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Money and Debts

It can be very stressful when you owe debts that you can’t pay.  However, there are laws that protect you and some of your property from your creditors.

In general, you cannot go to jail for a bad debt. [1] But a creditor can sue you in court and ask for a judgment.[2] If the creditor wins in court and you can’t pay what you owe, the creditor may try to take some of your income or property to the pay the debt.[3] This must be done through a legal procedure that gives you notice before anything is taken. 

Kentucky law automatically protects certain income and property from your creditors.[4] Some people with little property and income have nothing that can be taken by a creditor.[5] That is because all their property and income is protected by law from the creditors. For example, most private creditors cannot collect from public benefits you receive. [6] In this situation, you continue to owe the debt but the creditor is unable to collect from you.  However, if you owe a debt to the government, your public benefits might be at risk. [7]

Other people have income and property at risk to their creditors. If you are employed and earn enough, a creditor can attempt to garnish your wages.[8] If you own a home or land, a creditor might put a lien against your property. [9]

If you have property or income at risk to your creditors, you may want to consider filing a bankruptcy.[10] However, a bankruptcy is not the right option for everyone.[11] There are different types of bankruptcies available and limitations on how often you can file a bankruptcy.[12]

When you file a bankruptcy, you have to pay a filing fee to the court. [13] You are also required to list all your debts and creditors. If you don’t know the details about your debts, you should look at your credit report.[14] Not all debts can be discharged in bankruptcy. [15] Filing a bankruptcy will also negatively impact your credit score.[16]

Creditors are required to follow certain rules when contacting you about a debt. [17] There are laws in place that prevent harassment and steps you can take to stop contact.[18] You should see a lawyer if you feel you are being harassed illegally.

1. Can I go to jail for an unpaid debt?

Generally, no. Debt is not a crime. You can be jailed if you fall behind on your child support without good reason or if you act in a criminal manner. Anytime there is a chance of going to jail, you have a right to a trial and, if you are poor, to a court-appointed defense attorney.

2. What if a creditor sues me?

If you owe someone money they can file a court action and ask the judge for permission to try and use legal processes to collect the debt from you. If you receive paperwork about a lawsuit, you should talk to an attorney as soon as possible. There may be nothing you can do about the lawsuit, but it is important to get legal advice.

3. What if the court enters a judgment against me?

If the creditor wins in court and you can’t pay what you owe, the creditor may try to take some of your income or property to pay the debt. This must be done through a legal process which will give you written notice and a chance to request a hearing before anything is taken. In Kentucky, if your creditors sue you and win a judgment against you, they still may not be able to collect from you if you are “collection proof” (you do not own much property and you either don’t earn enough to have your wages garnished or your income benefits are protected by law from your creditors).

4. Can my creditor take my income or other personal property?

In Kentucky, you can hold on to certain property even if creditors sue you and win a judgment. For instance, you can always keep $5,000 equity in a homestead, burial plot or mobile home and $2,500 of equity in one vehicle.  Two debtors who own property together can double the total amount protected. 

5. What if I don’t own any property and have little income?

Your creditors generally cannot collect from you if you “collection proof.” This means you do not own much property and you either don’t earn enough to have your wages garnished or your income benefits are protected by law from your creditors. For example, if you do not own a home or land and your only income is SSI or SSDI, then you are likely collection proof.

6. Can my public benefits be taken by private creditors?

Generally, no. The following public benefits are protected from private debt collectors (except sometimes when child support is collected):

Public Assistance (KTAP)
Social Security and SSI
Unemployment Insurance
Veteran’s Benefits
Worker’s Compensation
Certain Retirement and Disability Benefits

7. If I owe money to the state or federal government, can my public benefits be garnished?

Generally, yes. If you owe money to the government (for example, federal student loans, income taxes, or a public benefit overpayment), different rules may apply and the government may be able to take some of what you owe before your benefit ever gets to you.

There are complex rules regarding what and how much of each benefit can be taken so it is important to discuss your concerns with an attorney familiar with public benefits law.

8. Can a creditor take all my wages?

Generally, private creditors cannot garnish your wages if you earn less than $217.50 per week.  Under Kentucky law, you cannot be fired from your job just because your wages are garnished for a single debt.

9. Can my creditor take my house?

Usually, no. Instead, the creditor must first try to collect the debt out of your other possessions or your income. If that doesn’t work, the creditor can start legal proceedings to have your house sold.  Normally, however, the creditor will just put a lien against your house.  The lien would allow the creditor to collect the debt if you ever sell your house.

10. What is a bankruptcy?

Bankruptcy is a legal process where a person who is unable to pay the debts they owe can have some or all of the debts forgiven.

