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Debt Collection Articles

Debt Collection Articles (06.10) 2

Table of Contents

What to Do If a Bill Collector Crosses the Line ................................................................................3

Which Debts Must You Repay?....................................................................................................... 6

Repossession: What Creditors Can and Can’t Take ....................................................................... 8

Time-Barred Debts: When Collectors Cannot Sue You for Unpaid Debts ..................................... 10

Tax Consequences When a Creditor Writes Off or Settles a Debt ................................................ 12

IRS Tax Bill Collections: What You Can Do................................................................................... 13

How Foreclosure Works ................................................................................................................ 15

How to Avoid Foreclosure.............................................................................................................. 18

Defenses to Foreclosure................................................................................................................ 21


In order to deal with debt collectors, it pays to learn what they can and cannot do. Although most bill collectors are careful to follow the law when contacting you, some are not. If a bill collector goes too far, you can take action.

The Fair Debt Collection Practices Act

The federal Fair Debt Collection Practices Act, or FDCPA (15 U.S.C. § 1692 and following), prohibits debt collectors from engaging in abusive behavior.

The FDCPA covers debt collectors who work for collection agencies. It does not cover debt collectors that are employed by the original creditor (the business or person who first extended you credit or loaned you money).

If a debt collector that works for a collection agency breaks the law, you can take steps to make sure it doesn’t happen again.

What Debt Collectors Can’t Do

Debt collectors from collection agencies cannot do any of the following:

Call you repeatedly or contact you at an unreasonable time (the law presumes that before 8 a.m. or after 9 p.m. is unreasonable).

Place telephone calls to you without identifying themselves as bill collectors.

Contact you at work if your employer prohibits it.

Use obscene or profane language.

Use or threaten to use violence.

Claim you owe more than you do.

Claim to be attorneys if they’re not.

Claim that you’ll be imprisoned or your property will be seized.

Send you a paper that resembles a legal document.

Add unauthorized interest, fees, or charges.

Contact third parties, other than your attorney, a credit reporting bureau, or the original creditor, except for the limited purpose of finding information about your whereabouts. Unless you have asked collectors in writing to stop contacting you, they can also contact your spouse, your parents (if you are a minor), and your codebtors.

What to Do If a Bill Collector Crosses the Line


What to Do If Debt Collectors Break the Law

Here’s what you can do if debt collectors engage in illegal activity:

1. Tell Them to Stop

Under the FDCPA, you have the right to tell a collection agency employee to stop contacting you. Simply send a letter stating that you want the collection agency to cease all communications with you. All agency employees are then prohibited from contacting you, except to tell you that collection efforts have ended or that the collection agency or original creditor intends to sue you or take advantage of some other legal remedy.

Don’t hide from debt collectors. You can tell a collector to stop calling even if the collector is not breaking the law. However, many debt counselors feel that, unless you’re judgment proof (that is, broke for the foreseeable future) or truly plan to file for bankruptcy, the best overall advice is not to ignore the debt or try and hide from the debt collector. Usually, the longer you put off resolving the issue, the worse the situation and the consequences will become. Whether you negotiate directly with the collector or obtain a lawyer’s assistance, many counselors feel the best strategy almost always is to speak to the collector.

2. Document Illegal Behavior

If a debt collector breaks the law, document the violation as soon as it happens. Start a log and write down what happened, when it happened, and who witnessed it. Then, try to have another person present (or on the phone) during all future communications with the collector.

In some states, you can record phone conversations without the debt collector’s knowledge. In others, this tactic is illegal. Check with your state consumer protection agency to find out what is permitted where you live.

3. File a Complaint

File a complaint with the FTC. File an official complaint with the Federal Trade Commission (FTC), the federal agency that oversees collection agencies. Contact the Federal Trade Commission at 6th and Pennsylvania Ave. NW, Washington, DC 20580, www.ftc.gov/ftc/complaint.htm. In your complaint:

include the collection agency’s name and address, the name of the collector, the dates and times of the conversations, and the names of any witnesses, and

attach copies of all offending materials you received and a copy of any tape you made.

Send the complaint to state agencies. Send a copy of your complaint to the state agency that regulates collection agencies for the state where the agency is located. To find the agency, call information in that state’s capital city or check the state’s website.

Send the complaint to the creditor and collection agency. Finally, send a copy of the FTC complaint to the original creditor and the collection agency. The original creditor may be concerned about its own liability and offer to cancel the debt.

Once your complaint is filed, don’t expect immediate results. The FTC may take steps to sanction the agency if it has other complaints on record. The state agency may move more quickly to sue the collection agency or shut it down for egregious violations. Your best hope is that the creditor will offer to cancel the debt.

4. Sue the Debt Collector

If you’ve been subject to repeated abusive behavior and can document it, consider suing the collection agency. But if the illegal behavior was merely annoying, don’t bother. For example, if the collector called three times in one day but never again, you probably don’t have a case.


To sue the debt collector, you can represent yourself in small claims court or hire a lawyer and go to regular court. (The other side may have to pay your attorneys’ fees and court costs if you win.)

