Basic Debt Collection and Consumer Protection in Georgia
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BASIC DEBT COLLECTION AND CONSUMER PROTECTION IN GEORGIA
This document tells you the following:
- Why do you need to understand your contract before signing it?
- How can creditors collect debts?
- How can consumers protect themselves?
Understand Your Contract
When borrowers cannot or do not make a payment on a loan, they are considered to be in default. Sometimes the situation they find themselves in seems unfair. Consider the situations that follow. Are they fair? Are they legal?
SITUATION 5 Brad buys a used auto for $1,000. He is to make a $200 down payment and four annual payments of $200 plus interest. The first year, he pays the $200 plus interest. During the next year, he loses his job. He cannot make the next payment. The dealer demands that he pay the $600 plus interest immediately.
In most credit agreements, when one payment is missed, all remaining payments are accelerated so that the rest of the debt becomes immediately due. It must be paid in full. In situation 5, the dealer is legally within his rights in demanding immediate payment from Brad. Brad agreed to this condition in the credit contract.
SITUATION 6 Sara is paying on a loan for a television at the rate of $25 per month. When she is ready to make her last payment, she discovers that the contract states she will pay $200, not $25. If she cannot make this payment, then the company will repossess her television.
Would this action be legal?
One practice that has caused debtors problems is the "balloon" payment. In this credit agreement, the last payment is much larger than the others. (The sudden increase in size is the reason for the term balloon.) Sometimes this payment is so large that an unwary debtor cannot pay it, and he or she defaults on the loan-which is what could happen to Sara in situation 6. Although some states outlaw balloon payments, they are legal in Georgia.
SITUATION 7 The Folleys bought furniture for their living room on credit. Later, they bought dining room furniture from the same dealer using an add-on installment plan. They paid the full amount of the living room set in a timely manner, but then they missed a payment. The creditor came to repossess not only the dining room furniture but also the living room set.
Was this action legal?
Add-on installment plans (situation 7) are also legal. Both sets of furniture could be repossessed, but only if the Folleys agreed to such a plan when they signed the contract, and the creditor obtained a security interest in each set of furniture. Debtors should be aware of what they are agreeing to in a contract.
All of these situations illustrate the importance of reading and understanding a credit contract before signing it.
How Creditors Can Collect Debts
Borrowing money carries the moral and legal responsibility of paying it back. Most people are careful to pay their debts. They consider it the right thing to do. They also know that they may need to borrow money again and want to be able to do so at as little cost as possible. Also, they want to avoid what can happen to people who don't pay their debts.
When a debtor is in default, the creditor has a legal right to collect the money owed. After all, in a credit contract, the debtor has taken on a duty to repay the debt, which can be enforced by courts.
SITUATION 8 Della owes money on her television set. When she misses a payment, she begins to get a series of phone calls reminding her to pay. The first call is polite, but the rest are abusive.
Are the calls legal?
The creditor-or an agency hired to collect on the debt-can try to persuade the debtor to make the payment. This action is legal unless it becomes harassment. The federal Fair Debt Collection Practices Act protects consumers from unscrupulous debt collection practices. For example, it limits how many times and for what reasons the creditor can call the debtor. It limits who else the creditor can call. It also limits what the creditor can do if the debtor says that the debt is not going to be repaid.
Under the act, collectors cannot abuse persons by threats of violence or illegal actions. They cannot say a person will be imprisoned for not paying debts, for example. It is also illegal to misrepresent facts. A debt collector cannot imply that he or she represents the federal or state government.
The Fair Debt Collection Practices Act would protect Della (situation 8) against the harassment described. What can she do? She can call a local consumer agency to report the creditor's harassment, or she can contact the phone company.
SITUATION 9 In situation 5, Brad could not pay the remaining $600 on his used auto. The auto was collateral on the loan. The dealer saw the auto parked downtown and repossessed it.
Is this action legal?
A creditor may take collateral, sell it, and use the money from the sale to pay the debt due. Repossession is usually carried out by the creditor without help from the courts or any state authority. Although this "self-help" repossession is legal in most states, the creditor must be sure that no law is being broken. A creditor may not break down a garage door to reclaim an automobile pledged as collateral for a loan, but a creditor may take the car from the debtor if the debtor leaves the car parked on a public street. (The law does not regard taking the car as stealing if the creditor already has been given the right to repossess the car.) The dealer in situation 9 is within the law to take Brad's car. However, Brad must have agreed in the contract to repossession if he couldn't pay his debt.
SITUATION 10 Brad's repossessed auto is not worth as much as it was a year ago. When the dealer sells it, it brings only $400. The dealer then goes to court to sue for the rest of the money. The court supports his claim. The dealer arranges to take some of Brad's weekly salary until the debt is paid.
Is this action legal?
