An Overview of Debtor-Creditor Law: Your Rights and Responsibilities
If you’ve borrowed money, you’re not alone. According to a recent federal government report, over 75% of American households carry some form of debt. But when the debt becomes too much to handle, some of us fall behind on payments.
This article summarizes your rights and responsibilities as a borrower. Remember, it’s always best to contact a local lawyer near you to get the best legal advice.
What Is a Debt? What Is a Debtor?
You typically sign a contract when you borrow money from a bank, credit card company, or other lender. This contract usually says that you have a legal obligation to repay the money loaned to you. Because you are a person who owes money, the law calls you a debtor. Your creditor is the person or company who gave you the money and has a legal right to repayment. The debt is the amount of money that you owe to the creditor.
Legally, debts fall into two categories. The first category is secured debt. Money that you borrow to buy a specific item creates a secured debt. Until you repay the loan, the creditor has legal rights in the property you borrowed money to buy. Mortgages and car loans are examples of secured debts.
Unsecured debts are more common. There generally isn’t any piece of property that can give a lender a security interest.
For example, student loans are unsecured because the lender cannot take back your college degree. Other common types of unsecured debt include credit card debt and medical debt.
The Special Rights of Secured Creditors
Secured creditors own a security interest in the property they give borrowers money to buy. If you fail to make payments, the creditor can take back the property. When real estate is involved, the creditor gets their security back through foreclosure.
The law gives creditors even stronger rights regarding secured personal property. If you stop making payments on your car loan, you default on the agreement, and the creditor can repossess the car. Unlike foreclosure, which typically requires notice and an opportunity to make things right before becoming final, repossession carries no such rights.
In most states, a creditor can repossess your car, motorcycle, boat, or other vehicle without notifying you first.
Creditors Can Take You to Court
Because unsecured creditors usually don’t have a specific piece of property to take back, they have limited options, so they are more likely to sue you for a debt. But both secured and unsecured creditors have the right to take borrowers to court to seek repayment.
Two things happen if the lender or debt collection agency wins the lawsuit against you. First, the judgment will remain on your credit report for seven years.
Second, the judgment gives the creditors more options to collect the debt, such as:
- Liens: A creditor can place a lien against your real estate and personal property. For example, if your credit card company sues you for an unpaid debt and wins, it can file paperwork to create a lien against your home. You will have to clear the lien before selling the property or ask the buyer to cover the lien, either of which is challenging. Also, you won’t be able to get a second mortgage on the property until the lien is removed.
- Garnishments: If you have a job, the creditor can garnish your wages, meaning that the court will order your employer to give the creditor a certain percentage of your paycheck to satisfy the judgment.
- Levies: Similar to a garnishment, a levy lets creditors access your funds. Levies, however, let creditors withdraw money directly from your bank account.
- Replevin Orders: Like a repossession, a replevin order allows a creditor to take back property such as cars and leased furniture.
Your Rights as a Debtor
When dealing with creditors, you have certain rights depending on the situation. Here are some essential things to know if you owe debts.
If Debt Collectors Call You
When an account is seriously past due (usually more than 180 days), a creditor usually sells it to a debt collection agency. The Fair Debt Collection Practices Act (FDCPA) gives debtors certain rights during the debt collection process. These include the right to be free from harassment such as constant calls, early morning or late-night calls, profane language, and threats.
If Creditors Report You to a Credit Bureau
You have the right to ensure that the information on your credit report is accurate. If it isn’t, you can ask the credit reporting agency to correct it. Talk to an attorney if you feel like a credit reporting agency has not corrected an error in a timely manner.
If Creditors Win a Lawsuit Against You
Even after a creditor wins a judgment, you still have important rights. For example, many states exempt certain property from judgments. To take advantage of these exemptions, most states require you to file paperwork with a local court or law enforcement agency that lists the property you believe to be exempt under state law.
If Your Paycheck Is Being Garnished
The federal Consumer Credit Protection Act (CCPA) says that the weekly garnishment amount cannot exceed either 25% of your net earnings or 30 times the federal minimum wage, whichever is less. Your state’s garnishment laws may provide more protections than the federal government’s.
The Advantage of a Local Legal Professional
People who owe money still have legal rights. Staying informed about the ever-changing law is crucial when resolving your financial matters. Speak to an attorney in your area to receive the best and most up-to-date legal advice tailored to your unique situation.