Loan Debt Reality


Debt-collection horror stories

If you have debts you can’t pay, you may be desperate enough to fall prey to some of the sleaziest collection tactics around. Or you could learn to recognize the tricks.

Are you afraid to answer your phone for fear of debt-collection threats? You’re not alone…”Debt collectors have gotten a lot more aggressive,” says Kristen Garrett, the public-relations coordinator for the Advantage Credit Counseling Service, a Pittsburgh nonprofit…

The best ways to pay off debt
Although most collectors stay within the bounds of the law, others behave in ways that are outrageous, heartless and/or just plain illegal…Counselors say they’ve noticed a difference between collectors for original creditors and the third-party debt collectors who buy debts for collection. Many times, the original creditor is more willing to work with consumers, says Robert Cotton, a certified personal-finance counselor with Consumer Education Services in Raleigh, N.C.

3 big problems with debt collectors…
With an outside debt-collection agency, agents’ jobs often “are based on what they are able to collect,” says Don Hicks, a senior counselor for Novadebt, a nonprofit credit counseling agency in Freehold, N.J. And the quickest way to get that money “is with aggression and instilling fear in consumers,” he says. Other methods are embarrassment or humiliation.

Here are some recent collection stories that rank among the worst of tricks:
We’re going to drag you to jail!
Garrett thought she’d heard it all until her agency got a call from a senior citizen late last year. “She called literally in tears and said debt collectors called and said they had the police outside. If she didn’t pay, they were going to drag her to jail,” Garrett recalls.

Debts are a civil matter, not criminal — and jail time isn’t even an option. “It’s important for people to know that there is no such thing as debtor’s prison,” Garrett says.

If agents are making illegal threats such as jail time, deportation or physical violence, you can report the harassment to the Federal Trade Commission or to your state attorney general’s office…The federal Fair Debt Collection Practices Act prohibits bad behavior by third-party collectors. Third-party collectors aren’t allowed to call you at work if you ask them to stop, reveal to anyone else that you have a debt, publish or threaten to publish your debt, harass you by phone or use profanity. They can’t threaten illegal punishment such as jail, loss of child custody, deportation or physical harm. They can’t phone your home before 8 a.m. or after 9 p.m., or even call at all if you or your attorney ask them in writing to cease contact.

We’re going to take your home!
One New Jersey senior owed $12,000 in credit card debt after charging everyday living expenses on her card, Hicks says. An agent called and told her that debt collectors were going to take her home. What’s more, she was told they weren’t willing to take a penny less than the $12,000 she owed, and they wanted it now…She tried to scrape up the money herself but couldn’t, Hicks recalls.

“Debt-collection agencies are very smart in doing research,” he says. They will threaten specific assets like a home or income source. But in many states, homes are protected from debt collection, Hicks says.

Continued: 2 things you can do…More from MSN Money and

If you’re being mistreated by a debt collector, there are two things you can do:

Call a local credit counseling agency affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Or you can call your state attorney general’s office to see what your rights are and which assets are protected in your state.

Ask the collection agency for its contact information and proof of the debt in writing. The debt-collection law requires it to comply. Tell the agency you want it to send you the agency name, contact address and phone number, the debt amount, the original creditor, the date of the original debt, and when and how the company acquired the debt. Not only will it help you research the debt’s validity, but it will buy you time, Hicks says.

We’ll make you a deal!
A Pennsylvania man opened his mailbox to find what sounded like a great offer: automatic debt settlement from a collection company, offering to take just $800 for his $1,100 debt. He threw it out.

That was a smart move, because it was a disputed debt from years before. The original creditor already had acknowledged that it wasn’t the man’s debt, says Garrett. It’s not uncommon for old debts to expire. They also can be discharged in bankruptcy or settled…In addition, states have time limits on how long a debt collector can legally pursue old debt, so it pays to see if that time has passed. If it has, you can’t be forced to pay the debt. If you don’t know if the debt is still valid, ask the debt-collection company for proof of the debt and contact the original creditor about its current status.

For consumers, knowledge is real power. “If you’re savvy and understand what you can do to keep it from getting aggressive, you’re in a better position as a consumer,” Hicks says.

This article was reported by Dana Dratch for

Published July 16, 2010
More from MSN Money and

The $555,000 student-loan debt

As default rates on loans for higher education rise, some borrowers see no way out, demonstrating how ‘good debt’ can go bad…By The Wall Street Journal

When Michelle…Columbus, Ohio, finished medical school in 2003, her student-loan debt amounted to roughly $250,000. Since then, it has ballooned to $555,000…It is the result of loan payment deferrals that Bisutti got while she completed her residency, default charges and relentlessly compounding interest rates. Among the charges: a single $53,870 fee for when her loan was turned over to a collection agency. “Maybe half of it was my fault because I didn’t look at the fine print,” Bisutti says. “But this is just outrageous now.”

To be sure, Bisutti’s case is extreme, and lenders say student-loan terms are clear and that they try to work with borrowers who get in trouble. But as tuitions rise, many people are borrowing heavily to pay their bills. Some no doubt view it as “good debt,” because an education can lead to a higher salary. But in practice, student loans are one of the most toxic debts, requiring extreme consumer caution and, as Bisutti learned, responsibility.