Many people mistakenly believe that if a car is purchased with credit and the debt is not repaid, the worst that can happen is that the car will be repossessed. However, even though the creditor can legally collect only the amount owed plus the cost of credit, there are several ways to recover debt, whether dealing with a car or some other item.
Suppose the creditor is a bank in Georgia. A debtor defaults on a bank loan, but the debtor has money on deposit in the bank. The law allows the bank to take this money to pay off the amount owed. This action is called setoff.
A creditor can take a debtor to court for default. As in any court proceeding, the defendant (that is, the debtor) must be notified in advance. The defendant can present his or her case at the hearing.
If the court rules that the debtor must repay the creditor, various debt-collecting measures are possible. The creditor may have the debtor's wages garnished, meaning that the creditor may demand that the debtor's employer pay a portion of the debtor's wages to the creditor. This arrangement would continue until the debt is paid off. This action was taken against Brad in situation 10.
Yet another action can be taken, as the following situation illustrates:
SITUATION 11 Sid has a string of bad luck. After taking out a loan of $3,000 to cover a series of debts, he loses his job. He cannot make the payments. The creditor obtains a judgment from the court saying that Sid must pay.
Can Sid's equipment that he uses for work be sold to pay the debt?
Sid's equipment could be sold, but only under certain circumstances. Following the judgment of the court in favor of the creditor, the creditor may then ask the court to order an attachment. The property is then taken (or "attached") by the court and sold, with the proceeds used to pay the judgment against the debtor, who is Sid.
However, attachment can be used to collect a debt only if the debtor lives-or is moving his or her property-outside the state that issues the order of attachment. Alternatively, attachment can be used if the debtor cannot be found after the required official attempts.
Protection for Consumers
In the last 25 years, protecting the consumer in credit transactions has been a major concern of federal and Georgia lawmakers. In fact, consumer credit is one of the most highly regulated consumer areas. Some of the acts passed by Congress have already been mentioned.
At the state level, the Uniform Commercial Code adopted in most states is an attempt to protect the debtor from certain acts and practices of creditors. For instance, suppose your car has been repossessed and is to be sold to pay your debt. You are anxious that the car be sold for as much as possible so that the debt will be fully paid. The Georgia code usually requires the creditor to notify the debtor of the time and place of sale. This notice gives you a chance to be at the sale. By then, you may have the money to bid on your car, or you can encourage others to bid so that the final sale price will cover the debt. Also, Georgia has passed the Georgia Fair Lending Act, which prohibits abusive home loan practices.
Some of the oldest forms of credit protection legislation are the federal bankruptcy laws. These laws allow debtors who are unable to pay their debts as they come due to hold off their creditors. They can either write off or repay their debts under court supervision.
There are two types of bankruptcy petitions, Chapter 7 and Chapter 13, for individuals. Chapter 7 is known as straight bankruptcy. In a Chapter 7, the debtor declares that he or she cannot pay his or her debts as they come due. If this declaration is accepted by the court, most unsecured debts such as credit cards are canceled. Also, debtors generally must surrender some unsecured assets to the court, which are sold and the sale proceeds used to pay creditors. On the other hand, certain debts such as taxes and student loans cannot be canceled.
It is hard for a debtor to get credit after a Chapter 7 bankruptcy. The bankruptcy will remain in his or her credit history for 10 years.
A Chapter 13 bankruptcy allows the debtor to arrange to repay as much of his or her debt as possible under court supervision. A Chapter 13 bankruptcy makes it easier to reestablish credit. It also allows the debtor to cancel certain unpaid debts that can't be canceled under Chapter 7.
Recent changes in federal bankruptcy laws have made filing a Chapter 13 more attractive. It is now easier for the debtor to keep a home and certain other assets. Under Chapter 7 bankruptcy, however, it is now harder for a debtor to avoid certain payments, including alimony and child support and bills for luxury goods bought before the bankruptcy petition was filed. It has become less attractive.
Filing for bankruptcy should be a solution of last resort. Persons who have declared bankruptcy can legally be denied credit. For this and other reasons, informal solutions to over-indebtedness should be looked at first.
There are credit counseling services, such as the Consumer Credit Counseling Service, in your community. These services provide advice about managing debt. Be cautious, however, about private moneylenders who call themselves credit counselors. Usually, they suggest replacing several small loans with one large loan. This practice can be desirable, but private moneylenders often are more interested in making loans than in solving credit problems.
* Excerpted from An Introduction to Law in Georgia, Fourth Edition, published by the Carl Vinson Institute of Government, 1998 (updated 2004). The Vinson Institute is not responsible for errors in the online text. Content is for information only; in no way should the information in the book be considered legal advice to anyone on any matter for which there are legal implications. Any such matter should be specifically addressed with an attorney. The book is available for purchase ator by contacting the Publications Program, Carl Vinson Institute of Government, University of Georgia, 201 M. Milledge Avenue, Athens, GA 30602; telephone 706-542-6377; fax 706-542-6239.