Money damages. If you win in court, you are entitled to recover:

the amount of any actual financial losses you suffered -- for example, your therapy fees, if you suffered extreme anxiety as a result of the collector’s actions, or the amount you paid to switch to an unlisted number to avoid harassment, and

an additional amount (unrelated to actual losses) up to $1,000 for any violation of the FDCPA.


Some debts are more important than others. If you are having trouble paying your bills, take the time to prioritize your debts. Make a list of essential and nonessential debts -- and always pay the essential debts first. Read on to learn which debts are essential and which aren’t.

Essential Debts

An essential debt is one that you should put at or near the top of your list for payment. If you let an essential debt slide, you could face serious consequences.

Rent. Unless you know you are going to move and have a place to live, make paying your rent a top priority.

Mortgage. If you’ve lost your job or had another financial setback, carefully consider the pros and cons of selling your house.

Reasons to sell. You might be better off selling your home, renting a moderately priced place, and using what’s left over to pay your other essential bills.

Reasons not to sell. Consider the housing market. If your house will be worth more in a year than it is today, you might wait and sell later. That would give you more money to pay your creditors.

Child support. Failing to pay child support can land you in jail. What’s more, a child support debt never goes away -- it doesn’t expire, and you can’t wipe it out in bankruptcy. You’ll have to pay this money sooner or later, so you should try do it when it will help your kids the most.

Utility bills. Being without gas, electricity, heating, water, or a telephone is not safe -- put these bills near the top of your list.

Car payments. If you need your car to keep your job, make the payments. If you don’t, consider selling it or voluntarily turning it over to avoid repossession. You may be able to use any leftover money to buy a cheaper car.

Other secured loans. A debt is secured if a specific item of property (called collateral) is used to guarantee repayment of the debt. If you don’t repay the debt, most states let the creditor take the property without first suing you and getting a court judgment. If the property is something you cannot live without, stay current on your payments.

If you don’t care whether the property is taken, or are confident that the creditor doesn’t really want it, don’t worry about missing a payment or two. But a default on a loan or a repossession of property will appear on your credit report for seven years and will affect your ability to get credit in the future.

Unpaid taxes. If the IRS is about to take your paycheck, bank account, house, or other property, immediately contact the IRS to set up a repayment plan.

Nonessential Debts

A nonessential debt is one with no immediate or devastating effects if you fail to pay. Paying these debts is a desirable goal, but not a top priority. Just remember that failure to pay any debt will cause it to stay on your credit report for seven years.

Department store and gasoline charges. If you fail to pay these bills, you’ll probably lose your credit privileges and, if the debt is large enough, you may be sued.

Which Debts Must You Repay?


Loans from friends and relatives. You may feel a moral obligation to pay, but these creditors are most likely to be understanding of your predicament. See if you can defer making payments until you are back on your feet or agree on an alternate repayment plan.

Newspaper and magazine subscriptions. These debts aren’t essential, but failure to pay will lead to collection actions.

Legal and accounting bills. These debts are rarely essential, but may lead to threatening letters and lawsuits if they remain unpaid.

Other unsecured loans. An unsecured debt is not tied to any specific item of property -- in other words, there is no collateral for the debt. This means that a creditor cannot take your property without first suing you in court.

Essential or Nonessential?

Some debts straddle the line between essential and nonessential. Not paying won’t cause severe consequences in your personal life, but could prove painful nonetheless. In deciding whether or not to pay these debts, consider your relationship with the creditor and whether the creditor has initiated collection efforts.

Some of these debts include:

Auto insurance. In some states, you can lose your driver’s license if you drive without insurance. In California, you cannot register your car without proof of insurance.

Medical insurance or bills. If you let your health insurance lapse, you may have difficulty getting new insurance. Especially if you are currently under a physician’s care, you’ll want to continue making payments.

Credit and charge cards. If you don’t pay your credit card bill, the worst that will happen before the creditor sues you is that you will lose your credit privileges. But penalties and interest add up quickly.

Car payments for a car that is essential for your job. The inconvenience of not having a car may justify making these payments.

Court judgments. Once a creditor has a judgment, the creditor can collect it by taking a portion of your wages or other property. If a particular judgment creditor is about to grab some of your pay, the fact that the original debt may have been nonessential is irrelevant.

Student loans. Paying an old student loan isn’t essential if the holder of your loan isn’t hassling you. But paying the loan may become essential if the IRS is about to intercept your tax refund, the holder of your loan threatens to garnish your wages, or you are making payments under a “reasonable and affordable” repayment plan to rehabilitate your loan and get out of default.

Stick to Your Debt Paying Plan

Do not make payments on nonessential debts unless you have money left after paying the essential ones. Don’t lose sight of your priorities if nonessential creditors are breathing down your neck.


If you’re behind in your loan payments, you may be worried that the creditor can repossess something you own -- your car, your home, the new refrigerator. Repossession is what happens when a creditor takes back property you have used as collateral (security) for a loan because you have defaulted on the loan agreement. There are strict rules as to what a creditor can and cannot take if you default on a loan.

Typically, you default on a loan if you don’t make your monthly payments in full and on time. But you could also be in default if, for example, you don’t maintain insurance coverage on a car you financed. Though credit agreements differ and laws vary from state to state, here are some general guidelines for what creditors can and can’t repossess.

What Can Be Repossessed?

