calls from debt collectors who you can't pay? Can a debt collector take your car?

Our reader, Marbella, who lives in California, says a collection agency told her she must appear in court over a debt of $1,200 that she defaulted on a while back:

I'm not working right now and I don't think I am until about a year. Now the thing is that I have a car under my name but my (boyfriend) also appears on the title. Could they go after the vehicle?

"Like many life situations, there's the formal, legal answer, and then there's the practical answer," says Northern California bankruptcy attorney Cathy Moran, who blogs at BankruptcyInBrief.com. "Legally, a creditor with a judgment could reach the share of a co-owned asset that its debtor owns. If there is a loan attached to the car, there has to be enough value in the car to pay off the debt from your share of the car before a creditor could have the sheriff tow the car and sell it. They'd have to give the co-owner his share of the sale price."

But practically speaking, there are a few hurdles. The first is the fact that some personal property is off-limits to creditors. In our reader's case, the California exemption protects $2,900 in equity in a vehicle. (In each state, specific property is "exempt" or safe from creditors. Types and amounts of exemptions vary by state.) "So the car would have to have enough value to pay the sheriff's fees to tow and sell it and the exemption to which you are entitled before the creditor gets anything from the sale," says Moran.

In fact, Moran says that in 37 years of law practice, the only creditor she's seen try to seize and sell a car is the Internal Revenue Service. (Note: the IRS has greater powers than other creditors when it comes to seizing property.)

And there's another hurdle: Before a creditor can go after an asset like a car they must first get a judgment in court. And to do that they must sue the consumer and win — and again, only then could they try to seize and sell the car.

"Going this route is expensive for the judgment creditor and risky in that any procedural error could open the judgment creditor to one or more federal or state consumer protection law claims," says Atlanta bankruptcy attorney Jonathan Ginsberg. "Since you are only part owner of the vehicle, the seizure option is even less attractive, especially since the total debt is only $1,200," he says. He agrees with Moran that the IRS is the only creditor that would likely go after personal property like a car.

But that doesn't mean Marbella — or you, if you find yourself in a similar situation — should just ignore collectors. If you are sued for a debt and fail to show up in court, the plaintiff (the collector or creditor who sues you), will get a judgment against you which may open the door for them to go after property that is easier for them to get, such as your wages or money in a bank account. Exactly what they can do to collect a judgment debt depends on state law. A consumer law attorney can tell you what's at risk and may be able to help you negotiate a settlement or raise a defense to the lawsuit in court. "You can also talk to your lawyer about possibly filing bankruptcy," Ginsberg says, "which could make the problem go away entirely."

Also worth noting is the fact that if a creditor already has a judgment against you, some property may be at risk already. Credit.com commenters often tell us that they didn't even realize there was a judgment against them until they got their credit reports or credit scores (you can check your credit scores for free every month on Credit.com) — or until they discovered their bank account had been emptied by a judgment creditor. Here's how to get your free annual credit reports to find out if a judgment is listed there. If you find one, make an appointment with a consumer bankruptcy attorney right away to discuss your options.

Why a Debt Collection Letter Doesn't Look Like It's From a Debt Collector

The most difficult part of a debt collector's job has been, and always will be, establishing communication with the consumer they are collecting from. Debt collectors go to great lengths to establish contact with consumers primarily through telephone calls and letters. In my experience, once contact is eventually established with the consumer, one of their biggest complaints is the claim they have never been notified about their debt being in collection. This would always come as a surprise because we would send consumers what is known in the debt collection industry as a "validation notice" once we received the account. The validation notice outlines the consumer's rights to validate their debt if they are unsure of it. So if a debt collector is sending validation letters – and it's my experience that the majority of debt collectors do — why aren't consumers receiving them?

The answer most likely is consumers are receiving them, but because the envelopes from debt collectors are often vague and inconspicuous, they aren't getting opened. These letters are often confused with solicitation from marketing companies who keep the return address and envelope nondescript in order to get the recipient to open the piece of mail. However, a lot of recipients won't open mail if they do not know where the letter is from or who sent it. The problem with that practice is if you are in debt and a debt collector is contacting you, the last thing you are likely to see on the envelope is anything related to a debt, most notably the name of the creditor or debt collection agency trying to collect from you.

Why the Secrecy?

So why doesn't a debt collector at least put their company name on the return address? Because that practice could be in violation of the Fair Debt Collection Practices Act. The FDCPA clearly states a debt collector may "not use any language or symbol on any envelope or in the contents of any communication effected by the mails or telegram that indicates that the debt collector is in the debt collection business or that the communication relates to the collection of a debt." Therefore, in order to remain compliant with this section of the law, debt collectors are prohibited from placing any information on the envelope, including their business name that would indicate they are a debt collector or that they are attempting to collect a debt.

