The Warybuyer Speaks! Thoughts on Credit Card Defense, Debt Collection, Credit Reporting and Auto Fraud

Tsunamis are dangerous because people don’t see the wave building until just before it crashes on the shore and wipes everything out. You may not realize it, but your credit card debt is just like that.

Over and over again, our clients tell us that they had everything under control until they lost a job or someone got sick or they had some other unexpected event. In fact, they didn’t have things under control. They just didn’t understand that their credit card debt was designed to rise up and wash them away at just such crisis points in their lives.

To credit card companies, the most profitable customers are the slow pays, the ones who regularly incur late fees and penalty rates but continue to pay. These folks are also the balance surfers. When they can’t afford a payment on one card because of a penalty rate, they’ll transfer the balance to another card that has a lower rate. The trick for the credit card companies wanting to maximize their profit is to turn as many of their cardholders as possible into these slow paying, balance surfing customers.

The credit card companies start the tsunami by playing a game of musical chairs. When a good paying customer slips a little, they ratchet up the game by imposing penalty rates and extra fees. They hope the consumer will continue to pay or if he can’t, surf to other cards so their competitors take the losses. When they’ve pushed too hard and the consumer is in danger of defaulting, they pull their chairs out by jacking up interest rates and/or minimum payments to such a level that the consumer has no choice but to surf. At some point however, the balance transfer offers dry up and the music stops. The last cards in the game are the ones that don’t get paid. When the credit card companies see this happening, they race to get their chairs out of the game. The consumer is washed out before he even knows what happened.

What does this mean for you? As long as you are charging your cards and making the minimum payments, everything seems fine, but when you hit a crisis, even just a short term one, the tsunami starts to build. Your interest rates go up, you get hit with fee after fee, and your minimum monthly payments start to climb. If you’re lucky, you can get out of the water before it gets dangerous, but for lots of people, the game moves too fast for them to do anything about it and they’re flooded with multiple credit cards that they just can’t pay back.

This game may be legal, but it is immoral and disgraceful. Do not be ashamed if you find yourself in this position. Be indignant. Recognize that the credit card companies knew this would happen to you when they started the game. They used your hard work and your belief that you should always pay your debts to drive you to your financial breaking point.

The new credit card law is not going to stop this game. It will slow it down a bit for the consumers who may stumble every once in a while, but for the consumers who have serious crises, the chairs will keep getting pulled out from under them. They’ll just receive a little extra paper to document the fact that they’re getting screwed.

If you are over 65 you can defer your property taxes until your house is sold. All you have to do is fill out some paperwork at the county tax assessor’s office. Not only will this defer all future taxes, but if you are currently behind on your taxes, it will stop all collection efforts, even if you’ve been sued or given notice that your house will be sold.

However, this is not for everyone. The county charges 8% interest on the unpaid taxes and they are secured by a lien on your home. If you were planning on using the equity in your home to buy a new home or to fund an inheritance for your heirs, the deferral will slowly eat away your equity, perhaps completely, depending on how long you let the deferral run.

If you have a mortgage, you should not do this unless your mortgage company approves. Most mortgages contain a provision that says you will not allow anyone to place a lien on your house that would interfere with the mortgage company’s lien. The deferral can put you in violation of this provision and your mortgage company may foreclose on the property or pay the taxes itself and bill you for them. If they pay your taxes, you will be in for a nasty shock, as they will bill you not only for the taxes they paid, but force you to make escrow deposits for next year’s taxes. Your mortgage payment could go up by hundreds or even thousands of dollars, depending on the size of your tax bill. Be sure to get written approval from your mortgage company before you sign any papers for the county.

A district court in Montana recently held that a collection attorney violated the FDCPA by asking a pro se consumer to admit he had no defenses when the attorney knew the consumer had raised a statute of limitations defense:

The inescapable conclusion is that Mr. Dendy asked a pro se defendant to admit false information. He either did so knowingly, or neglected to review his minimal file before signing the requests. He served the requests with no ostensible reason to believe that the defendant would understand their import. The requests for admission appear to be designed to conclusively establish each element of JRL’s case against McCollough and to use the power of the judicial process against a pro se defendant to collect a time-barred debt. This conduct is abusive, unfair and unconscionable. The Court’s conclusion in this regard is strengthened when one considers that JRL’s behavior is measured by the objective “least sophisticated debtor” standard. McCollough v. Johnson, Rodenberg & Lauinger, 2009 U.S. Dist. LEXIS 1372, at *19–20 (D. Mont. Jan. 8, 2009).