Below is list of what creditors can repossess if you default on a loan. If a creditor is allowed to repossess an item, the creditor does not have to go to court and get a judgment before it repossesses the property.

Your home. Your home loan is secured by the property you purchased with it. If you do not make your mortgage payments, the lender can repossess the home. This is what happens in a foreclosure. After the lender evicts you, it sells the property to recover as much of the outstanding loan balance as possible.

Your car. Most auto loans, whether obtained through the dealer, a bank, a credit union or any other lender, give the creditor the right to repossess the vehicle if you default on the car loan. The lender is not required to give prior notice. After repossessing your car, the lender will sell it to recover the money you owe. If there is a shortfall between your outstanding loan balance and the sale price, you may be held responsible for paying it, plus the creditor’s repossession expenses.

Rent-to-own items. This includes furniture, electronics, appliances, and anything else you rent with the option of purchasing.

Any property used as collateral. A debt is secured if a specific item of property (called collateral) is used to guarantee repayment of the debt. If you don’t repay the debt (or are in default on the loan for some other reason), most states let the creditor take the property without first suing you and getting a court judgment.

For example, say you have a car that you do not owe any money on, and you offer it as collateral on a loan for a new business. If you fail to fulfill the terms of that loan agreement, your car can be taken. (Repossess is a bit of a misnomer in this sense, because the lender may never have owned an interest in the item that is being taken.)

If you are unsure whether a debt is secured, check your credit agreement. Your credit agreement will also detail the things that would put you in default on the loan (for example, being behind on your payments or not maintaining proper insurance).

What Can’t Be Repossessed?

Here’s a list of what creditors cannot repossess if you default on a loan. Keep in mind, however, that the creditor can always sue you in court to recover the money you owe. If the creditor wins the lawsuit, it may be able to garnish your wages or put a lien on your property.

Property not specifically named as collateral. If something is not specifically named as collateral for a debt, it cannot be repossessed. So, for example, say you have an unsecured personal loan and a car loan, both with A&B Bank, and you default on the personal loan. As long as you continue to make payments on the car loan, the bank cannot repossess your car because it was not specifically named as collateral for the personal loan.

Repossession: What Creditors Can and Can’t Take


Credit card purchases. Credit card debt is unsecured, which means the credit agreement does not name anything as collateral for the loan. Therefore, items purchased with a credit card cannot be repossessed.

Property named as collateral in an unenforceable contract. A contract that does not comply with your state’s legal requirements may be void and unenforceable. A lawyer can review your contract for validity and advise you on your consumer rights.


If you have old, unpaid debts, you may be safe from a lawsuit to collect the debt. This is because a creditor or debt collector has a limited number of years to sue you for an unpaid debt. This time period is set by state law and is called the statute of limitations.

The time allowed varies greatly from state to state and for different kinds of debts. Under certain circumstances, this time period can be restarted. So be very careful when talking to debt collectors about old debts. If you say the wrong thing, you could extend the time the creditor has to sue you for the debt.

When Are Debts Time-Barred?

To determine if your debt is time-barred - that is, too old for a creditor or collector to sue you for it - you must do some legwork.

Determine what kind of debt it is. Is the debt based on a written contract, oral contract, or a promissory note (a written promise to pay money to somebody)? Is it a credit account? If so, is it open-end or closed-end credit?

Is the Account Open- or Closed-End Credit?

Determining whether an account is open-end or closed-end is not always easy. Generally, if you can use the account repeatedly, it’s open-end credit (also called “revolving credit”). Your payments vary depending on how much credit you have used in a certain period of time. The most common example of open-end credit is a credit card.

Closed-end credit usually involves a single transaction, such as the purchase of a house or car, and the payments are fixed in amount and number.

Many transactions fall somewhere in between open- and closed-end credit. Also, many creditors try to characterize a closed-end account as open-end, either to take advantage of a longer statute of limitations or to avoid providing the more extensive disclosures required for closed-end credit.

The statute of limitations for open- and closed-end accounts is often different. To complicate matters even more, the statute of limitations for an open-ended account is not always clear. Some states have a special statute of limitations for credit card accounts. Others apply the statute of limitations for written or oral contracts to open-end credit.

Determine when the debt was due. This is when the statute of limitations starts ticking. For open-end accounts, the statute of limitations starts to run when the first payment was due.

Find the applicable statute of limitations. Statutes of limitations are set by state law. They usually range from about three to ten years and depend on the type of debt. To find out the statute of limitations for debts in your state, you can:

Consult a lawyer.

Check out your state laws, either by going to a local law library, contacting your state consumer protection agency (visit Consumer Action ( www.consumeraction.gov) for a list of consumer protection agencies), or doing some research on the Internet. You can find most state laws online through Nolo (www.nolo.com/statute) or Findlaw (www.findlaw.com).

Consult self-help legal manuals.

Time-Barred Debts:

When Collectors Cannot Sue Your for Unpaid Debts


Using the Statute of Limitations

If the creditor has waited too long to sue you, you must raise this as a defense in the papers you file in response to the lawsuit. If you can prove that the debt is older than the statute of limitations, then you will not have to pay it. If the creditor or debt collector knows that the statute of limitations has expired on the debt and still sues you, it may have violated the federal Fair Debt Collection Practices Act (FDCPA).

