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Legal Protections For Consumers In Debt Restructurings

Dealing with debt can be really stressful and overwhelming. As a consumer, it’s important to understand your rights and the legal protections available when going through a debt restructuring process. This article provides an overview of key laws and regulations that offer safeguards for consumers in these situations.

The Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCPA) is a federal law that provides guidelines and restrictions on the practices of debt collectors. It applies to third-party debt collection agencies that collect debt on behalf of creditors. The FDCPA prohibits abusive, deceptive, or unfair collection practices.

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Some key consumer protections under the FDCPA include:

  • Debt collectors cannot harass or abuse consumers – this includes threats of violence, obscene language, repeated phone calls, etc.
  • Debt collectors cannot lie or misrepresent information about the debt being collected.
  • Consumers have the right to dispute debts and request debt validation from collectors.
  • Debt collectors cannot discuss debt information with third parties other than the consumer’s attorney.
  • Consumers can request that collectors stop contacting them.

Violations of the FDCPA can result in collectors being fined or consumers receiving compensation. Consumers should report FDCPA violations to the Federal Trade Commission or consult a consumer rights attorney.

The Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) regulates the collection and use of consumer credit report information. It promotes accuracy, privacy, and proper use of consumer data in credit reports.

For consumers in debt restructurings, key protections under the FCRA include:

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  • Consumers have a right to obtain a free copy of their credit report from each of the three major credit bureaus once every 12 months. This allows consumers to review their reports for inaccuracies that may negatively impact them.
  • If a debt is restructured through a debt management plan or debt settlement arrangement, this must be properly reported by creditors as “paid as agreed” rather than a negative status like “settled for less than full balance.”
  • Outdated negative information must be removed from credit reports after 7 years. Bankruptcies can be reported for up to 10 years.
  • Consumers have the right to dispute inaccurate or unverified information on their credit reports. Credit bureaus must investigate disputes within 30 days.

Consumers facing issues with credit reporting related to a debt restructuring should file complaints with the Consumer Financial Protection Bureau (CFPB). Violations of the FCRA can result in penalties against creditors or compensation for consumers.

The Truth in Lending Act

The Truth in Lending Act (TILA) regulates disclosures of credit terms and costs to protect consumers in credit transactions and promote transparency.

For consumers in debt restructurings, TILA requires:

  • Clear disclosure of annual percentage rates (APRs) and finance charges associated with any new repayment plans, debt management plans, or restructured loan terms.
  • Notification of changes in terms for mortgage loans or other long-term financing programs. Consumers must be given opportunity to accept or reject changes.
  • Proper reporting to credit bureaus if loans are restructured – this includes notifying them if accounts become current after restructuring.

Violations of the TILA can result in fines to creditors or lenders. Consumers have the right to sue creditors for actual and statutory damages.

The Credit Card Accountability Responsibility and Disclosure (CARD) Act

The Credit CARD Act provides additional consumer protections specifically for credit cards. Key regulations include:

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  • Restrictions on arbitrary interest rate increases on existing credit card balances. Rates can generally only be increased for new transactions after providing 45 days notice.
  • Monthly credit card statements must provide clear breakdowns showing how long it will take to pay off balances only making minimum payments.
  • Consumers under age 21 must demonstrate independent ability to make payments or have a cosigner to obtain a credit card.
  • Creditors cannot offer gifts for opening a credit card then charge the consumer for those gifts if the credit card is closed in the first year. This prevents “free” gifts being taken away through fine print.

For consumers undergoing debt restructuring on credit cards, the CARD Act provides critical safeguards. Violations can be reported to the CFPB.

The Dodd-Frank Wall Street Reform Act

While most famous for regulations of banks and financial institutions, the Dodd-Frank Act also created the Consumer Financial Protection Bureau (CFPB). The CFPB serves as a federal regulator focused exclusively on protecting consumer rights in the financial sector.

For consumers undergoing debt restructurings, the CFPB:

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  • Provides resources on credit counseling services to assist consumers in debt
  • Handles complaints and disputes with creditors and debt collectors
  • Prosecutes violations of consumer financial protection laws
  • Offers consumer advisories and education related to credit reports, debt collection, credit cards, mortgages, student loans and other debt

Consumers can submit complaints to the CFPB through their website or hotline. The CFPB will investigate complaints, work towards resolutions, and can impose fines or penalties against companies that violate regulations.

Working with Non-Profit Credit Counseling Agencies

Non-profit credit counseling agencies can also provide assistance to consumers undergoing debt restructurings or debt management programs. Reputable agencies are certified and regulated through the National Foundation for Credit Counseling (NFCC) .

Certified credit counselors can:

  • Provide budgeting and financial literacy education
  • Negotiate with multiple creditors for reduced interest rates or waived fees
  • Set up debt management plans that consolidate multiple debts into one monthly payment

The NFCC requires member agencies to maintain strict ethical and operational standards when working with consumers. However, consumers should still research any agency before enrolling in services.

Understanding Chapter 7 and Chapter 13 Bankruptcy

For consumers facing severe financial distress, bankruptcy may be an option as a legal process for debt elimination or restructuring. The two most common bankruptcy filings are Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy involves liquidating eligible assets to pay back creditors. Remaining dischargeable debts like medical bills or credit cards are eliminated. However, consumers must pass a “means test” to qualify. High-income consumers may have to file under Chapter 13 instead. After filing, consumers receive an automatic stay protecting them from debt collection efforts while the bankruptcy proceeds. Key Chapter 7 consumer protections include:

  • Asset exemptions allowing consumers to keep essential property like a primary home, vehicle, and personal belongings up to certain values
  • Discharge of qualifying unsecured debts like medical bills, utilities, personal loans, and credit cards
  • Halting of debt collection efforts, foreclosures, wage garnishments, and vehicle repossessions

Chapter 13 Bankruptcy

Chapter 13 bankruptcy involves establishing a 3-5 year repayment plan supervised by the bankruptcy court. Key consumer protections include:

  • Lower monthly payments spread out over years instead of a single liquidation
  • An automatic stay stopping collections and wage garnishments
  • Ability to catch up on mortgage payments through the repayment plan
  • Option to discharge some debts not eligible under Chapter 7

Consumers can protect assets like homes that may be at risk in Chapter 7. However, consumers must have regular income to qualify for the repayment plan obligations.

Getting Legal Advice

Navigating the legal system during debt restructuring can be complex. Many federal and state laws come into play regarding consumer rights and creditor responsibilities. To ensure full understanding of options and protections, consumers should consider consulting with financial attorneys or advisers that specialize in debt relief.

Non-profit credit counseling from NFCC member agencies can also provide guidance. But for debt restructuring involving bankruptcy, debt settlement programs, or complex creditor negotiations, seeking legal professionals is wise.

They can advise on the optimal approaches to:

  • Negotiate with creditors
  • Consolidate multiple debts into one manageable payment through debt management plans
  • Restructure high interest loans like credit cards or payday loans
  • Rebuild credit scores after defaults or collections
  • Qualify for and file the optimal type of bankruptcy
  • Ensure proper reporting to credit bureaus throughout the debt relief process

Relying on knowledgeable legal advice helps consumers develop financial stability while also exercising their rights.


For further information on consumer protections in debt restructurings, please consult the following additional resources:



Financial Guidance

For personalized guidance on debt relief options and consumer protections, contact a NFCC certified financial counselor or consult with a consumer bankruptcy attorney.

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