The abuse of pro se litigants by collection lawyers is a massive problem. Collection lawyers take advantage of pro se litigants’ lack of understanding of the rules to get judgments without having to disclose that they lack the evidence they would need to prove their cases if they were put to trial by another lawyer. At least in Montana, they got pushed back a little.

Both the federal and Texas debt collection statutes protect consumers from debt collection harassment, but they don’t cover all kinds of debts, only consumer debts. This means debt collectors collecting non-consumer debts are not subject to the restrictions in those statutes. I see this most commonly in 3 situations: business debt, criminal and quasi-criminal debts, and personal injury or property damage claims.

Small businesses frequently use credit cards and other consumer finance sources to run their businesses. The courts look at the actual use of the money borrowed to determine whether a debt is a business or consumer debt. A person who uses a Target Visa card to purchase office supplies for his home business has created a business debt. The protections in the debt collection statutes will not apply. This works in reverse as well. A person who uses a card issued to his business for personal purchases has created a consumer debt and is protected by the debt collection statutes even though the card issuer never intended that to be the case. When use of a card is mixed, the courts look to the primary use, so if the card was used to purchase $5000 worth of goods and $2501 of that was consumer goods, then the debt is covered by the debt collection statutes.

Criminal fines and civil claims arising out of crimes are not covered either. Most commonly this becomes an issue in shoplifting cases. Texas has a statute that allows merchants who are victims of a theft to sue the thief for damages. The statute is quite onerous and there are debt collectors who specialize in threatening to sue people under the statute unless they pay exorbitant sums of money to settle the claim. Because the claim arose out of a theft instead of a consumer transaction, the debt collection statutes don’t apply. Note: the debt collection statutes do apply to bad check collectors, even though writing a bad check can be a crime in certain circumstances. As long as the check was written for a consumer transaction, the collection agency is bound by the debt collection statutes. The difference is that a check is considered to be part of a “transaction”, the word used in the statutes, while a theft is not.

Tort claims are the third area where this gap in coverage can leave a person vulnerable to debt collection abuse. “Tort” is the word the law uses to describe claims that people have when they are injured or their property is damaged or lost as a result of an accident or other wrongful conduct. Because these claims don’t involve a transaction, they are not covered. This commonly arises under the Texas statute that allows suspension of the drivers license of a person who fails to pay a damages claim arising out of a traffic accident. Some debt collectors specialize in buying unpaid claims from insurance companies and threatening driver’s license suspension if the debtor doesn’t pay. These collectors also aren’t covered by the debt collection statutes.

There is still limited protection from debt collectors who engage in outrageous collection tactics. Texas has a common law claim for unreasonable debt collection practices, but it is little-used and not well-defined. As a practical matter, it is only helpful in cases of extreme abuse or harassment.

Do you know what your credit card costs you? Let’s look at the math. Take a Citibank card with a $5000.00 balance and a 14.99% interest rate. Calculated according to one of their recent card agreements, if you pay the minimum payment each month, it will take you 19 years and 10 months to pay the card off. Your payments will total $10,551.68 over that time period, or just over 2 times the amount you borrowed.

Now, let’s look at what happens if you are not always on time with your payments. If you are late twice a year, Citibank will impose their default rate, which under the same agreement we used above, was 28.99%. This is actually fairly low for a default rate, in excess of 30% is fairly common. If you make the minimum payment each month, it won’t take you much longer to pay the card off, just! 22 years and 8 months, but you will pay $17,755.83, or an extra $7000 or so for the privilege of paying late twice a year.

Think that’s a crock? Think you’ll just stop paying, save your money and settle with them for 50% on the dollar in a couple of years? Ok, let’s look at that math. After 2 missed payments, your interest rate goes to the default rate. You’ll incur late fees for at least 6 months, although it appears that Citibank’s policy is to stop imposing fees after 6 months. After 2 years, if you haven’t been sued, your balance will be $9,060.89, so your 50% on the dollar settlement will cost you $4,580.45, or about what you owe now. If you wait 3 years to try to settle, your balance will be $12,066.35 and your 50% on the dollar settlement will cost you $1,033.17 more than you owe now.

What is the lesson here? You can’t win. That’s it. Nothing else. (Well, you can win, but only if you don’t play).