However, a statute of limitations does not eliminate the debt - it merely limits the judicial remedies available to the creditor or collection agency after a certain period of time. A debt collector may still seek voluntary payment of an old debt even though the law cannot force you to pay it.

Some Debt Collectors Try to Enforce Time-Barred Debts

In recent years, aggressive debt collectors have begun trying to enforce debts that are barred by the statute of limitations. They buy these debts from original creditors for pennies on the dollar, so they make a tidy profit when they collect anything.

Some of these debt buyers use aggressive tactics when they try to collect on time-barred debts. According to media reports, they abuse and harass debtors and try to trick debtors into reaffirming debts so that the statute of limitations begins anew.

What Should You Do if a Collector Tries to Collect a Time-Barred Debt?

The most important thing is not to say or do anything (whether on the phone or in a letter) that in any way acknowledges that you owe the debt. Acknowledging the debt or making even a token payment can extend or revive the statute of limitations in some states.

Be Careful Not to Waive, Extend, or Revive the Statute of Limitations

If you claim that the statute of limitations prevents a collector from suing you for a debt, the collector might argue that you have waived, extended, or revived the statute of limitations in your earlier dealings.

Waiving the Statute of Limitations

If you waive the statute of limitations on a debt, it means you give up your right to assert it as a defense later on. The law makes it very difficult for a consumer to waive the statute of limitations by accident. A court will uphold a waiver only if you understood what you were doing when you agreed to waive the statute of limitations for your debt. In certain circumstances, even then a waiver may be unenforceable. If you think you may have waived the statute of limitations, you should still raise it as a defense (and force the creditor to demonstrate that you waived it).

Extending the Statute of Limitations Extending the statute is often called “tolling.” Tolling or extending the statute temporarily stops the clock for a particular reason, such as the collector agreeing to extend your time to pay.

For example, Emily owes the Farmer’s Market $345. The statute of limitations for this type of debt in her state is six years. Normally the statute would begin to run when Emily stopped paying the debt, but Farmer’s gave her an additional six months to pay (and therefore tolled or extended the statute of limitations for six months). After six months, Emily still cannot pay the debt. The six-year statute of limitations begins to run at this point.


Reviving the Statute of Limitations

Reviving a statute of limitations means that the entire time period begins again. Depending on your state, this can happen if you make a partial payment on a debt or otherwise acknowledge that you owe a debt that you haven’t been paying. In some states, partial payment will only “toll” the statute rather than revive it.

For example, Ethan owes Memorial Hospital $1,000. The statute of limitations for medical debts in his state is four years. He stopped making payments on the debt in 2002. The four-year statute began to run at this point. In 2005, Ethan made a $300 payment and then stopped making payments again. In Ethan’s state, his partial payment of $300 revived the statute of limitations. The hospital now has four years from the date of his $300 payment to sue Ethan for the remainder of the debt.

A new promise to pay a debt may also revive the statute of limitations in some circumstances. In most states, an oral promise can revive a statute of limitations, although in a few states the promise must be in writing.

If you settle a debt with a creditor for less than the full amount, or a creditor writes off a debt you owe, you may owe money to the IRS. The IRS treats the forgiven debt as income, on which you may owe income taxes.

Why the IRS Can Assess Taxes on Forgiven Debts

Here’s how it works. Creditors often write off debts after a set period of time -- for example, one, two, or three years after you default. The creditor stops its collection efforts, declares the debt uncollectible, and reports it to the IRS as lost income to reduce its tax burden. The same is true when you negotiate a debt reduction. The creditor will report the amount you didn’t pay as lost income to the IRS.

Of course, the IRS still wants to collect tax on this money, and it will turn to you for payment. Because you no longer have to pay the full amount of the debt, the IRS treats the forgiven amount as gained income, for which you should pay income taxes.

Foreclosures and property repossessions. This rule applies even to debts you owe after a house foreclosure or property repossession. In this situation, the law can seem especially cruel: Not only have you lost your property, but you’ll also have to pay income tax on the difference between what you originally owed the lender and what it was able to sell your property for (called the “deficiency”).

However, the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) changed this for certain loans partially or wholly forigiven during 2007 through 2012. The law provides tax relief if your deficiency stems from the sale of your primary residence (the home that you live in). Here are the rules:

Loans for your primary residence. If the loan was secured by your primary residence and was used to buy or improve that house, you may generally exclude up to $2 million in forgiven debt. This means you don’t have to pay tax on the deficiency.

Loans on other real estate. If you default on a mortgage that’s secured by property that isn’t your primary residence (for example, a loan on your vacation home), you’ll owe tax on any deficiency.

Loans secured by but not used to improve primary residence. If you take out a loan, secured by your primary residence, but use it to take a vacation or send your child to college, you will owe tax on any deficiency.

If you don’t qualify for an exception under the Mortgage Forgiveness Debt Relief Act, you might still qualify for tax relief. If you can prove you were legally insolvent, you won’t be liable for paying tax on the deficiency. See “Exceptions on Reporting Income,” below, for details on the insolvency exception.