Generally when a bankruptcy action is complete unsecured debts are forgiven. Some examples of unsecured debt include credit card debt, medical bills, and utility bills.  There are some debts that cannot be forgiven through bankruptcy, such as: alimony, child support, and (usually) student loans. 

11. How do I know if a bankruptcy is right for me?

Bankruptcy may be right for you if you owe large amounts of debt. If you only have a few small debts it may be better for you to work out repayment plans with your creditors before considering bankruptcy.

Bankruptcy may not be necessary if you are “collection proof.” This means you do not own much property and you either don’t earn enough to have your wages garnished or your income benefits are protected by law from your creditors. For example, if you do not own a home or land and your only income is SSI or SSDI, then it is likely not necessary for you to file for bankruptcy because your income cannot be taken by private creditors in most cases.

It is sometimes difficult to determine if you are “collection proof” so it is important to discuss garnishment with someone who understands the details.  If you cannot afford an attorney, you can call legal aid to see if you qualify for free legal assistance.

Generally, if your income and property are protected from your creditors, you shouldn’t file bankruptcy.  However, if you think bankruptcy is necessary, talk with an attorney to learn all about your options.

12. If I have filed bankruptcy before, can I file again?

If you have previously filed for Chapter 7 bankruptcy (the most common type for low income persons) and had your debts discharged, you must usually wait eight years before you can file a Chapter 7 bankruptcy again.

There are different types of bankruptcies and the rules about the waiting period vary based on the type of bankruptcy.  It is important to discuss your situation with an attorney, especially if your debts were not discharged in your original bankruptcy filing.

13. How much does bankruptcy cost?

As of October 2020, to file a chapter 7 bankruptcy there is a $335 filing fee and a chapter 13 bankruptcy requires a $310 filing fee.

Before an individual can file for bankruptcy they will have to complete a credit counseling course from an approved credit counseling agency. This will usually cost between $0-50. You will also have to take an approved personal finance course after you file and the cost will likely be $0-$50 for that as well.

You will have to pay attorney’s fees if you hire a private attorney to assist with your bankruptcy. If you cannot afford an attorney you can call Kentucky Legal Aid to see if you qualify for assistance.

14. Why should I look at my credit report and how do I find it?

Your credit report will state the amount of your monthly payments on any debt, the amount you still owe on the debt, and whether you are up to date on debt payments. It is important to monitor your credit report because it will keep you informed of your obligations and if you believe there is an error on your report you have a legal right to dispute it. Your credit report can also alert you to signs of identity theft if there are accounts you did not open under your name.

You are able to get a free credit report once a year at AnnualCreditReport.com or by calling 877-322-8228.

Generally, unpaid debts will remain on your credit report for seven years.

15. What kind of debts can be forgiven in a bankruptcy?

Generally, when a bankruptcy action is complete unsecured debts are forgiven. Some examples of unsecured debt include credit card debt, medical bills, and utility bills.  There are some debts that cannot be forgiven through bankruptcy, such as: alimony, child support, and (usually) student loans. 

16. How will bankruptcy affect my credit score?

Bankruptcy may impact your credit score negatively but if you are already behind on many debts it likely won’t make it much worse. Ultimately, if a bankruptcy action is successful it can provide a fresh start to rebuild a credit score once former debts are forgiven. 

Bankruptcy will stay on a credit report for ten years and may make it more difficult to obtain loans or credit during that time so it is important to carefully consider the benefits and consequences before filing.

17. What can a creditor do to me?

If you owe money to an individual or company (“creditor”) and you cannot pay, the creditor may continuously contact you regarding the debt. The creditor may sell your debt to a debt collection agency, they may take you to court to try to garnish your wages, and they may report your debt to the credit bureau which can impact your ability to get a line of credit in the future. However, there may be laws that protect you if your creditor is taking actions beyond the ones mentioned above.

18. What can I do if I am being harassed by a creditor or debt collector?

Send a cease letter. This is a letter asking the creditor or debt collector to stop contacting you about your debt. Be sure to keep a copy of the letter and proof that you sent it (send it certified mail if possible) in case the communication does not stop. Federal law requires that debt collectors stop contacting you after you send this letter in most instances. (The law does not require creditors to respect your cease letter but some will so it is always worth a try.)

Creditors can call you at reasonable times and places to discuss your debts in a reasonable way.  But obscene or profane phone calls are illegal.  Federal statutes outlaw a number of practices used by collection agencies in the past.  If the federal laws are violated, you may be able to sue for damages.  Contact an attorney if you feel you are being harassed illegally.

(Insert cease letter sample link or language here - KLA will provide language)