But while the outside of the envelope may be vague and inconspicuous, the contents inside the envelope are more descriptive and important. Debt collection notices are often personal, confidential and time-sensitive in nature. These letters provide information the consumer needs to know as it relates to their debt, including the status of the debt and what might happen if the debt isn't resolved soon. Debt collection letters also contain specific disclosures that provide information about how consumers can dispute their debt along with other state-specific disclosures the consumer should be aware of. In addition, when consumers postdate payments with debt collectors, debt collectors may be required to send payment reminders which would also be sent within these envelopes as well.

Letters are one of the biggest expenses for debt collectors, so they want to make sure the letters are being delivered to the right consumer — and being opened by that consumer, as well. However, debt collectors must stay in compliance with the FDCPA and ultimately must hope consumers who receive the letters are going to first open the envelope, read the letter and establish communication with the debt collector so the debt can be resolved. With more consumers preferring to communicate with debt collectors non-verbally, letters will continue to play an integral part of the debt collection and resolution process. So the next time you get a piece of mail that you may not want to open because you don't recognize the return address, be sure to at least take the time to open the envelope to see whether it contains personal, confidential and time-sensitive information such as a debt collection notice.

Should Debt Collectors Be Able to Use Government Letterhead?

Debt collectors are legally prohibited from misrepresenting themselves as police or lawyers when communicating with consumers. Of course, that hasn’t stopped some collectors from breaking the rules, and there are plenty of debtors who can tell stories of precisely that.

The question of what exactly qualifies as misrepresentation is at the center of a lawsuit filed Dec. 1 in U.S. District Court in San Francisco. The suit alleges that debt collection company CorrectiveSolutions violated the Fair Debt Collection Practices Act (FDCPA) after using letterhead of various prosecutors’ offices when contacting debtors. The complaint calls into question the process surrounding CorrectiveSolutions’ alleged practice of representing themselves as law enforcement to consumers and threatening legal action for failing to pay the debt. The tricky part of this case, however, lies in the fact that CorrectiveSolutions is under contract with several California’s district attorney offices for the expressed purposes of interceding on the government agency’s behalf. The legal dispute focuses on the way they intervened.

It’s all tied to California’s Bad Check Restitution Program. The program allows people who bounce checks and the businesses who received the checks to settle the case out of court through what’s known as a diversion program. In this diversion program, an offender can avoid prosecution by paying the amount the bad check was written for, plus fees, in addition to taking an 8-hour bad-check-offender class at the offender’s own expense. Through this program, people and businesses who receive bad checks can submit a complaint, along with evidence, to the mailing address listed on the DA’s website.

Under California Penal Code 1001.60, the DA is permitted to contract private companies, like CorrectiveSolutions, to help execute this program. However, district attorneys may refer cases to the program only if the check writer is believed to have violated state laws, like intentionally defrauding the recipient. A lawyer with the DA’s office is required to review the cases to ensure they meet various criteria. For example, if a business wants a bad-check writer pursued for violating the law, they must first make attempts to contact the debtor three times before the case qualifies for the program, according to Teresa Drenick, assistant district attorney in Alameda County.

The lawsuit contends that prosecutors have allowed debt collectors to use DA letterhead without first vetting the claim that the debtor violated the law. The American Bar Association recently condemned the general practice of allowing debt collectors to use prosecutors’ letterhead, as it makes the prosecutor “party to deception” and violates Bar Association rules, the association’s Committee on Ethics and Professional Responsibility wrote in an opinion issued Nov. 12. The opinion does not specifically reference California or the district attorneys’ offices mentioned in the lawsuit.

Credit.com reached out to the district attorneys’ offices in the five counties mentioned in the lawsuit (Alameda, Calaveras, El Dorado, Glenn and Orange counties), but only two responded. Joe D’Agostino, assistant district attorney in Orange County, said they’re studying the Bar Association’s opinion.

“The program is run in a method that matches what the statute is,” D’Agostino said, referencing California Penal Code Section 1001.60, which describes the district attorney’s ability to contract the bad check diversion program to a private party. “The Bar Association’s opinion came down fairly recently, so we’re studying it. We always want to follow the rules and follow the procedure.”

Drenick, the assistant DA in Alameda County, wrote in a email statement to Credit.com that CorrectiveSolutions sends the DA’s office a list of cases each month, which is reviewed by the office to ensure the debt is legitimate and would meet legal requirements for pursuing a criminal case. Then, CorrectiveSolutions is given approval to contact the debtor using the DA’s letterhead. She did not specify whether or not an attorney reviews the bad check diversion cases, as the statute requires, and she did not respond to a request for clarification.