Tax Consequences When a Creditor Writes Off or Settles a Debt


IRS Reporting

Any financial institution that forgives or writes off $600 or more of a debt’s principal (the amount not attributable to interest or fees) must send you and the IRS a Form 1099-C at the end of the tax year. These forms are for reporting income, which means that when you file your tax return for the tax year in which your debt was settled or written off, the IRS will make sure that you report the amount on the Form 1099-C as income.

Even if you don’t get a Form 1099-C from a creditor, the creditor may very well have submitted one to the IRS. If you haven’t listed the income on your tax return and the creditor has provided the information to the IRS, you could get a tax bill or, worse, an audit notice. This could end up costing you more (in IRS interest and penalties) in the long run.

Exceptions to Reporting Income

There are several reporting exceptions stated in the Internal Revenue Code. For example, if the financial institution issues a Form 1099-C, you do not have to report the income on your tax return if:

the debt was a nonbusiness debt and was canceled before 2007 as a result of Hurricane Katrina

a student loan was canceled because you worked in a profession and for an employer as promised when you took out the loan

the canceled debt would have been deductible if you had paid it

the cancellation or write off of the debt is intended as a gift (this would be unusual)

you discharge the debt in Chapter 11 bankruptcy, or

you were insolvent before the creditor agreed to settle or write off the debt.

Insolvency means that your debts exceed the value of your assets. To figure out whether or not you were insolvent, you will have to total up your assets and your debts, including the debt that was settled or written off.

Example 1: Your assets are worth $35,000 and your debts total $45,000, so you are insolvent to the tune of $10,000. You settle a debt with a creditor who agrees to forgive $8,500. You do not have to report any of that money as income on your tax return.

Example 2: Your assets are worth $35,000 and your debts still total $45,000, but the creditor writes off a $14,000 debt. You don’t have to report $10,000 of the income, but you will have to report $4,000 on your tax return.

If you conclude that your debts exceed the value of your assets, include IRS Form 982 with your tax return. You can download the form off the IRS’s website at www.irs.gov.

The IRS has far greater powers than any other bill collector: The IRS has the power to take your wages, bank accounts, and other property without first granting you a hearing. Nevertheless, you aren’t entirely at the IRS’s mercy. Here are some tips that may help you if an IRS collector is at your heels.

The IRS collection process starts with computerized form letters, which should not be ignored. If you can’t pay, request more time by sending a letter back.

Carefully prepare your financial information before speaking with the tax collector. Make sure you don’t understate your living expenses.

Avoid giving bank account and employment information to the IRS over the phone.

IRS Tax Bill Collections: What You Can Do


If you don’t want to deal with an IRS collector over the phone, request that your file be sent to the local district office so you can meet with a tax collector to work out a payment arrangement.

Treat a collector with respect but remember you have rights. Read IRS Publication 1, which explains the Taxpayers’ Bill of Rights.

Never lie to an IRS employee about your assets or anything else. It is a crime.

If you can’t pay your taxes all at once, you can propose an installment agreement. If you get an agreement approved, keep to it.

It is possible, but never easy, to reduce your tax debts through something called an offer in compromise.

Bankruptcy may work to cancel tax debts or let you pay over time without interest and penalties accruing.

If you are in dire financial straits, ask the IRS to suspend its collection for financial hardship if your income is very low or if you are out of work.


Foreclosure happens when you fall behind on your house payments and your lender uses state procedures to sell your house. Foreclosure works differently in different states. In some states, the lender has to file a lawsuit to foreclose (judicial foreclosure), while in others, it can foreclose without going to court (non-judicial foreclosure).

Here’s a rundown of the basic procedures for each type of foreclosure.

Judicial Foreclosure

In a judicial foreclosure, the lender must go to court to get the foreclosure started. A judicial foreclosure typically takes several months or more, giving you time to look for another place to live, and to save some money for the future. Another advantage is that you can raise in court any legal defenses you may have to the foreclosure (without having to file your own lawsuit).

States Using Judicial Foreclosure

With some exceptions, foreclosures go through court in these states:

Arizona New Jersey

Delaware New Mexico

Florida New York

Hawaii North Dakota

Illinois Ohio

Indiana Oklahoma

Iowa Pennsylvania

Kansas South Carolina

Kentucky South Dakota

Louisiana Vermont

Maine West Virginia

Nebraska Wisconsin

How Foreclosure Works


Procedures in a Judicial Foreclosure

Here’s how a typical judicial foreclosure might proceed.

You get behind in your mortgage payments. A mortgage holder can begin foreclosure procedures if you miss just one payment, but usually will wait longer -- much longer in many states.

The lender sends a notice of intent to begin foreclosure. In many states, the lender sends a ten-day notice of intent to begin foreclosure proceedings. The notice informs you that the proceedings can be avoided if you make up the missed payments, plus costs and interest.

The lender files a lawsuit. If you don’t make up the missed payments, the lender will then go to court and file a lawsuit.

The lender gives you notice of the lawsuit. The lender does this by delivering a Summons and Complaint to you (called “serving you with” a Summons and Complaint in legalese).

You have a chance to respond. The Summons and Complaint give you a period of time within which you must respond if you choose to contest or argue the lawsuit (usually between 15 and 30 days). Whether or not you file a response is up to you. Either way, your lender will have the burden of proving to the judge that the foreclosure is justified under the terms of the mortgage.

