Zombie debts are old debts that come back to life.

Maybe when you think that old debt is dead because a creditor has charged it off , or a statute of limitations has passed, or even the debt has been discharged in bankruptcy.  Then you get a call from a debt collector.  Beware!  There are several ways that debt collectors can trick or pressure you into bringing that old debt back to life.

There are a lot of “debt buyers” out there, and their tactics and scruples leave a lot to be desired.  Debt buyers purchase old debts for pennies on the dollar from companies (such as credit card companies) that have charged off the debts on their books.  The debt buyers then take very aggressive actions to collect, employing intimidating and often illegal tactics, such as falsely claiming that a lawsuit has been filed, or failing to identify themselves, even threatening bodily harm.  A number of these companies have been fined by the Federal Trade Commission, but new ones seem to spring up like mushrooms after a rain, often involving the same people.  It is a very profitable business.

Here are some common traps:

You think the matter is resolved because the credit card company charged off the debt.  But that’s only a matter of the creditor’s bookkeeping.  A debt buyer may still purchase the right to collect the debt.

You think that a statute of limitations has expired when it hasn’t.  For example, here in Georgia actions on an “open account” must be brought within four years.  However, Georgia courts have ruled that credit card agreements are “simple contracts,” subject to a six year statute.

Even more shocking, if you agree to make any payments on an old debt, the law may treat your agreement as a new promise to pay,  with a new start to the period of limitation.  If you agree in writing, you could even revive debts that were discharged in bankruptcy!

If you are contacted about an old debt, do not make any commitments or give out any information.  Make a record of all contacts and consult with an attorney.

As a bankruptcy lawyer, I see Chapter 7 and Chapter 13 as financial tools.   It is not my role to past judgment on your decisions or make you feel guilty about making a particular decision.  My role is to serve as a trusted financial confidante to help you understand the pros and cons of the powerful financial tool called bankruptcy.

In fact, when you do appear in bankruptcy court you will note that lawyers for your creditors, the trustees and even the judges are focused on financial solutions.  Guilt and blame are not part of the equation.  Like any other financial tool, bankruptcy requires you to follow certain rules, but the underlying meme is financial not emotional.

I am by no means alone in positing that your consideration of the bankruptcy option ought to arise from a reasoned, thoughtful and logical consideration of both bankruptcy and non-bankruptcy options.  My colleague Frank Pepitone, a bankruptcy lawyer in Garden City, New York, argues that bankruptcy should be viewed as a type of rehabilitation.  Here is his thoughtful analysis:

Bankruptcy as Financial Rehabilitation

In our society, when people face emotional or physical problems, many will seek therapy. Therapy can be as simple as talking things out with a family member or friend. In more extreme cases, people will seek the help of a professional in order to work though their problems.

Rehabilitation for substance abuse, emotional trauma or physical injury are all forms of therapy designed to identify and correct an existing problem while providing the tools to move on successfully into the future. When people hit “rock bottom,” they toughen up, gather their courage and take these affirmative steps to get better and improve their lives.

Most individuals facing bankruptcy have hit their financial rock bottom. The bankruptcy process, along with the help of an experienced bankruptcy lawyer, can serve as the financial rehabilitation needed to springboard into future financial freedom, happiness and success.

The Rehabilitation Process

You are outside playing with your children or you are playing Sunday softball with your friends. You twist your ankle, tweak a knee or pull your shoulder. You pay a visit to your doctor, but other than the standard pain medication, there is nothing he/she can do for you. It is recommended that you start a physical rehabilitation program.

Through the rehabilitation process, you work with a physical therapist. With the help of this therapist, you identify the root cause of the injury and what steps can be taken to prevent future injury. You work together to repair and strengthen your body, fix whatever is wrong and ease the suffering. Through this process, you are given the tools to move forward post rehabilitation to continue to better yourself physically.

