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* How I Escaped Credit Card Debt

* What You Should Know About Credit Cards

* Reasons not to file Bankruptcy or Settle Your Debts

History of U.S. Credit Cards

Debt Prison — Tue, 01 Apr 2008 00:30:01 +0000

It’s estimated that the average American family has eight different credit card accounts. How did this happen? Having just watched the Frontline special “Secret History of the Credit Card“, I was quite amazed at the evolution of the modern Credit Card Industry. It seems that South Dakota was the State where the credit card industry really began to prosper. Sioux Falls South Dakota is one of the major credit card processing locations in America, processing millions of pieces of mail daily. From credit card offers to incoming payments, the Post Office in Sioux City is quite the hot spot.

Why South Dakota?

Prior to 1979, South Dakota had many laws dictating the interest rates that loan agencies and banks could charge for certain items. For example, they had one interest rate for new cars and another for used cars. At the time South Dakota, like all of America, was in a recession. So to encourage banks to loan money they removed these caps on interest rates. Meanwhile in New York, the Chairman of Citibank Walter Wriston, was looking for another state in which to do business. New York had ‘usury’ laws which permitted a credit card company from charging more than 12% interest. Walter claims that at the same time Citibank was going broke because they were borrowing the money at 20% from Federal Reserve District Banks.

In 1981 Citibank moved its credit card division from New York to South Dakota. Almost simultaneously there was a U.S. Supreme Court decision ruling that a Bank could ‘export’ its interest rate to other states (The Marquette Decision). This allowed South Dakota to become the credit card capital of America. In other words, if state law in South Dakota allowed banks to charge 25%, then they could send out credit card offers to all 50 states with wild interest rates, protected by South Dakota law. Also, Delaware copied South Dakota’s usury laws and soon Wilmington, Delaware became the credit card King of the East.

For the first time in U.S. history there was no limit to the interest rates that banks could charge nationwide. This permitted credit card companies to expand; soon becoming the most profitable sector in overall banking. Citibank has been more profitable than Microsoft or Wal-Mart.

Why are credit cards so profitable?

Currently about 145 Million Americans have revolving accounts with credit card companies. In 2003 alone 1.5 trillion dollars was charged onto credit cards. Approximately 55 million Americans pay off their credit card balance at the end of each month, preventing the banks from making profits off of them. The top ten credit card companies charge some of their customers 25 to 30% interest, some even pay more than this. Meanwhile interest rates from the Federal Reserve have been at or near record lows since 9/11, enabling these companies to make sick profits off the 90 million Americans who don’t pay their balance at the end of each month.

On top of this already highly profitable situation, Americans are carrying a record high amount of credit card debt. The average American family is carrying around $8,000 in revolving credit card debt. Not to mention that the savings rate of Americans is at it’s lowest since 1933 (The Great Depression). During the late eighties Andrew Kahr (a banking consultant) convinced many credit card companies to lower their minimum payment from 5% of the balance to 2%. This allowed the debt to ‘revolve’ longer as the balance would often increase. In Andrew’s words “Having a lower minimum payment allows you to offer higher credit lines.” Often customers would carry a higher balance and pay the minimum, allowing the credit card company to maximize their profit making potential. Every month about 35 million Americans pay only the minimum payment.

Many borrowers seem alright with the idea of high balances so long as they can pay the minimum payment. And at 2% of the balance this may not prove too difficult.

The Fine Print

Credit card companies use the three major credit history report agencies (Expirian, Transunion, and Equifax) to target borrowers who don’t pay their balances off at the end of each month. Fair Issac reviews credit histories and issues the FICO scores banks use to determine loan eligibility. Your FICO score often determines how much interest you will pay on a credit card. As the issuer of the credit card, the bank can change the terms of your credit card agreement at any time, and for any reason they see fit. There’s no law that prevents the issuer from changing the conditions of the loan.

