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Credit

Before considering debt relief, let’s discuss Credit.

DEBT AND CREDIT

A debt is an amount owed to a person or organization for funds borrowed or something bought on credit. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements.

Credit involves a contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date.

 CONSUMER CREDIT

 The Equal Credit Opportunity Act (ECOA) was passed in order to make sure that consumer credit was awarded based on an applicant’s rather than the applicant’s age, sex, color, religion, or national origin.  For example, a lender cannot consider the following when making a loan: race; marital status; receipt of public assistance income; receipt of alimony or child support; or future plans for children. Spouses have rights to individual credit application and consideration.  The other income of spouses does not have to be disclosed unless the applicant is relying on that income to qualify for credit. The penalties for violating the ECOA are the actual damages plus punitive damages of up to $10,000.  If there is a pattern or practice of violations, a class action may be filed which can result in damages up to $500,000 or 1% of the net assets of the defendant, whichever is less. 

The Truth-in-Lending Act (TILA) is part of the Federal Consumer Credit Protection Act.  The purpose of the TILA is to make full disclosure to debtors of what they are being charged for the credit they are receiving. The Act merely asks lenders to be honest to the debtors and not cover up what they are paying for the credit.  Regulation Z is a federal regulation prepared by the Federal Reserve Board to carry out the details of the Act. 

TILA applies to consumer credit transactions.  Consumer credit is credit for personal or household use and not commercial use.  For example, if you finance a PC for your home, TILA would apply.  But if you finance a PC for your office, TILA will not apply.  The TILA applies to both open end and closed end transactions.  Examples of open end transactions are credit cards, lines of credit, and revolving charge accounts.  Closed end transactions involve a fixed amount to be paid back over a period of time such as a note or a retail installment contract.  Open end disclosure requirements include: finance charges (including interest, the dates that bills will be sent and what, if any, security interest is being taken.  Bills for this type of credit transaction must have:

  • balance from last statement;
  • payments and credits;
  • new charges made since last statement;
  • finance charges on unpaid balance;
  • the billing period covered by the bill;
  • the time period in which payment can be made in order to avoid a finance charge (e.g., 30 days); and
  • information regarding billing errors — what to do and where to inquire about billing errors. 

            Solicitations for credit cards must include the following disclosures:

  • fees for issuing the card;
  • APR for the card;
  • minimum or fixed finance charges;
  • any transaction charges;
  • grace periods (if any);
  • how the daily balance is computed;
  • when payments will be due;
  • what the late payment will be; and
  • any charges that will be assessed for going over the credit limit. 

A good example of closed-end disclosures would be a credit transactions in which the amount to be repaid is definite from the beginning, like in a promissory note.  Closed-end disclosures that must be made include:

  • amount being financed;
  • finance charges;
  • annual percentage rate;
  • number of payments and when due;
  • total cost of financing (price of goods plus all finance charges);
  • any penalties for prepayment or late payment;
  • any security interest or lien in the goods sold or used as collateral; and
  • any credit insurance cost. 

In advertisements that include part of the credit terms, all the credit terms must be disclosed.  If payments are disclosed, you must disclose the annual percentage rate (APR), the down payment, and the number of payments.

Regulation Z gives a three-day cooling-off period for certain credit contracts.  One example of the notice is the following:

YOU, THE BUYER, MAY CANCEL THIS TRANSACTION AT ANY TIME PRIOR TO MIDNIGHT OF THE THIRD BUSINESS DAY AFTER THE DATE OF THIS TRANSACTION. SEE THE ATTACHED NOTICE OF CANCELLATION FORM FOR AN EXPLANATION OF THIS RIGHT.

This cooling-off period applies in a credit situation when the debtor’s home is given as security for the loan or a home solicitation sale is involved. The Home Equity Loan Consumer Protection Act of 1988 applies to home equity loans and provides for additional disclosures, e.g., that the debtor can lose his home in the event of a default. 

The penalties for violation of the TILA include an amount equal to two times the amount of finance charges with a minimum recovery of $100 and a maximum recovery of $1000 plus any punitive damages.  In a class action law suit the maximum amount of damages is $500,000 or 1% of the creditor’s net worth, whichever is less. 

The Fair Credit Billing Act requires monthly statements on open-end credit transactions.  The bill must contain an address for the debtor to write in order to report errors in the bill.  Any such notification must be sent within 60 days of the bill’s receipt, or damages can not be obtained by the debtor.  The creditor then has thirty days in which to acknowledge the notification and ninety days to take action.  The debtor does not have to pay the protested amount during this period of time.  Once the matter is resolved, the debtor must pay the correct amount owed.  If the creditor does not comply with the time limits of the Act the debtor does not have to pay the disputed amount, even if it is correct. 

The Fair Credit Reporting Act regulates the use of information on a consumer’s personal and financial condition.  The most typical transaction which this Act would cover would be where a person applies for a personal loan or other consumer credit.  Remember, consumer credit is credit for personal, family, or household use, and not for business or commercial transactions.  Also, this Act can apply when a person applies for a job or even a policy of insurance when certain investigations are made of the applicant. 