If you don’t respond, the chances are excellent that the foreclosure will go through. The court will issue a default judgment that authorizes the lender to sell your home.

If you do respond, you’ll have the opportunity to tell a judge just why you think you have a legal right to keep your house and that foreclosure is not warranted. The better your defenses, the longer the process will drag out in court. Even if you win, however, it may be a temporary victory if the lender can fix whatever problem caused it to lose this time.

The lender sends a notice of intent to sell. Once the judge issues a judgment, the lender typically will send you a ten-day notice of intent to sell the property. At this point, in many states you can avoid the foreclosure sale if somehow you can “redeem” the mortgage (pay it off in full, as well as the foreclosure costs and attorney’s fees).

The auction is held. If no one buys your home at the auction, ownership goes to the lender. Up to this point, the entire process, from the first notice to the auction, typically takes three months -- more, if you file a response to the Summons and Complaint.

You are allowed to stay or get evicted. Even when you lose ownership of your home, most state laws don’t require you to move out right away. The lender may just let the house sit, waiting for the market to improve. You can remain in the home payment-free until you receive an official, written eviction notice.

Non-Judicial Foreclosures

If you live in a non-judicial foreclosure state, your lender does not have to go to court in order to foreclose on your home. This means that the foreclosure can proceed more quickly.

If your property is in one of these states, you most likely signed two core documents when you bought or refinanced your home: a promissory note and a deed of trust. The deed of trust turns the promissory note into a debt secured by a lien (legal claim) on your home. The deed of trust authorizes the lender to foreclose on the property if you default. The deed of trust typically allows the foreclosure to proceed outside of court, under state law.


States Using Non-Judicial Foreclosure

Alabama Nevada

Alaska New Hampshire

Arizona (sometimes) New Mexico (sometimes)

Arkansas North Carolina

California Oklahoma (unless homeowner requests judicial forclosure)

Colorado Oregon

District of Columbia Rhode Island

Georgia South Dakota (unless homeowner requests judicial foreclosure)

Idaho Tennessee

Maryland Texas

Massachusetts Utah

Michigan Vermont (sometimes)

Minnesota Virginia

Mississippi Washington

Missouri West Virginia (sometimes)

Montana Wyoming

The Non-Judicial Foreclosure Process

Your state’s law sets out the specifics of the foreclosure procedure, including how much notice you get, how the property will be sold (typically at a public auction), and what rights (if any) you have to reinstate the loan before the foreclosure date or recover title to the property after it’s sold.

Time may be short. You have to be on your toes when a foreclosure looms in a non-judicial state. That’s because you’ll be given very little notice of the foreclosure sale, and once it happens, you may be permanently out of luck.

Notice of sale. In most states, your first notice of the proceeding will be the notice of sale. Depending on the state, this notice will be either served on you personally, published in the local newspaper, posted in the courthouse and on the property itself, or by some combination of the above.


Notice of default and notice of sale. Some states provide you with two notices -- a formal written notice that you are in default (usually about 30 days, but sometimes more and sometimes less) and another formal notice that your house will be sold at auction (again, usually about a month, but it can be as little as 15 days -- in Georgia, for example, and a few other states).

Right to reinstate. Between the notice of default and notice of sale, you typically are allowed to reinstate the mortgage by paying off what you owe, plus fees and costs (which can be very high). With a couple of exceptions, however, once the sale occurs, your house is gone.

The auction is held. If you don’t reinstate the mortgage, the home will be sold at auction. As with judicial foreclosures, if no one meets the minimum bid, the property goes to the lender.

Right to redeem. A few states give you some time after the foreclosure auction to redeem the property (to recover ownership of the property by paying off the successful bidder).

Challenging a Non-Judicial Foreclosure in Court

Because you don’t have the opportunity to raise defenses to the foreclosure in a non-judicial foreclosure, if you wish to contest the foreclosure, you will have to file a lawsuit yourself. When you do this, you ask the court to temporarily stop the foreclosure so that you can resolve the legal issues in court (and possibly at trial). Once you are in court, you can raise the same defenses you would have raised in a judicial foreclosure proceeding.

In these lawsuits, you typically ask the court for three things, in the following order:

a temporary restraining order (which lasts about ten days)

a preliminary injunction (which, in foreclosure actions, will last until the court decides the case), and

a permanent injunction (which will be issued if the judge decides in your favor).

Millions of Americans are losing, or close to losing, their homes. Foreclosures in the U.S. are hitting record numbers. If you’re having trouble paying your mortgage, learn about the steps you can take to avoid foreclosure or minimize your debt after it happens. Quick action is the key to success -- it can save your home or help protect your credit rating.

Don’t Walk Away: Consider Your Options

Don’t give up and let the lender foreclose on your home without considering your options. A foreclosure will hurt your credit rating and make it difficult, if not impossible, to buy another home anytime soon. In addition, if the profits from selling your home don’t cover the unpaid portion of your loan, your lender might sue you for the rest.

Your best options if you’re having trouble making mortgage payments include:

negotiating with your lender

getting government help

filing for bankruptcy

selling your home yourself, or

giving your home deed to the lender.