Universal Default Rate

If you were to miss a car payment or get behind a month on your mortgage, this can trigger a Universal Default. This loop hole allows your credit card issuer to raise your interest rate for being a month behind on your car note, house note, or any other financial obligation they become aware of. It’s in your credit card contract. These banks rationalize that if you’ve fallen behind on another creditor, you are now considered high risk to them as well (credit card issuer). Also, if you have high balances with other credit cards, you could fall into the ‘high risk’ zone. This agreement allows the credit issuer to raise your interest rate on items already purchased. So if you bought a flat screen TV. last year, and your interest rate was 9%, they can increase it to 20% just six months later if they’d like. What other organizations are allowed to do this?

Smiley VS. Citibank

In 1996 the U.S. Supreme Court ruled on Smiley vs. Citibank. The Supreme Court ruled that credit card companies could increase the ‘fees’ associated with their debtors. So what might have been a $10 late fee has now become a $35. Since the Smiley ruling, credit card issuers have doubled the amount of revenue they bring in from fees. Late Fee’s, Over the limit fees, return check fees and on and on. And once these fees are applied, the bank now has the option to increase your overall interest rate – often doubling it as well.

The Office of the Comptroller of the Currency (OCC) is part of the Treasury Department. This office regulates the National Banks, including the ones that issue credit cards. The acting Comptroller of the Currency in 2004, Julie Williams, stated that the OCC has three main purposes.

1. To make sure the banks don’t fail.
2. To insure the integrity of how the banks operate their corporate governance.
3. To make sure that they deal fairly and honestly with their customers.

This office has the ability to take enforcement actions against banks if they deem it necessary. When asked if she could give an example of when she brought a large institution to task, Julie responded “the action we took against Providian.” During the late 1990’s San Francisco based Providian was experiencing double digit growth. They were offering credit to the riskiest of customers with the lowest of credit scores. Much like the sub prime housing market, Providian was targeting customers that had no business seeking credit in the first place. Providian would receive payment and deposit the check, but not apply the payment to their customers account, sometimes for weeks. This would result in late fees and over the limit fees for Providian customers. Almost 50% of Providian’s profit was made from fees, not interest on the revolving debt.

Pat Wallace, head of the better business bureau in San Francisco, says that the OCC was contacted and offered no help. In fact, it wasn’t until the local media got involved that the OCC contacted the San Francisco District Attorney’s office. But the OCC didn’t exactly help. They informed this D.A. that the OCC was the Federal Authority for these National Banks, and therefore, “You don’t have any jurisdiction.” Meaning that the D.A. could not prosecute Providian for fraud. Eventually Providian was slapped with a 300 million dollar judgment, which the OCC took credit for. The OCC’s main order of business seems to be to restrict local prosecutors from suing National Banks for their ‘loan shark’ practices. The OCC is trying to eliminate the individual States Attorney Generals from pursuing legal action against these banks.

In 2004 the OCC declared itself the ‘regulator’ of all National Banks. This is an attempt to insulate the National Banks from the consumer protection laws of individual states. The OCC trotted out the Providian case as proof of their determination to protect consumers. The Credit Card Industry receives more complaints than any other industry in the country.

Watch the entire PBS investigation by clicking here.

Related Articles

* How I Escaped Credit Card Debt

* Reasons not to file Bankruptcy or Settle Your Debts

Escaping Credit Card Debt

Debt Prison — Sat, 09 Feb 2008 23:18:50 +0000

If you’re reading this then you’re probably already in trouble. I feel your pain. I decided to write this article after going through a tough experience with credit card debt. I realize that some people may have an enormous amount of debt from medical bills or some similar circumstance. This article won’t apply to everyone. I try to detail a few simple ideas and habits that I hope will assist you in your endeavor. See also DebtPrison.net related article How to settle your debts on your own.

If you have defaulted debt issues in Dubai (United Arab Emirates) please visit How to survive debt in the UAE and The Real Debt Prison in the United Arab Emirates.

The methods I have used are for the average person who has just ‘borrowed’ their way into financial red ink. By May of 2005 I had accumulated roughly $18,000 in credit card debt and was taking a serious look at bankruptcy. Between this and other debts I had incurred, I was unable to meet my minimum payments. My monthly income and expenses looked like this:

Gross Income $4,300.00 (I was a retail District Manager.)
Net Income $2,800.00 (After Taxes etc.)

