Hello aj10,
Thank you for your question.
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So, I am not a lawyer, but have done careful research on your question.
First, from the 'Lectric Law Library's stacks
Bankruptcy Questions - Basic Information & Answers you will find a
small discussion of secured vs. unsecured debt:
http://www.lectlaw.com/files/bnk06.htm
"...there are two types of loans: secured and unsecured. A secured
loan is one that requires you to pledge something as collateral. For
example, if you purchase a car, the creditor will usually require you
to put up the car as collateral. On the other hand, an unsecured
loan, does not require collateral. Using a credit card is usually an
unsecured loan.
If you default on an unsecured loan, the creditor's only recourse,
after the letters and the collection agency efforts fail, is to sue.
But if you default on a secured loan, the creditor can repossess the
collateral and sell it. If the money from the sale isn't enough to pay
off the loan, the creditor can sue you for the balance of the loan..."
Most sites will support that claim, that the next level of recourse is
suit. And defaulting on unsecured credit card debt can then attach
your real estate, bank account or salary if a judgement is granted.
And it most likely would be.
Now, not ALL credit card debt is unsecured.
The USF Federal Credit Union terms for their Visa card states:
http://www.creditunion.usf.edu/prod_serv/loans/goldvisadisclosure.htm
"...8. Default. You will be in default if you fail to make the MINIMUM
PAYMENT within 25 days after your monthly statement closing date. You
will also be in default if:
(a) you breach any other conditions of this agreement;
(b) your creditworthiness has become unsatisfactory to us because of a
change in your employment status, an increase in your other
obligations, bankruptcy or insolvency proceedings involving you, or
other reasons;
(c) you die, become incapacitated, or you fail to abide by this agreement.
In the event of default or if this agreement is terminated by you or
by us, the entire balance becomes immediately due and payable. The
Debtor, jointly and severally, agrees to pay reasonable attorney's
fees, court costs and/or collection agency fees and costs to the
extent allowed by applicable laws and regulations. I agree that my
salary or earnings may be subject to attachment or garnishment to the
extent allowed under applicable law.
9. Security Interest. To secure your account: (a) you grant us a
purchase money security interest under the Uniform Commercial Code in
any goods you purchase through the account. If you default, we will
have the right to recover any of these goods which have not been paid
for through our application of your payments in the manner described
in paragraph 4; (b) you grant us a security interest in any of your
property currently or hereafter held by us, except for a home or any
of your property that would be defined as "household goods" by the
FTC's Credit Practices Rule; (c) if you sign or have signed a Pledge
of Shares which specifically pledges your shareholdings with us to
secure this credit card account, your credit card account will be
secured by your pledged shares in the Credit Union; (d) collateral
securing other loans with USF Federal Credit Union may also secure
this account..."
So you must carefully read the terms that accompany any credit card
agreement. In the case above, accepting this card means you have
agreed that the merchandise you purchase with the card is security
against the debt as if you had signed a UCC Filing statement for
securing the debt with the purchase.
A page entitled "Secured vs. Unsecured Assets FAQ" talks about credit cards here:
http://www.debtworkout.com/susfaq.html
"...Q. How do unsecured creditors get paid?
A. Either by you paying them voluntarily or by court order. Remember,
unsecured creditors may also gain secured rights through the courts.
Q. What about the threats from the collection agencies?
A. They are exactly that, threats. Only a lawyer can back them up. If
you would like to enter into a payment plan sometimes these agencies
can be helpful. If you can not enter into a plan their only choice is
to go away or pass the case on to an attorney for the creditor.
Q. Can they still call me?
A. So long as it doesn't become harassment they may call occasionally
to check on your status. One of the bonuses of your hiring an attorney
is that you just tell the agency once to call your lawyer instead and
you'll never get a call from them again, it will be your lawyer's job
to field their calls.
Q. What are some examples of unsecured debt?
A. Most credit cards, debts to stores and money owed for services.
Q. Can some credit card debt be secured?
A. If the card was secured by a savings account then the debt is
secured up to the amount of the savings. Sears card holders should
make special note that Sears will consider major purchases such as
appliances and computers secured transactions under the terms of their
credit agreement. I have seen them go as far as claiming old tires and
car batteries as secured..."