This physical recovery progression is not that different from the financial rehabilitation encountered when you file for bankruptcy. Instead of visiting a doctor, you have consulted with your accountant, financial advisors or a credit counseling company. They simply cannot help you so they advise you consult with a lawyer.

The bankruptcy lawyer is your financial therapist. Through the consultation and future interactions with your lawyer, you will identify the root cause of your financial distress and determine what affirmative steps can be taken to counteract future financial hardship. Experiencing the bankruptcy process, you will strengthen and repair your financial situation. If all goes well, your case will culminate with your discharge and you will be granted the fresh start that you deserve.

This is the post rehabilitation stage where you must move forward and take positive steps to rebuild your credit and secure your financial future. Any bankruptcy lawyer worth his salt will have provided you with the necessary tools to make this happen. Your lawyer should provide you with some basic financial planning advice as well as the necessary steps to take post-discharge to repair and rebuild your credit.

Five Step Program

Like other forms of rehabilitation that institute a “step program,” I like to think of the bankruptcy process holistically. This process includes five steps that take you from financial rock bottom to financial freedom.

1. Admit the problem. Many people facing financial ruin refuse to admit that they are struggling. They will continue to make minimum payments, borrow from Peter to pay Paul and basically do anything possible to stay afloat. The first step is to address these financial issues by speaking to family, friends or trusted advisers. By admitting that there is a financial problem, it allows you to…
2. Seek professional help. By consulting with an experienced bankruptcy lawyer, you will get sound financial advice on dealing with debt and develop a plan to solve these problems. At this point, the damage is already done, so by speaking with an attorney, you can start to…
3. Repair the damage. This repair and reconstruction is done through the bankruptcy process. You are able to address and correct your financial woes through bankruptcy and hopefully emerge debt free with a fresh start. After completion of bankruptcy, it is your responsibility to…
4. Rebuild your finances. Post-discharge, it is your obligation to work to improve your credit and your financial status. You are not alone and your bankruptcy lawyer should advise you on the safest and smartest ways to rebuild credit and improve your scores. Finally, and maybe most importantly, you must engage in…
5. Prevention. This is probably the area where most of us fail. You must work with your bankruptcy lawyer to implement a sound financial plan to prevent a bankruptcy redo. This could include general advice on spending, savings, investing and frugality. Engage your lawyer, ask questions and develop a plan to deal with future emergencies and periods of financial distress.

As with anything in life, it is ultimately up to the individual facing the hardship to make the necessary changes to improve one’s situation. For those of you facing financial hardship and struggling with debt, transform your thoughts and take the affirmative steps to resolve your issues.

Bankruptcy does not have to be a negative experience. It is a tough decision and a hard one, but with the help of an understanding bankruptcy lawyer, it could be a rehabilitative process that sets a positive tone for the rest of your financial life.

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Frank Pipitone is a Long Island Bankruptcy Lawyer and the managing attorney at Pipitone Law, located in Garden City, New York.

This week I wrote a guest editorial for the Atlanta Journal Constitution proposing a return to the pre-1998 Bankruptcy Code provision that allows for student loan discharge 7 years after the loan first comes due.

At this point, however, student loan debt remains non-dischargeable and, as such, private bill collectors working on behalf of lenders who have issued non-dischargeable student loans, are aggressively pursuing delinquent borrowers – both former students as well as parents who co-signed or guaranteed their child’s student loans.

What rights are available to student loan borrowers?  I asked attorney Sergei Lemberg, whose firm represents consumers in matters related to fair debt collection, fair credit reporting and lemon law to answer this question.   Here are Sergei’s observations:

If you’re behind in repaying your student loans, you’re in good company. It’s estimated that five million former students are in default, and it’s a safe bet that debt collection agencies are nipping at their heels. That’s because the U.S. Department of Education outsources federal student loan debt collection to private debt collection agencies. In fact, collecting on defaulted student loans is big business; debt collection agencies rake in about $1 billion per year in commissions. However, a debt collection agency only makes its commission if it convinces you to make a monthly minimum payment that equals a certain percentage of the amount you owe. If a debt collector agrees to a monthly payment below that threshold, the agency simply receives a flat administration fee for the account.