House note $350.00
Car note $500.00
Truck note $320.00
Credit Card Payment $600.00
(Discover, Bank of America, and Citibank)
Student Loan $200.00

This left me about $800 to pay for everything else in my life. There is a problem with having a monthly budget that leaves you nothing at the end of the month – unexpected expenses! There are always things in life that pop up that are unexpected and unplanned. This puts you in a position where you don’t have enough money to pay all your bills. Once poor decisions bring you here, you’re finances are like a car driving off a cliff you’re not in control and it gains momentum on the way down. Getting here may have been easy, but escaping with good credit will prove hard.

The following are the best ways I know to turn your life around and regain control of your finances, hope this helps.

Don’t file bankruptcy of involve a third party

When all the money you make each month isn’t enough to pay your minimum payments it can be quite disheartening. I remember in the summer of 2005 not being able to make ends meet and not sleeping well. My phone was ringing off the hook from bill collectors and I was extremely stressed out. It really seemed as though there was no way out. The real problem was that I didn’t know what my options were.

Bankruptcy is bad for a variety of reasons. First and foremost, it means your going back on your word. If you aren’t the type of person that is interested in honoring your commitments then this article isn’t for you. By all means – go ahead and give your money to some lawyers. But if honoring your word means something to you, then relax and take a deep breath, everything is going to be O.K… Bankruptcy is bad. You’ve seen the loan applications that have that question “Have you ever filed bankruptcy?” It doesn’t specify “in the last seven years”. So once you go down that road, you’re branded as untrustworthy or High Risk.

Don’t get me wrong. Eventually your credit score will improve and you’ll be able to borrow money again. But bankruptcy should be the last option, only after you’ve honestly tried every other avenue and failed.

Perhaps you’ve seen the commercials on television. Some nice financial ‘do-gooders’ who are going to help you lower your monthly note while at the same time settling your credit card debts for a fraction of what you owe. It seems like such a wonderful idea. Basic premise: you save money while sticking it to those BMW driving Bank CEO’s. I have to give this subject some extra attention. Bankruptcy and settling your credit card debt is a large part of the problem driving today’s high credit card rates. After I failed to pay Bank of America and Citibank for three consecutive months my interest rate went from 21% up to 32.6%. This is called the default rate and is applied to a customer when they become High Risk. Believe me I was angry and wrote them letters requesting it be lowered. Of course they didn’t and looking back I don’t blame them.

Basically the Bank is using me to settle the score against the people that do in fact file bankruptcy or settle their accounts. Since they are losing money by loaning to those High Risk customers they need to recoup it from others. Hence 32.6% default rate.

The Banking sector in today’s U.S. market is without a doubt one of America’s most profitable endeavors. American culture has convinced everyone that they need anything they want and now (when they can’t afford it) instead of later (when they could afford it). Banks are not all bad. They keep this monster machine rolling. People can build houses and buy cars because of banks. Our economy is dependent upon them and they should be profitable. This doesn’t make me feel all good inside either but it’s still what makes the cookie crumble. The point is that this default rate is necessary. Not to mention that it wouldn’t be my problem if I had been more responsible in the first place.

The problem with using the financial ‘do-gooders’ is that they fail to mention the negative consequences of using their service. Back in the summer of 2005 I called one of these companies I had seen advertised. A person answered the phone and asked me some questions about my income and my bills. In three minutes she had concluded that I was eligible to be in their program. It happened so fast I felt like I was another victim of a high pressure sales presentation.

Under the guidance of their opportunistic lawyers I would pay their company $600 per month. Of this $600 they would keep $60 for themselves (handling fees?) and the rest would go into an account which they would watch over for me. When this account had reached a certain amount, they would make the first Bank an offer. For example, I owed Bank of America $6,800. Once my account has about $3,500 they make Bank of America an offer to settle at roughly 50%. It becomes a bargaining game as Bank of America shoots for a higher percentage. These ‘lawyers’ (negotiating on my behalf), tell Bank of America that if they don?t take the offer then this money will be offered to Citibank as a settlement and they might accept it.

