Deal With Your Debt: Unpaid Credit Card Balances and the Law

Ever want to hide from your creditors and hope your financial problems will just go away? If so, don’t do it! Unpaid, unsecured debts such as credit card balances, medical bills, and personal loans will not only cause great credit report damage, but you could also face legal trouble. Never take the prospect of getting sued lightly—the consequences are too severe.

Know your rights and responsibilities
A creditor or collector cannot take any wages, money, or property without first suing you in court, winning, then obtaining a judgment. Making idle threats is against the law. Also, be aware that in most instances you cannot go to jail for non-payment of unsecured debt, even if you have lost a lawsuit.

You are, however, responsible for the debts that you did incur. If a collector tells you, whether in a letter or over the telephone, that they will sue you, take them seriously. They cannot (legally) say it without following through.

Avoid a lawsuit
While it may seem like a lawsuit is inevitable, you could have more resolution techniques than you think. After all, in many cases, the creditor doesn’t want to go to court either. Your options include:

  • Pay in full. Though it may sound like an obvious solution, some who are in debt forget that they can simply pay what they owe and move on.
  • Installment payments. Propose what you can afford, and send your offer plus the first payment via certified mail with a return receipt. Even if the creditor refuses your checks, keep the payments up until the hearing. The judge may look upon your good faith effort favorably, and be open to judgment collection alternatives.
  • Debt Management Plan. A Debt Management Plan (DMP) is a consolidated payment arrangement made by a credit counseling agency. It can stop collection action, lower payments, and even reduce or eliminate interest and fees.
  • Negotiate a settlement. You may be able to arrange a lump-sum payment for less than the amount owed. The older the debt, the less the creditor may accept to consider the matter over.

Know your state’s statute of limitations
An unsecured creditor has a limited number of years to sue a delinquent debtor. This “statute of limitations” varies by state. In some states a creditor only has three years to take you to court, in others they may have as many as 15. Once the statute of limitations has passed you can no longer be sued for the debt.

Judgment proof
If you do not have any assets that can be legally taken to pay a debt, and are not likely to get any in the near or distant future, the creditor may decide against taking you to court. You may be considered what is commonly called “judgment proof.” Note that this is really only a concept and not a legal term. If you owe money you can be sued for nonpayment no matter what your circumstances.

If a lawsuit is inevitable
Sometimes, no matter what you do, the person or company to whom you owe money will choose the legal route. If so, when you are served with a summons, be sure to “answer” it (send in the paperwork that acknowledges the lawsuit date, time, and place). If you don’t, you will automatically lose, a default judgment will appear on your credit report, and the judgment creditor can begin to collect. Do not miss your court date either—again, it’s an automatic loss!

If you lose the case
The final amount you have to pay may include the original debt plus interest before the lawsuit, court costs, attorney’s fees, and post-judgment interest. The judgment creditor may collect on the debt in a variety of ways:

  • Wage garnishment. Depending on the state you live in, up to 25 percent of your net income (not to exceed 30 times the federal minimum wage) may be withheld from your paycheck and sent to the judgment creditor. In some states this collection method is not allowed.
  • Wage assignment. If you are self-employed or don’t receive a regular wage, the judgment creditor may take your tax refund, accounts receivables, royalties, or commissions.
  • Lien. A lien is a legal claim on such real property as houses, cars, and boats. When they are sold or refinanced, the lien must be paid for the title to clear.
  • Levy. The judgment creditor can levy (take) personal property such as checking and savings accounts, safe deposit boxes, cars or antiques.

If all of this isn’t reason enough to take control of your unsecured debts, also know that a judgment will follow you for quite some time. Judgment collection periods vary by state, but it can be decades. It will also be reported to the credit bureaus and will appear in the public record section for seven years if paid, and ten years if unpaid. When it comes to debt, avoidance simply doesn’t work.

Revised January 2016.

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