There’s no escape
Unlike other kinds of debt, student loans can be particularly hard to wriggle out of. Homeowners who can’t make their mortgage payments can hand over the keys to their house to their lender…Credit card and even gambling debts can be discharged in bankruptcy. But ditching a student loan is virtually impossible, especially once a collection agency gets involved. Although lenders may trim payments, getting fees or principals waived seldom happens…

Yet many former students are trying. There is an estimated $730 billion in outstanding federal and private student-loan debt, says Mark Kantrowitz of FinAid, a Web site that tracks financial-aid issues — and only 40% of that debt is actively being repaid. The rest is in default, or in deferment, which means payments and interest are halted, or in forbearance, which means payments are stopped while interest accrues.

Although Bisutti’s debt load is unusual, her experience having problems repaying isn’t. Emmanuel Tellez’s mother is a laid-off factory worker, and $120 from her $300 unemployment checks is garnished to pay the federal PLUS student loan she took out for her son…By the time Tellez graduated in 2008, he had $50,000 of his own debt in loans issued by SLM, known as Sallie Mae, the largest private student lender. In December, he was laid off from his $29,000-a-year job in Boston and defaulted. Tellez says that when he signed up, the loan wasn’t explained to him well, though he concedes he missed the fine print…

Loan terms, including interest rates, are disclosed “multiple times and in multiple ways,” says Martha Holler, a spokeswoman for Sallie Mae, who says the company can’t comment on individual accounts. Repayment tools and account information are accessible on Sallie Mae’s Web site as well, she says…Many borrowers say they are experiencing difficulties working out repayment and modification terms on their loans. Holler says Sallie Mae works with borrowers individually to revamp loans. Although the U.S. Department of Education has expanded programs like income-based repayment, which effectively caps repayments for some borrowers, others might not qualify.

Heather Ehmke of Oakland, Calif., renegotiated the terms of her subprime mortgage after her home was foreclosed. But even after filing for bankruptcy, she says she couldn’t get Sallie Mae, one of her lenders, to adjust the terms on her student loan. After 14 years with patches of deferment and forbearance, the loan has increased from $28,000 to more than $90,000. Her monthly payments jumped from $230 to $816. Last month, her petition for undue hardship on the loans was dismissed…Sallie Mae supports reforms that would allow student loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay them, says Holler…

Bisutti says she loves her work but regrets taking out so many student loans. She admits she made mistakes in missing payments, deferring her loans and not being completely thorough with some of the paperwork, but was surprised at how quickly the debt spiraled…She says she knew when she started medical school in 1999 that she would have to borrow heavily. But she reasoned that her future income as a doctor would make paying off the loans easy. While in school, her loans racked up interest with variable rates ranging from 3% to 11%…She maxed out on federal loans, borrowing $152,000 over four years, and sought private loans from Sallie Mae to help make up the difference. She also took out two loans from Wells Fargo for $20,000 each. Each had a $2,000 origination fee. The total amount she borrowed at the time: $250,000…

In 2005, the bill for the Wells Fargo loans came due. Representatives from the bank called her father, Michael Bisutti, every day for two months demanding payment. Bisutti, who had co-signed on the loans, finally decided to cover the $550 monthly payments for a year…Wells Fargo says it will stop calling consumers if they request it, says Senior Vice President Glen Herrick, who adds that the bank no longer imposes origination fees on its private loans.

Sallie Mae, meanwhile, called Michael Bisutti’s neighbor. The neighbor told Bisutti about the call. “Now they know (my dad’s) daughter the doctor defaulted on her loans,” Bisutti says…Holler, the Sallie Mae spokeswoman, says the company may contact a neighbor to verify an individual’s address. But in those cases, she says, the details of the debt obligation aren’t discussed.

Bisutti declined to authorize Sallie Mae to comment specifically on her case. “The overwhelming majority of medical-school graduates successfully repay their student loans,” Holler says…After completing her fellowship in 2007, Bisutti juggled other debts, including her credit card balance, and was having trouble making her $1,000-a-month student-loan payments. That year, she defaulted on both her federal and private loans. That is when the “collection cost” fee of $53,870 was added to her private loan.

Meanwhile, the variable interest rates continue to compound on her balance and fees. She recently applied for income-based repayment, but she still isn’t sure if she will qualify. She makes $550-a-month payments to Wells Fargo for the two loans she hasn’t defaulted on. By the time she is done, she will have paid the bank $128,000 — more than three times the $36,000 she received.

She recently entered a rehabilitation agreement on her defaulted federal loans, which now carry an additional $31,942 collection cost. She makes monthly payments on those loans — now $209,399 — for $990 a month, with only $100 of it going toward her original balance. The entire balance of her federal loans will be paid off in 351 months, when Bisutti will be 70 years old.

The debt load keeps her up at night. Her damaged credit has prevented her from buying a home or a new car. She says she and her boyfriend of three years have put off marriage and having children because of the debt.

Bisutti told her 17-year-old niece the story of her debt as a cautionary tale “so the next generation of kids who want to get a higher education knows what they’re getting into,” she says. “I will likely have to deal with this debt for the rest of my life.”

This article was written by Mary Pilon for The Wall Street Journal.

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