The purpose of the Act is to insure that consumer information obtained and used is done in such a way as to insure its confidentiality, accuracy, relevancy and proper utilization.  Under the Act, consumer reports are communications in any form which are provided by which regularly gather and furnish informa­tion on consumers to potential creditors, insurers or employers. Upon request, a credit bureau must tell a consumer the names and addresses of persons to whom it has made a credit report on that consumer during the previous six months.  It also must tell, when requested, what employers were given such a report during the previous two years. 

Some information obtained by credit reporting bureaus is based on statements made by persons, such as neighbors who were interviewed by the bureau’s investigator.  Needless to say, these statements are not always correct and are sometimes the result of gossip.  In any event, such statements may go on the records of the bureau without further verification and may be furnished to a client of the bureau who will regard the statements as accurate.  A person has the limited right to request an agency to disclose the nature and substance of the information possessed by the bureau to see if the information is accurate.  If the person claims that the information of the bureau is erroneous, the bureau must take steps within a reasonable time to determine the accuracy of the disputed items.  If no correction is made, the debtor can write a 100-word statement of clarification which will be included in future credit reports, even it the agency disagrees with clarification. 

The Fair Credit Reporting Act (FCRA) requires that a credit reporting agency follow reasonable procedures to assure accuracy of the information it gathers.  Adverse information obtained by investigation cannot be given to a client after three months unless it is verified to determine that it is still valid. Credit reporting bureaus are not permitted to disclose information to persons not having a legitimate use for this information.  It is a federal crime to obtain or to furnish a credit report for an improper purpose. Under the FCRA, agencies can only disclose information to the following:

  • a debtor who asks for his own report;
  • a creditor who has the debtor’s signed application for credit;
  • a potential employer; and
  • a court pursuant to a subpoena. 

Agencies are also limited as to what can be disclosed.  For example:

  • No disclosure may be made of bankruptcies that occurred more than 10 years ago;
  • No disclosure may be made of lawsuits finalized more than 7 years ago; an
  • There can be no disclosure of criminal convictions and arrests that have been disposed of more than 7 years ago. 

When a debtor applies for a loan of more than $50,000 or a job that pays more than $20,000, these limitations on disclosures do not apply. 

The Consumer Leasing Act is an amendment to TILA and provides disclosure protection for consumers who lease goods.  Basically, these disclosures fall into three categories:

  • how much is paid by the consumer over the life of the lease;
  • how much, if any, is owed by the consumer at the end of the lease; and
  • whether or not the lease can be terminated. 

Article 2A was added to the UCC to govern lease contracts of personal property. It has been adopted in several states, including Mississippi. 

Most, if not all, major loans or credit sales involve creating a lien on the property.  A lien on real estate would take the form of a mortgage or a deed of trust.  A lien on all other property would be covered by a security agreement.  In this agreement, the borrower in a loan transaction or the buyer in a credit sale would give a security interest in personal property in order to secure payment of his loan or credit obligation.  Granting a security interest in personal property is the same thing as granting a lien in personal property. Article 9 of the UCC deals with secured transactions.  A creditor who complies with the requirements of Article 9 can create a security interest that protects him against the debtor’s default by allowing the creditor to recover by selling the goods covered by the security interest. 

A secured transaction involves a sale on credit or lending money where a creditor is unwilling to accept the promise of a debtor to pay an obligation without some sort of collateral.  The creditor requires the debtor to secure the obligation with collateral so that if the debtor does not pay as promised, the creditor can take the collateral, sell it, and apply the proceeds against the unpaid obligation of the debtor. A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation.  Personal property is basically anything that is not real estate.  A fixture is personal property that has become so attached or adapted to real estate that it has lost its character as personal property and is deemed to be part of the real estate.  An example would be a central air conditioning unit within a commercial building. 

The property that is subject to the security interest is called the collateral.  The party holding the security interest is called the secured party. The agreement of the creditor and the debtor that the creditor shall have a security interest in the goods must be evidenced by a written security agreement unless the creditor retains what is known as a possessory security interest by taking possession of the collateral.  A written security agreement must be signed by the debtor and reasonably describe the collateral. 

A debtor may grant a security interest to secure future loans.  This involves granting a security interest in property a debtor may acquire later (a floating lien).  An example would be a security interest in all inventory of a store now owned or later acquired. 

When a security interest in property is superior to other interests and claims to the property, it is said to be perfected.  In other words, to secure protection against third parties’ claims to the collateral, the secured party must perfect the security interest.  This is generally done by filing a financing statement in the proper governmental office.   In Mississippi the proper governmental office in which to file UCC-1 Financing Statements is the appropriate Chancery Clerk’s office or the office of the Secretary of State.  Sometimes it is necessary to file in both the office of the Secretary of State and in the office of the Chancery Clerk. 

A financing statement is a different instrument from the security agreement.  The financing statement must be signed by the debtor and give the address of the secured party.  It also must give the address of the debtor and contain a statement indicating the kinds or describing the items of collateral. The financing statement does not set forth the terms of the agreement between the parties.  This is done in the security agreement.  The financing statement gives notice to the world that the secured creditor has a security interest in the collateral described in the statement. 