These options are described in more detail below.

How to Avoid Foreclosure


Beware of scam artists. People facing foreclosure are often preyed upon by others claiming they’ll “help.” Some homeowners have unwittingly signed documents giving these scammers title to their property, turning the owners into renters. Don’t sign anything without getting a professional opinion first.

Negotiating With Your Lender

As soon as you realize you’ll have trouble paying your mortgage -- ideally, before you’ve missed any payments - contact your lender. Now, more than ever, lenders are willing to negotiate with home loan borrowers, if only to reduce the number of foreclosures they’re dealing with. (Some lenders are even taking the initiative and contacting at-risk borrowers themselves.)

Do it sooner rather than later. If you call soon, you may be able to work out a solution with your lender. But if you’ve already missed three or four payments, it may be too late, and the lender may insist on foreclosure.

Possible solutions. The lender may accept partial payments for a few months (though you may have to agree to make up the difference later), accept a late payment, or agree to redo the terms of your loan.

What to say when you contact your lender. Here’s what you should ask for in lender-language. (And by the way, you’ll probably need to get to the right department first -- it may have a name like “loss mitigation.”)

Forbearance. You make a reduced payment, or no payment, for an agreed-upon period of time. Usually, the lender requires you to make up the difference at a later time. The lender is most likely to agree to this if you can demonstrate that you will soon receive a bonus, tax refund, or some other extra cash.

Loan reinstatement. You agree to make up your missed (or reduced) payments by a specific date.

Loan modification. Your lender agrees to alter the terms of the loan so that you can better afford the payments. For example, the lender may agree to add your missed payments to your loan balance, to stretch out your loan over a longer term (which will lower your payments but result in more interest over the life of the loan), or to convert an adjustable rate to a fixed rate mortgage.

Getting Government Help

The U.S. government is currently discussing ways to help homeowners facing foreclosure (and thereby lessen the impact on the U.S. economy). In the first plan to be implemented, FHASecure, the Federal Housing Administration (or FHA, at www.fha.gov) may grant FHA refinancing to borrowers who can show:

a history of on-time mortgage payments before the borrower’s teaser rates expired and the loans reset

interest rates that have or will reset between June 2005 and December 2008

3% cash or equity in the home

a sustained history of employment, and

enough income to make the mortgage payment.

Of course, many people won’t be helped by FHASecure, particularly if they’ve lost their job or their house’s value has declined. Keep your eyes on the news for other programs or forms of relief.


Filing for Bankruptcy

Filing for bankruptcy may help you keep your home, or at least get you out from under your mortgage. When you file, the foreclosure process is legally stopped (called an “automatic stay”). It can’t be reopened until your bankruptcy case closes or the lender gets court permission to proceed (called “lifting the stay”).

Selling Your Home

If you simply can’t afford the house you own, the above options won’t help. You will probably lose your home. But don’t wait for your lender to make the first move. If your home has appreciated in value since you bought it, you may be able to sell it yourself. (In fact, real estate investors may show up on your doorstep hoping for a bargain.) Again, contact your lender, who may let you stop making payments until the house is sold.

Ideally, the proceeds from the sale will cover your mortgage and selling costs. But if they won’t, ask your lender to consider what’s called a “short sale.” That means the lender accepts the sale proceeds even if they’re less than the amount you owe.

Handing the Deed Over to the Lender

If no one is interested in buying your house, your lender may agree to take the deed and cancel your debt. This is called a deed in lieu of foreclosure. The idea is that the bank can then sell your house (as with an actual foreclosure) but won’t report it as a foreclosure to the credit rating agencies -- in fact, you can negotiate with the bank about how it can help you preserve your credit rating.

Short sales and deeds in lieu of foreclosure will no longer leave you owing taxes. In the past, the IRS considered forgiven debt to be taxable income. However, this was erased for situations where the loan was for a primary residence, by the “Mortgage Forgiveness Debt Relief Act of 2007,” or H.R. 3648.


Until recently, successful defenses against foreclosure were relatively rare. But that is changing rapidly -- more homeowners are successfully challenging foreclosure actions.

This sea change is due, in large part, to the unearthing of more and more evidence that the real estate industry has been rife with fraudulent and predatory lending practices. Because of this evidence, courts that once rubber-stamped foreclosure actions are now beginning to shift their sympathies towards homeowners.

Homeowners and their attorneys are taking advantage of this change in judicial attitude, and challenging foreclosure actions in many different ways. Here’s a review of some of the most common defenses to foreclosure, and how to raise them in court.

How to Raise a Defense to Foreclosure

In order to raise a defense to the foreclosure action, you must bring the issue before a judge. This is automatic in about half the states, where foreclosures are typically accomplished through civil lawsuits and judicial foreclosure orders.

In the other states, foreclosures typically take place outside of court (these are called non-judicial foreclosures) and you have no automatic means to mount a legal challenge. To have your defenses ruled on by a judge in these states, you have to file a lawsuit alleging that the foreclosure is illegal for some reason and asking the court to put the foreclosure on hold -- pending the court’s review of the case.

Common Foreclosure Defenses

As courts are increasingly sympathetic to challenges to foreclosure actions, attorneys across the country are raising many different types of defenses. Below is a description of the most common of these.

