How to Deal With Banks Over Possible Litigation

If you default on a debt owed to a bank, you can expect to face litigation and a recovery action. The good news is that litigation and recovery are the bank’s last resort. Banks are often willing to work out a plan of repayment rather than suing you to get paid what they are owed, since litigation is expensive and extremely time-consuming. Here are some suggestions about how to avoid being sued by a bank.

Difficulty: Moderate

Instructions

1. Start by consulting with an attorney to discuss your particular situation. Every state has their own unique laws on the types of assets a creditor can recover from someone who owes them money. For example, if you receive disability checks and live in a state where that asset is protected from garnishment, a creditor cannot take it from you.

2. Evaluate your current financial situation. How much do you earn? Do you own any real property or other assets that you could sell or use in a different manner that would help you raise money to pay the debt you owe the bank? How much can you reasonably afford to pay the bank per month? Your answers to these questions will help you decide the minimum amount you can actually afford to pay per month.

3. If there is a legitimate reason why you are not earning enough to pay your loan, you may qualify for a hardship discharge or at least a deferment, so you can pay the debt sometime in the future. Typical reasons for allowing a discharge or deferment include death, permanent total disability, temporary total disability, rehabilitation for a disability, economic hardship, being a full-time student and military service. Remember, every state has its own laws governing this type of situation, so don't assume that because you might fall into one of these categories that you won't have to repay the debt.

4. Gather all documentation showing your necessary monthly expenses and gross income.

5. Contact the bank by letter or phone and plead your case. If you communicate with the bank by telephone, be certain to get the name, job title and phone number of the bank representative with whom you spoke. You may be given a referral number, so that every time you call to discuss your situation, your case can be pulled up on their computer. However, while it might be acceptable to initiate communication with the bank by telephone, is it advisable to follow-up with a letter reviewing the details of your conversation. Be upfront and honest about asking to set up a payment plan based on the amount you determined you can realistically afford to pay each month. But beware: if the amount you suggest is so ridiculously low that it will take seemingly forever for you to pay back the debt, don't expect the bank to agree. They are under no obligation to agree to a repayment plan in the first place, so if you suggest a plan that is incredibly unreasonable, don't be surprised when they don't agree.

6. If you and the bank reach an agreement, make sure you inquire about their rehabilitation requirements. Typically, if you make 12 consecutive monthly payments, your loan will no longer be considered in default and you can avoid any penalties. Be certain to get both their rehabilitation requirements and your repayment agreement in writing. Not only should you sign and date a copy of the agreement, an authorized bank representative should, too.

7. If you are not able to reach an agreement, try contacting a credit or debt counseling service. They will assist you in your financial planning and are often able to work out an arrangement with the creditor. Don't forget, however, that the creditor (the bank) is under no obligation to agree to a repayment plan, so any repayment suggestions you make should be reasonable.

Tips & Warnings

• Be careful with debt consolidation loans. Often the interest rates associated with those loans is so high it actually puts you deeper in debt.
• Remember, you don't have to hire an attorney for debt negotiation, but if you do, keep these suggestions in mind. When looking for an attorney, try finding one whose initial consultation is free. If you do hire a lawyer, be as well-prepared as possible when speaking with them. The less time they put into your case, the lower your attorney fees.
• In the end, it is up to the bank to decide what it considers a reasonable and affordable payment plan, but, depending on the situation, they might be willing to negotiate with you about your debt. That way, if you and the bank are able to come up with some type of repayment plan, the bank will get some of the money its due without the additional expense and hassle of litigation. Just remember, if you both agree to a repayment plan but you don't pay your debt as agreed, the bank can still pursue collection of the debt.
• Although filing bankruptcy is another option for getting rid of debt, the newly revamped U.S. Bankruptcy Code makes the process extremely complicated and expensive. Since filing for bankruptcy is so much more difficult than it was before the new code went into effect in October, 2005, bankruptcy should only be considered as a last ditch resort.
• Failure to resolve your financial difficulties will negatively impact your credit rating for many years.