The Education Department recently announced that it would review its debt collection agency commission structure, and that it would mandate that debt collectors offer those in default an income-based formula for collecting minimum payments on student loans. However, these changes will likely not take effect until mid-2013. In the meantime, it pays to understand the rules of the road so that you can meet your obligations while not becoming a victim of debt collection tactics.

First, understand that you may be eligible for student loan consolidation if you have either a direct loan or a Federal Family Education Loan. In addition, you may qualify for the Education Department’s Special Direct Consolidation Loans, which are being offered until June 30, 2012. To be eligible for these loans, you mush have at least two FFEL loans, one from the Education Department and one from a commercial lender. The Education Department loan must be less than 270 days delinquent. Consult the Department of Education’s loan consolidation center for additional information.

Second, be aware that private debt collection agencies that collect on behalf of the Department of Education must abide by the Fair Debt Collection Practices Act. This is a federal law that draws boundaries between debt collection tactics that are allowed and those that cross the line. For example, the FDCPA prohibits debt collectors from calling you early in the morning or late at night, calling repeatedly to the point of harassment, and threatening actions that they do not intend to take or are not allowed to take. In collecting student loans, debt collectors have been known to threaten consumers with wage garnishment unless a payment is made immediately. While it’s true that wages can be garnished in order to repay defaulted federal student loans, the debt collection agency must send you a notice of intent to garnish and let you know that you have the right to an impartial administrative hearing.

Finally, know that according to the FDCPA, if a debt collector crosses the line, you have the right to sue the debt collection agency. If you win your lawsuit, the debt collection agency will be required to pay you monetary damages, as well as your court costs and attorney fees.  If your rights have been violated, consult with a fair debt attorney.

In any case, this potential client asked a few questions and just as we were about to conclude the call he mentioned that he had been sued 3 weeks prior but “it really doesn’t matter because I am currently unemployed and I can get rid of that debt in a bankruptcy later on.”

Nothing could be further from the truth.

In Georgia, if you are sued by a creditor like a credit card lender or medical provider, you have 30 days in which to file a written answer in the state court where you were served.   After 30 days, the lawsuit goes into “default,” but Georgia law actually gives you an additional 15 days to reopen the default by paying court costs.

If you let the lawsuit go into default the plaintiff creditor will get a judgment and then a “fi fa” that he can use to go after wages, bank accounts or property.

Why, then, should you care if a creditor gets a judgment when you are unemployed and own no property?   There are several reasons:

First, you may not always be unemployed and not own property.  Judgments in Georgia last 7 years and they can be renewed thereafter.  It is not uncommon for creditors to sit on uncollected judgments and then sell the right to collect or renew collection efforts years after the original date on the judgment.   Even if a creditor tells you that the claim or judgment against you has been “written off” it can come back with a vengeance if a creditor or creditor’s agent discovers that you own property or that you now employed.

Second, the language in the lawsuit could include allegations of fraud or other wrongful behavior.  If a default judgment is issued on the basis of such language, the judgment lien will most likely not be dischargeable in bankruptcy.

Third, while you can, in theory, get rid of a judgment lien by filing something called a “motion to avoid judicial lien” in your bankruptcy, this type of motion is not applicable in every case and these motions can add cost to your bankruptcy case.

Fourth, it is possible that the creditor may not actually have the evidence to prove its case and by filing an answer you may be able to negotiate a settlement on favorable terms and thereby avoid bankruptcy completely.

Fifth, your financial situation may change such that you are not eligible for bankruptcy or you stand to lose too much by filing.  A default judgment could put you in a very uncomfortable position, either now or in the future.

The bottom line is this: if you receive a lawsuit, contact a lawyer immediately for advice about your options and never assume that a default judgment is harmless.