“If we agree to allow the case to go by way of diversion, we authorize CorrectiveSolutions to send the check writer a letter on behalf of our DA Bad Check program advising that their check was returned for insufficient funds and offering them the option of participating in the diversion program to avoid criminal prosecution,” Drenick wrote. “It is a well thought-out diversion program. Last year (2013) our program returned $69,132.01 to local businesses as payment on dishonored checks through the Bad Check program. … There is no ‘rental’ of our letterhead; rather, a statutorily-authorized diversion program that helps local businesses collect on bad checks while giving the check writers an opportunity to avoid a criminal conviction/record.”

The future of this practice seems to depend on prosecutors’ reactions to the Bar Association’s opinion and the outcome of this litigation in California. Meanwhile, consumers may remain subject to the debt-collection tactic that the lawsuit is calling into question. CorrectiveSolutions did not respond to multiple requests for comment from Credit.com.

If your state doesn’t have a diversion program like California’s, writing a bad check can still come back to haunt you. If you bounce a check, the recipient may sue you over the unpaid sum, which may result in a judgment on your credit report —  a credit score killer. (You’re entitled to free credit reports once a year under federal law and you can get a free credit report summary at Credit.com.) Debt collection can be confusing and intimidating for consumers, even when collectors follow the guidelines in the FDCPA. If you’re dealing with a debt collector, make sure you know your consumer debt collection rights, and form an action plan for paying off your debt.

Recent Settlement Shows That Consumer-Reporting and Debt-Collection Procedures are Top Priorities for CFPB

An $8 million settlement announced November 19, 2014, between the Consumer Financial Protection Bureau (CFPB) and the nation’s largest “buy here pay here” auto dealer represents yet another warning coming out of Washington, D.C. that:

1. Compliance with the requirements of the Fair Credit Reporting Act (FCRA) when businesses furnish credit information to consumer reporting agencies (CRAs) is a top federal regulatory priority; and

2. The CFPB is creating and enforcing its own debt collection rules applicable to any creditor modeled after those specified for debt collectors under the federal Fair Debt Collection Practices Act (FDCPA).

While this enforcement action is in the context of a “buy-here pay-here” car dealer operation – DriveTime Automotive Group, Inc. (“DriveTime”) – the issues raised apply to any business that reports information to the CRAs or collects consumer debts. Moreover, this enforcement action comes hard on the heels of a $2.75 million settlement of alleged FCRA violations by an auto lender; other settlements against creditors for abusive collection activities; and bulletins issued by the CFPB reminding businesses of their obligations under the FCRA. In particular, the CFPB’s $2.75 million settlement in August 2014 with First Investors Financial Services Group, Inc. involved the alleged distortion of consumer credit records via flaws in the auto lender’s computer system that resulted in the inaccurate furnishing of information to the CRAs. The CFPB-First Investors consent order can be found here.

Here, DriveTime and its finance company affiliate not only agreed to pay an $8 million civil penalty, but also agreed to follow a comprehensive set of compliance requirements for its debt collection and credit reporting operations. In toto, the settlement subjects DriveTime’s debt collection and credit reporting operations to the close supervision of the CFPB for five years.

DriveTime’s specific practices deemed in violation of the FCRA include:

• Having inadequate written policies governing DriveTime’s furnishing information to the CRAs. Even though written policies are required by Regulation V promulgated under the FCRA, DriveTime’s policies were only one and a half pages long, had not been updated for three years, and omitted any discussion of how to handle consumer disputes of credit information;
• Reporting inaccurate current balance information on charged off accounts, the timing of repossessions, and the date of first delinquency. At least some of these problems were known to DriveTime and caused by problems converting data from DriveTime’s computer systems to that of a vendor engaged to handle credit reporting to the CRAs; and
• Failing to properly respond to consumer disputes by investigating the disputes and correcting errors that were detected. DriveTime receives 22,000 disputes a year, which are handled by two employees.

In the settlement, DriveTime agreed to revamp its FCRA compliance procedures and policies in conjunction with a CFPB-approved consultant, to provide a comprehensive plan to the CFPB for improvements, and to report on implementation.

DriveTime’s specific debt-collection practices deemed by the CFPB to constitute unfair harassment of debtors focused on DriveTime’s failure to record and respect “do not call” or DNC requests, including:

• Calling debtors at their workplace after receiving “do not call” or DNC requests from the debtors;
• Repeatedly calling third-party references provided by debtors with their credit application, even after the references requested the calls to stop, and discussing the consumer’s debt with the references; and
• Obtaining telephone numbers from third-party vendors, and repetitively dialing those numbers – even when the numbers were not associated with the debtor – resulting in complete strangers receiving multiple debt-collection calls from DriveTime.