So, once again, a credit card transaction may be more secured than you
might have imagined. And if not, court judgements can be made against
you for defaulting. It is not as simple as avoiding the harassing
calls of collection agents and going scott free.
Additionally, depending on the agreement with the credit card company,
the interest rate can be raised once you are in default of making
payments. This will cause the debt to skyrocket. For example, this pdf
of an agreement with AmeriCU shows that their reasonable Platinum Visa
rate of 7.9% goes to 17.9% upon default:
http://www.americu.org/pdf/cc_app.pdf
Bankrate.com says the following:
http://www.bankrate.com/brm/news/cc/20000103.asp
"...Severe, long-term consequences
Besides taking a big bite out of your budget, late credit card
payments can have more severe, long-term consequences. Some issuers
raise interest rates dramatically if a cardholder is late even once.
Fail to meet the due date twice within six months and the annual
percentage rate is almost sure to be jacked up.
Consumer Action, a nonprofit education and advocacy organization,
recently surveyed 105 cards at 63 banks and found that penalty
interest rates, known as "default" rates, have reached daunting
levels.
For example, Washington Mutual's default APR is 28.7 percent; American
Express is at 24 percent, and AT&T Universal Card, Bank of America,
Household Bank's GM Rewards card and Wells Fargo have gone to 23.9
percent..."
So, during whatever period that exists between defaulting on payments
and judgement, bankruptcy or debt consolidation, the amount of the
debt can skyrocket surprisingly quickly if a default interest rate is
put into place by the credit card company.
Now, I would recommend *legitimate* credit counselling to determine if
the amount of debt is sufficient to suggest bankruptcy. Quite often, a
payment plan can be worked out with the credit card company that will
allow for reduced interest and payments without the extreme measure of
bankruptcy.
On the other hand, not all debt consolidation agencies are totally
above board and if your friend decides to go this route, he will need
to carefully choose one with a quality reputation.
You will find numerous pages on the Internet offering debt
consolidation services or other programs. The following page contains
a lot of information and seems to be written legitimately. Note the
section on Bankruptcy:
http://www.berkshire.net/~mkb/
In part, they note:
"...Q. What are the advantages of bankruptcy?
A. Once debts are discharged through the bankruptcy court they're gone
forever. With the other options you will most likely have to pay some
money even if it is pennies on the dollar.
Q. Is that better or worse for my credit?
A. Bankruptcy ranks as the worst thing possible on your credit report,
but once it's over you may start to rebuild credit immediately.
Q. How long will the case take?
A. Chapter 7 cases may be filed in days and finished in 4-8 months
most times. Chapter 13 cases may take many months until a plan gets
approved then three to five years for the plan to be completed. I've
seen chapter 11 cases take years for plan approval and even more years
to carry it out.
Q. How long until my credit gets back to the point where I might hope
to get a regular credit card or mortgage?
A. Rebuilding credit depends on how aggressively you try to get back
on track, but don't figure less than 1-3 years. Remember, you can
always get a secured credit card or a mortgage with a low loan to
value (LTV) and high interest rate, sometimes even still in the middle
of a bankruptcy..."
And this page on Debt Consolidation Loans - A Consumer's Debt
Consolidation Loan FAQ:
http://www.debtworkout.com/bad_credit/home_loan/debt_consolidation_loan.html
And do spend time at a "Things You Need to Know About" page which
talks about Credit and Debt Management:
http://credit.about.com/cs/debtcounselling/a/120800.htm
This is an excellent site with quite a bit of information including
how to sift through the various companies offering help with debt and
consolidation. For example:
"...Lets begin at the beginning. What is "Debt Management"? This name
has become an umbrella for a large group of debt-environment functions
and activities: debt reduction, consolidation, negotiation,
settlement, bankruptcy, credit repair clinics, and even deciphering
credit reports. Since a couple of these will not be discussed at
length in this article, here are a few brief notes which should not be
overlooked.