This means that Bank of America may be looking at another year or two before they get another offer from me ‘the client’! If you are like me then you’re probably asking yourself “Why can’t I just do this myself and keep my money,” You can.

What’s bad about this is that you’re now giving money to a third party that could be applied to your debts. And this third party now has ALL of your money. Does that sound like a good idea to you – someone else having all your money? In the package that these lawyers sent to me, it described the manner in which I could confiscate my funds away from them, if in the course of things, I changed my mind and wanted my money back. From what I can remember reading it didn?t sound like fun.

Also, while all of this is going on, your credit history and score suffers. And even once the balances are settled, you’re still left with a gaping hole in your credit report. This means that on future loans you’ll pay a higher interest rate. Paying a higher interest rate on future loans will prove more costly than paying what you owe and salvaging your credit now. Not to mention, while your money is growing in their ‘account’ the interest and fees are still being charged to the money you owe Bank of America. So what started out as $6,800 one year later is now $10,220!

Once I received this packet of information (which I paid $50.00 for) I realized there was even more for me to worry about. It stated that monies I owed Citibank could not be settled, so I would still owe Citibank the full amount. It was actually an AT&T Universal credit card. But as it turns out, Citibank had bought them out some time ago. These professors of law and good will didn’t tell me this. I found out about it on my own.

That was enough for me! No third parties. They make your life worse while profiting off your ignorance. See also DebtPrison.net related article How to deal with collection agencies.

Get serious about your cash flow

If you’re reading this then you’re probably broke. The first step towards regaining control is proper accounting for every penny you earn. You would be surprised how many people honestly don’t know where every penny they earn is going. I used to not keep up with my cash flow and guess what happened - I bounced checks. So I can’t pay all my bills and on top of that now, I have bounced checks with fees that I already can’t afford.

I prefer Microsoft Money. This can be downloaded from the Microsoft Money website at http://www.microsoft.com/money/order.aspx/
This will cost you 19.99 and is the only money that I will suggest you spend. It’s well worth the twenty bucks and is easy to use. With this program you can keep up with all your income and expenses accurately. By using this program I always know exactly how much I have in the bank at any time. This program will also show you a monthly report of your income and how much money you spent in each category. Knowing where your money is going is the first step in controlling your cash flow.

Every couple of days I sit down and open Microsoft Money. I check my banking online to see if I have had any deposits - if so I put them in. Every time I buy something I get a receipt and put the amount into Microsoft Money. It’s easy to use. Developing a working budget and analyzing your spending will help you save dollars. These dollars are applied to your credit card debt. Spending twenty dollars may make you cringe, but it’s the first step towards gaining control and understanding personal finances.

Start using cash to make purchases

I had to change this paragraph of my article after listening to Dave Ramsey for a while. When you use cash you literally see your money leaving your wallet. This has a psychological effect. I mean it almost hurts when you watch that money leave your hand. For those who need tough discipline Dave even recommends putting your cash into envelopes. You have a separate envelope for each spending category. At the beginning of the week go to the ATM and withdraw your budgeted cash for the week. Then sit down and put the amounts per category into the envelopes. This only works if you don’t spend more than what is in the envelope. This really helps people learn to control their spending and stick to the proposed weekly budget.

Figure out how much cash you have access to

If you’re like me you probably need as much money as you can earn and find. Let’s think about some ways to free up some cash you may have not considered. When I finally reached the end of my rope financially I had been with the same job for seven years. $1000 per week was my salary and was the best money I had made by the age of 30. Although I had a college degree I lacked specialized skills for the job market.

Fear of quitting my job and the unknown aftermath was part of the problem. In order for me to rectify my credit in the time I wanted, more income was necessary. First of all, see if there are physical items or services that you can do without. Here is a list of things that you might be able to live without.