If your parents are willing to support you (temporarily, one hopes), and you can pay off your debts in a few months, go for it.  Just don’t overstay your welcome.  Now that you’re an adult, you’re a guest.

If you are thinking about filing bankruptcy, there are some things to keep in mind.

First, student loans are not dischargeable in bankruptcy (although if you have some income, you can work out a payment plan that’s not too burdensome.)

Second, if you want to file in Chapter 7 and discharge all of your (dischargeable) debts, you will have to pass the infamous “Means Test.”   Two important factors in this test are household income and your ability to pay your debts.  What is considered a “household” for these purposes depends on how the court views your situation.  If you are paying rent and other necessities, you may be considered a renter and be treated as a separate household.   On the other hand, if you are completely dependent on your parents, it would probably appear to the court as a single household.  This would require inclusion of your parents’ income in applying the Means Test.  The bankruptcy case would not otherwise involve them, but they would have to disclose information about their income.  The second concern is that if you have some income but are not incurring living expenses, your budget will look like you have enough money to pay at least some of your debts.

If you are in an apartment and over your head in (dischargeable) debt, and you are considering bankruptcy, you probably should stay put if you can.  Chapter 7 is especially attractive for people with a lot of debt and a low income who expect (or hope!) to land a good-paying job in the near future.  If you wait until after you get that job, if your income is high enough, you may be forced to file a Chapter 13 and make at least partial payment of debts that would otherwise have been completely discharged in a Chapter 7.

Suppose you have a mortgage at 6 or 7% interest and are fortunate enough to be employed, but your spouse has lost his or her job, or your hours have been cut back.  If you could refinance at current rates (say, 4%), the reduction in monthly payments might might make the difference between keeping and losing your home.  Also, if you have been paying on the loan for several years and could spread repayment of the current balance over the next 30 years, that would give you even more breathing room.  The problem is that you owe more than the house is now worth.

The policy change recently proposed by President Obama hold some promise of providing relief for folks in such a situation.  The details have not yet been released, but thePresident’s proposal is to remove caps that had allowed homeowners to refinance 100% of the outstanding balance on loans owned or guaranteed by Fannie Mae and Freddie Mac,  where the balance owed is up to 25% more than the house is worth.

The proposal might enable some homeowners to avoid bankruptcy altogether.  For others, it might make a Chapter 13 plan more feasible.

If enacted, the bill would indeed protect “Mortgagee Equity.”  Unfortunately, if people understood proper legal terminology, they would know that the Borrower is the Mortgagor.  It is the Lender who is the Mortgagee, and it is the Lender’s equity in the mortgage that is being protected! 

The primary effect of this bill would be to increase the lenders’ return on investment by giving them an additional tool to pressure harried debtors into raiding their retirement funds, funds that lenders are otherwise unable to reach.

One of the most common mistakes made by people desperately trying to hold onto their homes is to withdraw money from their retirement funds.  Your retirement funds cannot be attached by creditors, whether or not you declare bankruptcy.   As traumatic as it may be to lose a house to foreclosure, it would be even worse to catch up momentarily, only have the house go into foreclosure down the road after you have blown your retirement nest egg.

There are other ways you may be hurt by applying retirement funds to your mortgage debt.  Should you end up declaring bankruptcy, you are allowed to keep (ie., exempt) a portion of the equity in your home.  If you pay down your mortgage debt, you may have more equity than the allowed exemption.  If that happens, the trustee can force the sale of your home and turn over excess proceeds to your unsecured creditors.

Also, if the amount you owe on your house is greater than its value and you are in a Chapter 13,  you may be able to “strip” a second mortgage.  If you have a second mortgage and you pay down the first mortgage to the point where the balance you owe is less than the value of the house, you will have destroyed your ability to strip the second mortgage.

Finally, if all this isn’t enough to deter you from raiding your 401(k), think about the fact that even though you may not have to pay the 10% penalty for early withdrawal, whatever you withdraw is still subject to income tax, and income tax obligations are not dischargeable in bankruptcy.

