Dealing with unethical debt collectors

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question for the expert

Dear To Her Credit,
I have a payday loan. When I took it out, I was on unemployment and Social Security disability. My unemployment ran out, and I could not pay the loan. I am legally blind. Now the payday loan company keeps calling me and telling me that I will be arrested for fraud for not paying the loan, but that was not the case. I am living on $1,500 less a month than I used to make. I can't afford to pay it, but what can I do? I have filed for bankruptcy, but the loan company says that does not cover the loan. -- Callie

Answer for the expert

Dear Callie,
The payday loan company representative is telling you lies.

All debts are dischargeable in bankruptcy unless the law specifically excludes them. San Francisco lawyer Jeena Cho says, "Unfortunately for this payday company, such loans are not part of the excluded class of debt. In other words, it is a big fat lie and it is absolutely dischargeable in bankruptcy."

The only exception to this debt may be if you took it out within a certain number of days prior to filing for bankruptcy, which could be considered as fraud. Ask your bankruptcy lawyer if you're not sure.

Their suggestion that they could have you arrested for fraud is so bad it's almost laughable. Yes, it is possible to go to jail in this country for shady financial dealings, like check fraud, embezzlement or tax evasion. But no, we do not lock people up solely for getting into financial trouble, even if the creditor doesn't like the way they got into it. Cho says, "There is no debtors' prison in the U.S. anymore, and such false threats are specifically against California Civil Code 1788.10." The code prohibits creditors from threatening with any collection action that they do not intend to pursue, including actions that are against the law. Most states and the federal Fair Debt Collections Practices Act have similar provisions.

Collectors also like to threaten to place liens on your property, such as your home, car or bank account. If you have no assets, Cho notes that there's nothing for them to put a lien on. "You may be what's known as 'collection-proof.' Meaning, there is no way for the creditor to collect."

It's time to start standing up for yourself, starting before you get the next phone call from the payday loan company. Read the list of consumer rights at the FTC website. You may be surprised at how many laws your shady lender has broken already. Knowing your rights is the first step to making sure you keep them.

From the time you filed for bankruptcy, an automatic stay has been in place. The automatic stay is a provision that keeps creditors from taking any kind of action until your bankruptcy case is settled. Every creditor listed in your bankruptcy case should have received a notice of the stay, and violation of the automatic stay can put the creditor in legal trouble.

If your bankruptcy case has been settled, you should be done dealing with this creditor. Cho says, "Assuming she incurred the loan before the bankruptcy, it should have been discharged. She should first call her bankruptcy lawyer and ask the lawyer to send a letter. If the attorney refuses or will charge for the service, she should send a copy of the Notice of Discharge to the payday loan company and demand it cease contact as the debt was discharged in bankruptcy."

Finally, this is a great time to get a fresh start on your total financial picture -- not just on your debts. You should learn about money management, budgeting and finding ways to reduce your living expenses. Just as importantly, you can get career guidance to help you get back into the workforce. Many people with limited or no vision work in fields as diverse as counseling, piano tuning, working with children or even politics. You can get started at the American Foundation for the Blind website. With the help of these resources, you can find ways to use your unique gifts and talents, stay involved with other people, and plan for a new financial future. Good luck!

See related: Don't even think of spending frivilously before bankruptcy

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Updated: 01-23-2018