When a debtor defaults on an obligation in a secured transac­tion, the secured party has certain rights under UCC with respect to enforcing his claim against the collateral.  These rights can be specified by the security agreement itself.  The UCC also provides for procedures that the secured party can follow in the event the security agreement does not itself provide for all necessary procedures. In the event of default, the secured party is entitled to take the collateral from the debtor.  Self-help repossession is when the secured party simply goes and takes the collateral himself.  This is allowed if it can be done without causing a breach of the peace – – In other words, if the debtor will allow the secured party to take the collateral without raising any trouble.  If taking the collateral cannot be done without causing a breach of the peace, the secured party must use court action.  In other words, the secured party must go to court and get the court to order the collateral to be seized and sold pursuant to the security agreement and the UCC. 

The secured party may sell the collateral at either a private sale or a public sale providing this is done in a commercially-reasonable manner. Notice of the sale of the collateral has to be given, and the debtor has the right to redeem the collateral prior to its sale.  Proceeds from the sale of collateral are applied first to the expenses incurred by the secured party in seizing the collateral and making the sale.  Next, the proceeds are used to pay the outstanding indebtedness.  Next, the proceeds are used to pay any indebtedness owed to any other secured party.  Finally, if there is any money left, it is to be paid to the debtor. 

            The Fair Debt Collection Practices Act (FDCPA) prohibits harassment or abuse in collecting a debt such as threatening violence, use of obscene or profane language, publishing lists of debtors who refuse to pay debts, or even harassing a debtor by repeatedly calling the debtor on the phone.  Also, certain false or misleading representa­tions are forbidden, such as representing that the debt collector is associated with the state or federal government, stating that the debtor will go to jail if he does not pay the debt. This Act also sets out strict rules regarding communicating with the debtor. 

The FDCPA applies only to those who regularly engage in the business of collecting debts for others — primarily to collection agencies.  The Act does not apply when a creditor attempts to collect debts owed to it by directly contacting the debtors.  It applies only to the collection of consumer debts and does not apply to the collection of commercial debts.  Consumer debts are debts for personal, home, or family purposes. When a collector contacts a debtor, if the debtor asks for verification of the debt, the collector must provide this verification in writing.  The debtor must include the amount of the debt, the name of the creditor, and the debtor’s right to dispute the debt. 

The collector is restricted in the type of contact he can make with the debtor.  He can’t contact the debtor before 8:00 a.m. or after 9:00 p.m.  He can contact the debtor at home, but cannot contact the debtor at the debtor’s club or church or at a school meeting of some sort.  The debtor cannot be contacted at work if his employer objects.  If the debtor tells the creditor the name of his attorney, any future contacts must be made with the attorney and not with the debtor.  The debtor can call off the collection contacts at any time.  The collector would then have to use other collection means like filing suit.  

The Act prohibits contacting other people about the debtor’s debts, with the exception of the debtor’s spouse and parents.  Another exception is that third parties can be contacted in order to get the debtor’s address, phone number and place of employment.  Contact with the debtor by postcard is prohibited because someone other than the debtor may see the contents of the postcard. When a collection agency violates the Act, it is liable to the debtor for damages, and it is no defense that the debtor in fact owed the money that the agency was seeking to collect.  Debtors can collect up to $1,000 in actual damages in addition to actual damages.  Also the Federal Trade Commission can get a cease and desist order to stop any unlawful practices. 

Garnishment 

Garnishment is a legal procedure in which a person’s earnings are required by court order to be withheld by an employer for the payment of a debt such as child support. Title III of the Consumer Credit Protection Act (CCPA) prohibits an employer from discharging an employee whose earnings have been subject to garnishment for any one debt, regardless of the number of levies made or proceedings brought to collect it. 

The CCPA protects employees from being discharged by their employers because their wages have been garnished for any one debt and limits the amount of employees’ earnings that may be garnished in any one week. An employee is only protected from discharge if the employee’s earnings have been subject to garnishment for the first time. 

This Act applies to all individuals who receive personal earnings and to their employers. Personal earnings include wages, salaries, commissions, bonuses, and income from a pension or retirement program, but do not ordinarily include tips. For ordinary garnishments (i.e., those not for support, bankruptcy, or any state or federal tax), the weekly amount may not exceed the lesser of two figures: 25 percent of the employee’s disposable earnings, or the amount by which an employee’s disposable earnings are greater than 30 times the federal minimum wage. Specific restrictions apply to court orders for child support or alimony. The garnishment law allows up to 50 percent of a worker’s disposable earnings to be garnished for these purposes if the worker is supporting another spouse or child, or up to 60 percent if the worker is not. An additional 5 percent may be garnished for support payments more than 12 weeks in arrears. The wage garnishment law specifies that the garnishment restrictions do not apply to certain bankruptcy court orders, or to debts due for federal or state taxes. If a state wage garnishment law differs from the federal law, the law resulting in the smaller garnishment must be observed.

 

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