Telephone (land lines and cellular)
Cable TV or Satellite
Furniture or appliances
Pets
Video games
Musical Instruments
Real estate
Vehicle

This list can be much larger. However, these are some of the things that you can stop using (services) or maybe even sell for needed cash (physical items). I recently went on http://www.ebay.com/ and auctioned off everything in my house that I really didn’t need. Some of the items were musical instruments and video games, even some books. Just make sure that you charge the other party enough shipping or you will lose money there. I sold an electric guitar by advertising in the local paper. As it turns out I had more cash at hand than I realized!

Managing your debts one by one

Have an epiphany! The hard truth may be that you can’t fulfill all of your financial commitments according to the loan agreement. Realize this and move on! For me, reaching this conclusion was the hardest part of this process. It was frightening because I didn’t know what would happen when I broke the agreement. Try to relax and take a deep breath, everything is going to be O.K..

Sometimes you just have to be creative. I had two vehicle loans and only needed one car. My father, on the other hand, was driving a ten year old Mazda B2200. Conveniently he just turned 62 and his Social Security checks began coming in. I didn’t have enough equity built up in either vehicle to sell without having to come out of my pocket. So I convinced my father to sell his old truck and take up the notes on mine. This is what we did and that freed up $300 per month, and Dad looked great in his newer Ford F-150.

My student loan was financed through Sallie Mae. They have a deferment program where you can put off making monthly payments if you’re in financial trouble. So I took a 6 month break from paying them - during which time I consolidated my student loans and am currently only paying $120 per month. I would like to pay more but the consolidation loan has a much lower interest rate than BOA and Citi – they are at 32.6% remember?

I owed 11 more payments on my Mitsubishi. Since I had to have a car I decided to pay that off first. I decided to continue to pay Discover Card (for some reason they kept a lower interest rate… today 28%), and as for Bank of America and Citibank, they received a letter. Here it is:

June16, 2005

Account: XXXX XXXX XXXX 1664

Bank of America Representative:

Due to my financial situation I must request at this time that my account be closed. I am trying to avoid bankruptcy and am unable to meet my minimum payments. In a few months, we should be able to work out a payment plan that is satisfactory to us both. Please refer to your records and review the amount of money your bank has made from me in finance charges and fees. In closing my account, please omit further finance charges, interest, and fees. I look forward to satisfying this debt, at a later time, in a manner that is fair and reasonable. Please do not call my work, as it may jeopardize my job.

Current debt: $7,279.25

Best regards,

Unfortunately for me, they didn’t agree to omit further charges, interest, and fees. However, I lived in the disaster path of Hurricane Katrina. Because of this I received 6 months interest and fee free. It kicked in September 2005 through February 2006. This saved me about $3,200 in interest - one good result from that storm. Since I was no longer paying BOA and Citi, I saved 2,000 in 45 days. Some of that was saved and some came from selling things I didn’t really need.

Once I had $2,000 in the attic, I decided to quit my job. I began asking myself how much trouble came my way because I carried around fear of the unknown, and I was about to strangle my boss. So here I was jobless, and with a huge amount of unsecured debt. Within 8 days I had a new job making even more money and working less hours. I couldn’t believe it, my life had somehow improved! Please understand that I’m not suggesting that everyone go out tomorrow and quit their job. Like commercials say “results will vary”. I’m just trying to make the point that life out there in the unknown wasn’t nearly as dangerous as I thought it would be.

By Christmas 2005 I had saved $5,000. It was truly hard to believe. By this time I owed $3,500 on the Mitsubishi Eclipse. So I paid the car off in full. By paying off the car and having my father pick up the truck note, I had $800 per month more that I could apply to my credit card debt.

I began the process of climbing out of the hole in March of 2006. By that time the $18,000 I owed had grown to $22,000. I needed a way to determine how much I needed to pay per month to hit payoff in 20 months. So I used a spreadsheet which I have conveniently posted for you to download here.

