4 options for bills in collections

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Dear Bankruptcy Adviser,
My mother had medical bills for open-heart surgery that were placed with collection agencies in 1996. She has been paying $50 per month to several collection agencies for the doctor portion and $150 per month to collection agency for the hospital portion for 10 years as she had no medical insurance. She recently had to reduce her payments to them due to additional medication and medical costs. They are cashing the checks. Have they agreed to accept the new amounts? The collection agency for the hospital portion sent a letter saying she must immediately pay the remaining $20,000 balance. The only income she gets at 72 is Social Security. Do I need to hire an attorney to represent her or write more letters myself?
— Bonita

Dear Bonita,
This is a difficult situation and the most important thing is that you take action quickly to prevent it from getting worse. However, if you do, there may be some light at the end of the tunnel.

The collection agency will take your mother’s money any way it comes. Were they accepting lower payments? Yes, but they will still seek full payment for as long as they can. Even though your mother is only receiving Social Security income, it is possible she will be sued by the collection agency. If they get a judgment, the collection agency’s only legal recourse is to place a lien on her home if she owns one. However, they may attempt to levy her bank account as well. This is the real danger.

Many banks erroneously execute a bank levy order even though the only funds in the account are from Social Security checks. Also, it’s possible that the collection agency may attempt to levy an account in which your mother is only a co-signer. In other words, if you co-signed with your mother for an account, it’s possible that the collection agency will levy this account and take your money. This does happen and it can require a great deal for you to get your money back.

At this point, your mother has four options:

  1. Negotiate a settlement with the collection agency. The collection agency would demand a significant lump sum payment. She may not have the means, but if you are assisting her financially, this is a worthwhile possibility to pursue.
  1. File for bankruptcy. If your mother does not own a house and has no valuable assets then she should be able to qualify for a Chapter 7 bankruptcy. With a house, she would need to file Chapter 13. If there is a nonprofit legal services network in your city that has bankruptcy attorneys who file pro bono for low-income individuals, contact them immediately. Otherwise, you will likely need to hire an attorney or at least a bankruptcy documents preparer.
  1. Take out a reverse mortgage. If your mother does own a home that is paid off and she simply lives off her Social Security check then bankruptcy may not be an option. However, with a reverse mortgage she can pay back the debt on a monthly basis and protect herself from creditors. If this is an option then you need to act immediately. The collection agency is likely on its way to the courthouse right now to place a lien on the property. If you can get a reverse mortgage and make arrangements with the collection agency to continue making payments, that’s preferable. An attorney can fight for your right to resume making payments once a lien has been placed on the property, but it’s time-consuming and costly.
  1. Hire a law firm to protect her Social Security checks. There is a service offered by law firms that actually protects your check. You agree to deposit your Social Security checks into a bank that they work with and then you pay the law firm an additional monthly fee to keep the creditors away. The law firm will contact your creditors and inform them to communicate with you only by mail. At the same time, the bank will make sure that the creditor cannot levy your bank account.

Bonita, if your mother has bank accounts, I recommend using a service such as in No. 4 above. If she has a home, a reverse mortgage may supply her with the funds she needs. If she does not have a home and cannot make the payments, bankruptcy is probably her best option. Finally, if you are able to help her with a lump-sum payment, it may be to your advantage to work with a professional debt negotiator. Move fast, Bonita — and good luck.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser, go to the “Ask the Experts” page, and select “bankruptcy” as the topic.