The Terms of the Mortgage Are Unconscionable

Over the years, attorneys have used a branch of law called “equity” to come up with a panoply of approaches to defending against foreclosure. The equity branch of law focuses on fairness in situations where a legal statute doesn’t provide adequate relief. It usually isn’t enough to simply claim that the foreclosure is unfair; rather, you have to come up with a specific justification for your position that has previously been recognized by the courts.

One such justification is a principle known as unconscionability -- that is, the terms of your mortgage, or the circumstances surrounding it, are so unfair that they “shock the conscience of the judge.” In one case where this defense was successful the borrower spoke very little English, was pressured to agree to a loan that he obviously couldn’t repay, was not represented by an attorney, and was unaware of the harsh terms attached to the loan (such as an unaffordable balloon payment ).

You Are a Servicemember on Active Duty

If you’re on active military duty, the Servicemembers Civil Relief Act (SCRA) provides you with special protections. Most importantly, if you took out your mortgage before you were on active duty, your foreclosure must take place in court even if foreclosures in your state customarily occur outside of court. If a foreclosure is initiated while you’re on active duty, you can automatically receive a nine-month postponement of the proceeding by requesting it from the court in writing.

Defenses to Foreclosure


The Foreclosing Party Didn’t Follow State Procedures

In some cases, the foreclosing party doesn’t follow state procedural requirements for bringing a foreclosure action (for example, it fails to properly serve on you a Notice of Default required by state law). If this happens, you may be able to challenge the foreclosure. If your challenge is successful, the court will issue an order requiring the foreclosing party to start over.

Virtually all judges will overlook errors that are inconsequential, such as the misspelling of a name. Similarly, if the foreclosing party’s error doesn’t actually cause you any harm, it may not be worth fighting over. More serious violations will get a more serious response from the court.

The Foreclosing Party Can’t Prove It Owns the Mortgage

In federal courts (where some large lenders prefer to bring their foreclosure actions), only the mortgage holder (the owner or someone acting on the owner’s behalf) may bring the action. If your mortgage, like many, has been sold and bought by many different banks, lenders, and investors, proving just who owns it can be difficult for the last holder in the chain.

Though state courts are usually looser than federal courts about who can bring a foreclosure action, appropriate documentation of who owns the mortgage must nevertheless be presented, and this is often difficult for the foreclosing party to do.

The Mortgage Servicer Made a Serious Mistake

Mortgage servicers (entities who contract with banks and other lenders to receive and disburse mortgage payments and enforce the terms of the mortgage) make mistakes all the time when they’re dealing with borrowers. A study by law professor Katherine M. Porter showed that in 1,700 Chapter 13 bankruptcy cases, a majority of the claims submitted by mortgage owners had errors. (Misbehavior and Mistake in Bankruptcy Mortgage Claims, Texas Law Review 2008.)

You may be able to challenge the foreclosure based on mistakes such as:

crediting your payments to the wrong party (so you weren’t, in fact, delinquent to the extent asserted by the foreclosing party)

imposing excessive fees or fees not authorized by the lender or owner, or

substantially overstating the amount you must pay to reinstate your mortgage.

Mistakes on the amount you must pay to reinstate your mortgage are especially serious. This is because an overstated amount may deprive you of the main remedy available to keep your home. For example, if the mortgage holder says you owe $4,500 to reinstate (perhaps because it imposes unreasonable costs and fees), when in fact you owe only $3,000, you may not have been able to take advantage of reinstatement (say you could have afforded $3,000, but not $4,500).

The Original Lender Engaged in Unfair Lending Practices

You may be able to fight your foreclosure by proving that your lender violated a federal or state law designed to protect borrowers from illegal lending practices. Two federal laws protect against unfair lending practices associated with residential mortgages and loans: the Truth in Lending Act (TILA) and an amendment to TILA commonly termed the Home Ownership and Equity Protection Act (HOEPA). TILA applies to all loans. HOEPA only applies to “high cost” loans -- certain loans that have an unusually high interest rate or that come with unusually high up-front processing fees.


Lenders violate TILA when they don’t make certain disclosures in the mortgage documents, including the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and more.

In the case of loans covered by HOEPA, lenders must comply with various notice provisions and are prohibited from using certain mortgage terms, such as balloon payments in loans with terms of less than five years.

The right to rescind the loan. TILA and HOEPA provide a number of remedies for the borrower if these laws are violated. However, the key remedy in foreclosure actions is the borrower’s ability to retroactively cancel or rescind the loan. This is referred to as the right to an “extended rescission.” Unfortunately, the right to an extended rescission under these federal laws applies only if the loan is a second or third mortgage that you used for purposes other than buying or building your home (for instance you used it to pay off your unsecured credit card debt). Also, the violation must be considered “material” (that is, significant or substantial).

State-law remedies for “high-cost” loans. A few states have special protections for people facing foreclosure on “high-cost” mortgages. If your state is one of these, and the lender has violated any of its provisions, you might be able to raise that violation as a defense in your foreclosure case.

Copyright © 2010 Nolo®

The material contained in this article should not be considered a substitute for consultation with an attorney.

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