Credit Repair Clinics - Nolo Press and other notable consumer groups
for debt management issues strongly suggest avoiding credit repair
clinics. Many of these clinics are illegal. Some have been caught
stealing the credit files of folks under the age of 18, have died, or
live in far away areas. Others break into credit bureaus and change
files, and still others suggest you start a new IRS Employer
Identification Number (EIN) which besides illegal, blocks earning any
Social Security benefits. But the real bottom line even for the legal
operations is, that none of them can do anything for you that you
can't do for yourself... except charge you $250 to $5000 for
unnecessary services.
Deciphering Credit Reports - Credit reports can be intimidating but if
taken slowly with the use of materials sent with your credit report,
you will get through it. If you are going to try to correct your own
credit report as strongly suggested you should do, you are going to
have to understand it. To understand it, you are going to have to roll
your sleeves up and get intimate with it. There are additional support
materials for you to use in this site's "Credit Workshop" as well as
at the online sites of the credit reporting agencies.
Debt Reduction - Since my site probably falls more within this
category, probably little has to be said except that any site which
fosters debt reduction and/or wise credit use ideas has my vote. Such
sites are not my competitors... they're my allies.
Debt Settlement and Negotiating With Creditors Yourself - Though this
article does touch upon such topics by professionals, self involvement
may be the best thing for you. However, because of the length of the
current discussions, the debt settlement and/or negotiating on your
own cannot be covered until the next article..."
This site is packed with useful information. Two organizations they
recommend at their summary page are:
"...When this article began I said I would not endorse a debt managing
group but that I felt comfortable in suggesting that there were two
groups which I believed could be used as a standard to measure others.
Here are some reasons why.
National Foundation Consumer Credit (NFCC) is the umbrella for the
non-profit Consumer Credit Counseling Service (CCCS). All references
in this article to the proper handling of client accounts is part of
what NFCC and CCCS is all about. NFCC is the largest and oldest
non-profit group dedicated to credit education and counseling. In 1999
they counselled 1.6 million families enabling more than 1/3 of the
families to repay their debts on their own and repaying $2.352 billion
to banks, retailers, finance companies, and credit unions that might
otherwise have been lost to bankruptcy. Only 7% were referred to an
attorney for legal assistance.
In addition to the link below, NFCC has a 24 hour toll free phone
number at 1-800-388-2227. For Spanish Speaking: 1-800-682-9832.
Accelerated Debt Consolidation, Inc is a for-profit group out of South
Florida. Very few (if any) debt management groups have a spotless
record with the Better Business Bureau. Accelerated Debt
Consolidation, Inc does. Additionally, national statistics reflect
that only 4% of debt management clients actually make it past one year
in the program. Out of 380 clients at their former company, ERC, from
May 1999 to May 2000, 97% still remained after one year. I am also
strongly impressed with the company owner's record as well as their
consumer warning page (which they seem to strongly adhere to
themselves). They appear to be upfront, organized, and efficient.
In addition to the Accelerated Debt Consolidation, Inc links below,
there is a toll free phone number at 1-800-810-5250...."
So, to summarize a bit for you:
Not all credit card debt IS unsecured. Your friend's may and may not
be. Read the bank card agreements carefully.
Ignoring payments and collection calls WILL lead to lawsuits,
particularly if the debt is sizeable. And ignoring the problem can
lead to dramatically increased interest rates on the unpaid balances.
Bankruptcy or legitimate debt consolidation will allow a rebuilding a
credit after a period of time. Strongly consider that your friend will
most likely want to buy a car or home sometime in his future and
although bankruptcy or debt consolidation may delay these types of
purchases or raise the cost of credit, they will set the stage to
allow credit to be rebuilt.
Search Strategy:
unsecured +"credit card" +default
"credit card" +default +recourse OR penalty OR penalties
bankruptcy vs "debt consolidation"
I trust my research has provided you with some ammunition to help your
friend reconsider his position on his credit card debt. If a link
above should fail to work or anything require further explanation or
research, please do post a Request for Clarification prior to rating
the answer and closing the question and I will be pleased to assist
further.
Regards,
-=clouseau=- |