In the settlement, DriveTime agreed to abide by DNC requests, and to take steps to avoid making repetitive calls to third-party references or disclosing the debt to the references. DriveTime also agreed to provide customers with information on how to make requests to limit calls to debtors and to improve its systems to prevent unwanted calls. These conduct agreements are analogous to requirements under the FDCPA that require debt collectors to respect DNC requests and to avoid disclosing to third parties the existence and status of a consumer’s debt. In other words, by way of this settlement, DriveTime is bring required to abide by standards of conduct – in collecting its own debts – analogous to those imposed on third-party debt collectors under the FDCPA, even though DriveTime is not directly subject to the FDCPA. DriveTime also agreed to revamp its debt-collection procedures, to hire a CFPB-approved consultant, to provide a comprehensive plan to the CFPB for improvements, and to report on implementation of this plan.

One other aspect of the settlement is notable. The CFPB has no specific direct supervisory authority over DriveTime, as opposed to large banks and mortgage lenders, among others. Nevertheless, even when the CFPB lacks supervisory authority, the CFPB has jurisdiction to enforce the Dodd-Frank Act’s general Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) protections against essentially any financial services company. Moreover, as part of the settlement, DriveTime agreed to subject itself to the supervisory authority of the CFPB, meaning that the CFPB will have the power to conduct on-site examinations at will.

Finally, we also note that the CFPB has included “buy-here pay-here” auto dealers in its September proposal for regulating larger participants in the nonbank auto finance market. The proposal can be found here. In sum, businesses that think that they are beyond the reach of the CFPB because they are not within its supervisory authority are mistaken and must gauge their compliance efforts accordingly.

How to Get More Leverage for your Company if your Customer Goes Delinquent

All too often, commercial debt collection becomes a negotiation.  When negotiations begin, the stronger our client’s position is, the better these negotiations will go.  The ultimate deal struck could be a larger dollar amount collected, payments collected more quickly, avoiding going to court, or if necessary, the final outcome in court and the resultant judgment collection process. 

We are often amazed to find that our new clients often have boilerplate deficiencies which weaken their negotiation positions and cost them money in the long-run.  One boilerplate omission that we often see is no provision holding the customer liable for collection fees.  Below is an excerpt from our free ebook:  the Terms and Conditions Handbook which discusses over 70 items which should be considered for governing the vendor/customer relationship:

“In the USA, typically, you will not have the legal right to recover collection costs or attorney fees unless there is a signed written agreement with this provision. Just having this provision on your invoices is not necessarily enough. You want to have a document signed by your customer indicating they agree to this provision and the Application is typically the best document to memorialize this term. You want to specifically include collection costs so that collection agencies can add this fee into the amount they are trying to recover on a pre-litigation basis, as they cannot add “potential” attorney fees at this stage. Whether or not you actually collect these costs, it gives you and your agents much more leverage during collection agency, litigation, and judgment collection activities.

In the event that Vendor commences any action to collect delinquent invoices, Applicant agrees to pay collection expenses and attorney fees, whether or not suit is filed.

We see the following version less frequently, but it has the advantage of spelling out the liquidated damages in the event of default. Some courts use a schedule to determine the fee to be awarded to attorneys for getting a judgment. This fee typically is substantially less than the contingency or hourly fee paid to the attorney. By having an agreed attorney cost in the executed Application, the Vendor has a much better chance of being awarded the full attorney cost, thereby offsetting the cost of having to litigate to get paid. It also helps at the collection agency stage, and gives in house collectors more leverage during the threat to send to collections:

We further agree to pay a 25% collection charge, in the event of default, if the account is placed with an attorney or bonded collection agency.”

When we are collecting on a $25,000 claim, adding our collection fee of 20% (i.e., $5,000) to the delinquent amount means that we can begin negotiating from a starting point of $30,000 (more if interest and/or late fees are also included in the provision).  By starting at a higher dollar amount due, this gives us a stronger negotiating position with the customer regardless of what the customer is negotiating for, for example a discount or more time to complete the payments.

When the customer realizes that the collection fees will be added to the amount due, this often encourages the customer to give the debt owed a higher place on the payment priority list.  In fact, this by itself can help us get a resolution while the debtor then pushes other debts back or ignores them entirely.

Any time we are able to collect collection fees our client is financially better off.  Our clients frequently choose to waive the collection fee as a way to motivate the customer to immediately pay what is due.  This is a far better option for many of our clients than going to court and often it incentivizes the debtor to pay off our client’s past due invoices instead of paying what is owed to other vendors.

This collection fee provision can also give in-house collectors better leverage with past due customers.  Phone calls and final demand letters sent to delinquent customers can remind them that if the claim is turned over to collections, they will be responsible for the significant collection costs.  This provision may motivate debtors to become current to avoid collections even when all previous collection attempts have failed.

Surprisingly, of the 22 terms and conditions examples included in our free ebook, only one included a provision for collection fees, and only six included a provision for attorney fees.  These omissions definitely represent missed opportunities for our clients.