Here’s why:

The track record of loan modification programs is abysmal.  Months go by while a loan modification application is “under review”.  Borrowers consistently report that lenders repeatedly lose paperwork and ask for it over and over again.  In the end, few loan modification requests are granted.

If the modification is granted, lenders often have added so much in interest and penalties that the outstanding balance of the “modified” loan has grown to the point that it would be impossible to pay, even if written at reduced interest rates over an extended term.

If the modification request is denied, the likelihood of the homeowner being able to catch up are slim indeed.  Even if the lender has not piled on the intervening interest and penalties, few families in financial distress will have been able to set aside their monthly payments so that they can pay up on the arrearage.  Furthermore, if you are behind even one month, the lender may choose to refuse payment and proceed with foreclosure.

If the arrearage has not grown too large while the modification application was pending, the house may still be saved by filing under Chapter 13 and paying off the arrearage over the five year course of the plan.  However, if the accumulated arrearage has become too large, the required payments may be too high for the plan to be workable.

It is common to see bills pile up when one member of the family is seriously injured, resulting in large medical bills and often loss of income due to inability to work.

My first piece of advice is to keep any settlement proceeds in an entirely separate bank account in your wife’s name only.  The money should not be commingled with any joint funds, nor should you be a joint holder of the account or have any rights to access to the money.

If most or all of debts are in your name only, it may make sense for you to file individually.   However, if you have signed as the responsible party for some of your wife’s debts, such as her medical bills, or if you have joint accounts, you may be relieved of the debts, but she may still remain liable, in which case filing bankruptcy may not be as much help as you would like.

If your wife is also responsible for significant debt, such as her medical bills or joint liability for your home mortgage, filing individual bankruptcy may not resolve your problems.  While your creditors may not be able to get at your wife’s settlement proceeds, the question of the extent to which her creditors can gain access to them is a question of state law.  Many states have laws protecting such funds from attachment by creditors.  (This is another reason to keep those funds separate.)  Also, depending on state law, your wife’s medical insurance carrier or health providers may have legal claims with respect to proceeds from the lawsuit.  You should ask her personal injury attorney about this.

Whether or not you decide to file, bankruptcy, separately or jointly, you would be well served to consult with a bankruptcy attorney on how to best protect the proceeds of the lawsuit.

But what about recent charges?

Credit obtained by fraud is not dischargeable.  If a creditor alleges fraud, the creditor must file an adversary proceeding and provide evidence to prove it.  Generally speaking, this means proving that the debts were incurred with no intent to repay them.  Although the creditor has the burden of proof, a mere declaration of an intent to repay is not a defense.  The question is whether there was a reasonable expectation of the ability to repay.  In making this determination, factors to be taken into account include, whether new credit cards were obtained, whether the credit application contained false information, whether there were large cash advances, purchase of luxury items, whether the amounts, times, places and types of charges varied from past patterns, how much was charged, when and what for, whether the debtor was employed or otherwise able to pay, and whether the debtor has recently consulted with a bankruptcy attorney.

While the burden is generally on the creditor to prove fraud, certain transactions create a presumption of fraud, thereby putting the burden on the debtor to prove otherwise.  These transactions include debts to a single creditor for luxury goods and services incurred within 90 days of filing totaling more than $600 and cash advances totaling more than $875 incurred within 70 days of filing.  (These numbers are changed periodically.)

Keep in mind that this does not mean that smaller transactions will avoid scrutiny, nor that you can avoid trouble if you wait more than the specified number of days.  Creditors (and the trustee) are likely to carefully review any recent credit card transaction, transfer of assets or debt obligation.

If you are contemplating bankruptcy, the first thing you need to do is to stop using your credit cards.  If this seems impossible (it’s not).  If bankruptcy is a possible source of relief for you, your bankruptcy attorney can help you develop a plan to avoid the appearance of fraud.