By using this spreadsheet you can see how long it will take you to pay off your credit cards. It also tells you how much of what you eventually pay is interest. For me to pay off $22,000 in 20 months I actually end up paying back $28,224. That means that in 20 months the banks make $6,224 in interest off me. It’s a sickening feeling when I think of how desperately I could use that money right now. I’ve had to put off taking trips and going out to dinner. Basically, for those of us in a prison of debt, life is on hold. Everyday I start sentences with “When this is over”. The light at the end of the tunnel is now within my view.

Perhaps “when this is over” I will remember the struggle it requires to escape the reckless spending of a young man in his twenties. I vow not to make the same mistakes twice. But most importantly, I’ve kept my word, honored my commitments, and salvaged my credit report.

Related Articles

* What You Should Know About Credit Cards

* Restrictions on Wage Garnishment for Debt Collection

Can you go to jail for not paying your credit card debt?

Debt Prison — Sat, 08 Dec 2007 16:25:37 +0000

Many people have emailed me asking if they could go to prison for not paying their credit card debt. It seems that some collection agencies are trying to intimidate debtors with the threat of arrest and imprisonment. A collection agency representative might comment “if you don’t start making payments on this we can take you to court and put you in jail.” There’s a lot of information on this subject and I will attempt to organize it in an intelligent manner. The correct answer to this question is - it depends! See also, DebtPrison related article Can you leave the U.S. to avoid paying your debts.

See also all of my articles on Collection Agencies.

See also DebtPrison related article How to deal with Collection Agencies.

Failing to make payments on debt is not considered a crime in the United States. The U.S. hasn’t utilized a debtor’s prison since the 1850’s. Some countries will still place a debtor in prison for failing to make payments. However, the U.S. government has a vested interest in making debt a desirable circumstance, therefore debt is not criminalized. In order to go to prison you must be convicted of criminal behavior. Laws regarding these issues will vary state to state. See also DebtPrison related article How to settle your debts on your own.

Here are your options with debt you’re defaulting on:

1. Settle your debt (but you’ll need some cash).

2. File bankruptcy (an often nightmare).

3. Ignore it and possibly go to jail for contempt of a court order (very rare).

4. Start paying it back in full.

5. Leave the United States

What will most likely happen

It’s always been my understanding that your creditor can take you to civil court and obtain a judgment against you saying that you owe the debt. Through the judgment the collector can then garnish your wages or even get liens against your assets. But getting to this point of wage garnishment or liens against assets is time consuming and usually never occurs. That’s because the collector has to go through a process that I’ll explain later in the article.

Going to jail for contempt wasn’t something that I thought could occur, but then I’ve read some comments from my readers below. I’m assuming there’s more to the cases than just the average default. It seems that in some rare cases an arrest warrant can be issued for contempt of court. I think this is somehow related to your not showing up in court, but from what I’ve read these arrest warrants are very uncommon.

This was stated by Sherri below in the comments “They tried to take me to court in 2000 ish. I tried to set up a payment plan and the guy told me he would not allow a payment plan and wanted me to ask friends and family to pay the bill. This week I got a letter in from the sheriffs dept stating it was a warrant for arrest. The attached paperwork was showing a court date for 12/20/07. In which I NEVER received any paperwork stating I had a court date in Dec.”

And this was stated by Deb “I owe around 3,000 in credit debt, and a sheriff keeps banging on my door leaving me a note from the sheriffs dept, what the hell is this all about? And can they arrest me in my own home?”

I have no way of knowing specifically what occurred in the two above mentioned cases that led to the Sheriff’s Dept. getting involved. In general, the negative outcomes (negative credit reporting, wage garnishment, liens, or jail) often depends on the amount of money involved and the aggressiveness of the creditor. The more money involved (almost always in excess of $1,000) the more likely the creditor or collection agency will pursue legal action.

Usually the process follows these guidelines:

You have defaulted on your payments. Your creditors collection division calls you daily to try and talk you into making a payment. After a year or two they give up on the phone calls and letters. They can’t get you to pay so they (this could now be a collection agency, not the original creditor) sue you in civil court. This can happen even if you are in a debt settlement program. It’s a lot of trouble and expense for them to sue you, so normally they won’t bother unless they figure they can get some money out of you.

