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Recent Blog Posts
Consequences of Violating an Automatic Stay During Bankruptcy
When a debtor files for bankruptcy protection, the court will put an automatic stay on collecting the debt. This means that creditors must stop contacting the debtor with collection notices or attempting to repossess collateral properties until the bankruptcy is completed or the stay is otherwise lifted. Violating the stay is a serious offense that may result in court fines or the debtor filing a lawsuit against you. The severity of the penalty depends on whether you knowingly violated the stay and whether you continued to violate it after being told to stop.
Violation Examples
Once it is confirmed that you received notice of the debtor’s bankruptcy filing, you are expected to comply with the automatic stay. This means you are not allowed to:
- Send letters to the debtor demanding repayment
Four Arguments for Denying Chapter 7 Bankruptcy Discharge
The primary reason that creditors do not want debtors to file for bankruptcy is the possibility of discharging the debt. At the end of a Chapter 7 bankruptcy case, the court will discharge most of the remaining debts that were not paid from the sale of nonexempt assets. Secured creditors can repossess the collateral property but cannot collect on the loan balance without a reaffirmation agreement. Debts to unsecured creditors may be completely wiped out. Creditors can attempt to deny the discharge of their debts by using an adversary proceeding against the bankruptcy filer. They must prove that the debtor is attempting to defraud them through bankruptcy. There are several reasons why a court may agree to deny the discharge of debts:
- Lying During Bankruptcy: A debtor may abuse the bankruptcy process in order to discharge debts that they are capable of paying. A court may deny the discharge of all debts if the debtor lied or withheld information with the intent to defraud the creditors and manipulate the system.
Assessing the Risk of Modifying a Commercial Loan
Lending to a commercial borrower has the potential to be more lucrative to a creditor than lending to a consumer borrower. The average consumer borrower will take out one major loan during their lifetime – a home mortgage. A successful business may continue to take out loans as it expands its operations, creating a long-term business relationship with the lender. There are risks when lending to a commercial borrower if the business struggles. Creditors know they must evaluate the likelihood that a business will be able to repay them before entering a loan agreement. They may need to adjust their evaluation if the commercial debtor falls behind on its loan payments.
Creditor Options
When a commercial debtor misses a payment, the one thing you cannot afford to do as a creditor is to ignore it. You should respond to the first missed payment by contacting the debtor to determine the reason for the missed payment. If the missed payments continue for several months, you have a difficult decision to make. You can:
What Are a Creditor’s Rights When Collecting from Cosigners?
A person looking to create a loan agreement may need a cosigner if the creditor is uncertain whether the borrower will be able to continue making payments until the loan is repaid. As a creditor, a cosigner may allow you to take a chance on a potential client by mitigating some of the risks. If the borrower defaults on their debt, you have another party that you can order to repay the loan. However, the cosigner will want to avoid paying you if they can get out of it. You must understand the rights of creditors and cosigners and the circumstances under which the cosigner is liable for the debt.
When Can You Collect from a Cosigner?
According to Illinois law, creditors are not allowed to take collection action against a cosigner until:
- The primary debtor has defaulted on or is delinquent on the debt;
Three Limitations of Wage Garnishment for Creditors
Wage garnishment is one of the most direct tools that creditors use to collect from noncompliant debtors. A creditor can submit a garnishment order after it has filed a lawsuit against the debtor and received a money judgment from the court. Employers are required to comply with a garnishment order and can be fined if they do not withdraw the exact amount ordered or if they retaliate against the debtor for the garnishment. However, wage garnishment has limitations that can sometimes prevent a creditor from collecting the necessary money from the debtor. Here are three facts about wage garnishment that creditors should know:
- Cap on Withdrawals: There are federal and state protections against wage garnishment to prevent creditors from taking all of a debtor’s wages. First, garnishment must come from the debtor’s disposable earnings, which is the debtor’s wage after deducting expenses such as Social Security and pension contributions. Commercial creditors in Illinois are not allowed to garnish a wage unless the debtor makes more than 45 times either the state or federal minimum wage – whichever is higher. With Illinois currently having a higher minimum wage, debtors must earn more than $371.25 per week. If the debtor is eligible, commercial creditors can take the amount that the wage exceeds $371.25 per week or 15 percent of the debtor’s wage – whichever is lower.