Keep in mind that there are rules that collection agencies must follow according to the Fair Debt Collection Practices Act. If they don’t follow the rules you can actually hire an attorney and file suit against them! For example, if they have your phone number, they are not allowed to call your family, friends, or employer (if you request them not to). Also, you can write a cease and desist letter which instructs them to only communicate with you via U.S. snail mail.

Scenario 1 – You don’t show up and the judge rules in favor of the creditor and against you. This judgment is an acknowledgement that you owe the money. I’ve read that 80% to 90% of judgments are never collected! This is because the judgment is usually just an acknowledgement that you owe the money, and that is all. In order to collect another court date must be assigned to perform a ‘writ of execution’. If they summons you for this, and you don’t appear, they may issue a bench warrant for your arrest.

A writ of execution is a common court order granted by a court in an attempt to satisfy a judgment obtained by a plaintiff. When issuing a writ of execution, a court typically will order a sheriff or other similar official to levy property owned by a judgment debtor. Such property will often then be sold in a sheriff’s sale, and the proceeds remunerated to the plaintiff in partial or full satisfaction of the judgment. It is generally considered preferable for the sheriff simply to confiscate money from the defendant’s bank account. If the judgment debtor owns real property, the judgment creditor can record the execution to “freeze” the title until the execution is satisfied.

If you don’t show up for this one you may be arrested for contempt of court. This is the part of the process where the facts will be laid out. This is the part where they get your employment information for wage garnishment or asset info for liens. But bear in mind, most collections will not get to this point. It really just depends on how aggressive they are on your particular case. And many people are actually in a position where they cannot be collected on. Perhaps you are disabled and on limited income. Chances are they can get a judgment but will never be able to collect. There is also a federal minimum (I think this figure is 30 hours of minimum wage pay per week), which if you make below, they cannot collect. For example, if minimum wage is $5.80 per hour, times 30 hours, comes to $174/week or $702 per month. If you make that or less they cannot touch you. Money that is in IRA’s, custodial accounts, trusts, annuities, and insurance contracts are often untouchable. See also, Restrictions on Wage Garnishment for Debt Collection.

Scenario 2 – You go to defend yourself against the creditor. You explain why you do not owe the money. Or you explain that you owe the money and cannot pay it because of personal circumstances. The judge may or may not rule in favor of the creditor. If you don’t owe the money or really can’t pay – just walk into court and defend yourself, you’ll be glad you did.

Please understand that the garnishment of wages depends on many factors such as: your level of income, possibly your spouses income may be considered, and the number of dependents you have. To read about someone’s personal experience in using debt settlement companies read Tell Debt Settlement Companies to Kiss Your Ass. If this article doesn’t convince you to stay away from these companies, I don’t know what will.

Can you be arrested at airport returning to U.S.?

I’ve seen this question come up quite often. Some people moved away from the United States into another country. However, they left behind tens (or hundreds) of thousands of dollars of debt. Now they need to re-enter the U.S. for a vacation or to visit family. They are worried about an outstanding arrest warrant related to the debt. If you are concerned about this possibility try performing an information search on yourself at a site like this one. Perhaps avoiding entering the state where you used to live would be a good idea. Now if you have a warrant for fraud (related to your debt) the possibility for arrest may carry a bit more weight since this is a criminal, not civil arrest warrant. Keep reading to learn more about fraud and other issues related to debt and jail. See also, DebtPrison related article Can you leave the U.S. to avoid paying your debt.

Fraud

Also, if you obtained debt by committing fraud you can go to jail. For example, let’s say you just moved into a new apartment. Mail for the previous tenant is still arriving at your apartment. A credit card offer comes in the mail for the previous tenant. You fill out the application, mail it in, and start using this new credit card which is in someone else’s name. This is fraud and if convicted you could serve time in prison. This happened to my cousin. He moved out of his apartment and the following tenant received his mail and ran up thousands of dollars in retail charges. He had to get a lawyer involved and it took years to get this completely removed from his credit report.

Perhaps you have ‘borrowed’ your sister’s credit card to go out and spend a couple of grand without her knowing about it. In this case you could be fined and or imprisoned for fraud. This type of conduct is also considered criminal in nature.

You could possibly be looking at prison if you ran up thousands of dollars of debt on credit cards with no intention of paying it back. Recently the federal government changed the law regarding filing bankruptcy on credit card debt. The new law makes it harder to erase the debts you owe to credit card companies. Before this law went into effect, bankruptcy courts received a record number of new filings. Broke Americans were all trying to file for bankruptcy before the new law kicked in.

At the time I had an acquaintance that had in fact, filed bankruptcy on debts to various creditors, worth over $60,000. We were discussing the new law and he suggested that I run up tens of thousands of dollars in credit card debt. When the bills came due I would simply file bankruptcy before the new law took effect. Many people did exactly that. If the credit card company can prove that this was your intention, then some judges would find you guilty of fraud – taking out loans that you had no intention of repaying. However, it is usually difficult to prove that someone had no intention of repaying the debt. For example, if you applied for six credit cards, maxed out the limits for a total of $15,000, and then never made a payment, you could be in serious trouble. It would be obvious that your intent was criminal.

In general if it can be proved you received money or goods by deceptive practices you may be eligible for a criminal conviction.

You could also be imprisoned for the following:

If you violate a court order (a judgment against you to pay child support).

If you are convicted of willfully failing to pay your income tax to the government.

If you are attempting to hide assets or income to avoid paying a debt for which there is a judgment against you.

Bankruptcy related acts that can result in criminal penalties include:

If you defraud tenants

If you forge a bankruptcy judges signature

If you commit perjury during the creditor’s meeting

Keep in mind that there is a difference in a judgment (civil court decision about money you owe another party), and a verdict (criminal court conviction of a crime). In a civil court case the outcome will largely depend on the judge and his interpretation of the circumstances.

Simply defaulting on your debt is not a crime

If failing to pay your debts equaled prison time then half the people you know would be in jail. Even the author of this article, although my debt is caught up now and will be soon be paid off in full. Many people have lost their jobs or had unexpected medical issues force serious changes to their financial lifestyle. Through no fault of their own a debtor may no longer be able to make the minimum payments. This is not a crime and one cannot go to jail for these reasons. Like I said earlier, collection agencies will do anything they can to convince you to send them a payment. If you have credit card debts or medical bills that you can no longer pay, you can’t go to jail. This is why we have debt settlement, bankruptcy, and ruined credit scores.

Although you can’t go to jail for failing to pay your debts, there is a list of negative consequences you may be eligible for;

Collection Agencies can call your phone several times a day.

They can even call your place of employment, asking for you or where they can find you.

They can call your neighbors and ask them if they know where you are.

They can sue you in civil court for the balance of debt you owe them.

They can win a judgment in civil court against you for the debt owed.

Through the judgment they can garnish wages from your paycheck.

Through the judgment they can garnish your banking accounts.

They can (in some states) get a lien against your assets (house) and sell it to pay off the debt.

They can report the collection information to credit bureaus which lowers one’s credit score.

So the short answer is no – you can’t go to jail for simply not paying your debts, unless you are in contempt of court (very rare). But, creditors and collection agencies can make your life a living hell. So it’s in your best interest to get this situation handled in a manner that benefits you.

Remember that some debt collectors will scare you anyway they can to force you to pay up. The best advice I can give is to educate yourself about your options. Take the time to read information across the web about debt and collection. There are a lot of articles out there – most of them are accurate and truthful. Please feel free to leave questions or testimonials at the forum. Go forth and be debt free!

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Related Articles

* The Fair Debt Collection Practices Act

* Get Everything in Writing: Collection Agencies and Their Lies

* Reasons not to file Bankruptcy or Settle Your Debts

* Will Debt Follow You Abroad?

* How I Escaped Credit Card Debt

* What You Should Know About Credit Cards