Illinois Law Protects Commercial Loan Lenders
When creating a loan agreement in Illinois, there is a big difference between personal loans and commercial loans. Individuals or spouses take out personal loans in order to pay for family or household expenses – the most common example being home mortgages. Commercial loans are credit agreements made with business owners for the purpose of starting or expanding a business. In Illinois, commercial loans are more favorable to lenders than personal loans because of the Illinois Credit Agreements Act. Thus, making sure to classify a loan as a credit agreement could save you from a lengthy legal battle.
Commercial Loan Rules
The Illinois Credit Agreements Act states that a credit agreement or any revisions to an agreement is valid only if the agreement is in writing and signed by both parties. The law defines credit agreements as not including credit cards or loans for personal, household, or family purposes. The lender and the commercial debtor cannot create an agreement by:
When You Can Foreclose on a Reverse Mortgage
Older homeowners can use a reverse mortgage as a source of income or credit. While borrowers qualify for regular mortgages based on their income, a reverse mortgage is based on the borrower’s equity in their home. People age 62 and older are eligible to take out a reverse mortgage on their principal residence as long as they own it outright or have enough equity in it. The mortgage balance is not due until a qualifying event occurs. If the borrower or their heirs do not repay the mortgage, the lender may foreclose on the property.
When Can a Reverse Mortgage Become Due?
According to Illinois’ Reverse Mortgage Act, there are five ways that the balance on a reverse mortgage can become due:
- The borrower or last remaining tenant dies;
- The property is sold;
- The borrowers no longer use the property as their principal residence;
Differences Between Debt Consolidation and Debt Restructuring
When a client is unable to pay a debt, it sometimes makes sense to offer to modify the loan. Though you may lose some money after the modification, it would be less of a loss than if the client filed for bankruptcy and discharged the debt. The modification may also allow you to maintain your relationship with the client. Two forms of modification are debt consolidation and debt restructuring. Though they have some similarities, they are each best suited for certain debtor situations.
Debt Consolidation
With debt consolidation, the debtor enters a new loan agreement that pays for multiple, smaller loans over a longer period of time. Debt consolidation can be attractive to the debtor because:
- It simplifies payments of multiple loans into one payment;
Illinois Reducing Interest Rate, Revival Deadline on Consumer Debt Judgments
Illinois Gov. J.B. Pritzker is expected to sign a bill that will change the rules for collecting consumer debt after a debt judgment. The bill, which has passed both the Illinois Senate and House of Representatives, would reduce the interest rate charged to outstanding consumer debts. More significantly, the bill would cut by 10 years the amount of time that a creditor has to revive a judgment that has become dormant. Sponsors of the law tout it as a way to protect low-income Illinois consumers from cumbersome debts. Creditors of Illinois debtors may need to work faster to collect on court-ordered debt judgments.
Qualifications
There are two important caveats of the law as it applies to debtors. The changes affect debt judgments only if:
- They involve consumer debts; and
- The debt is $25,000 or less.
Supreme Court Sets Civil Contempt Standard for Creditors in Bankruptcy Cases
A recent U.S. Supreme Court ruling established that creditors can be held in civil contempt for violating a bankruptcy discharge order unless there is “fair ground of doubt” as to the violation. A chapter 7 bankruptcy discharge will clear a debtor from having to repay most of their debts incurred before filing for bankruptcy. A discharge does not apply to certain debts, such as student loans or debts incurred due to fraud. Otherwise, a creditor is not allowed to ask a debtor to repay debts from before the discharge order and could be punished for knowingly violating the order. While not a landmark Supreme Court decision, lower courts will likely cite the ruling during disputes between debtors and creditors after a bankruptcy discharge.
Case Details
Taggart v. Lorenzen is an Oregon case involving a business investor who had received a bankruptcy discharge to protect him from repaying his creditors. Litigation continued over the ownership of the debtor’s business interests, and the court ordered the debtor to pay the creditors’ legal fees at the end of the case. The debtor filed for an order of contempt, claiming that the creditors violated the discharge order by trying to collect legal fees. This case became a larger argument about what constitutes a creditor being in civil contempt of a discharge order:
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