Your credit cards are maxed out. You haven’t had a raise in three years. Your kids need new shoes and you don’t have money to pay all your bills.
What do you do?
The first thing is do not panic. It’s scary and embarrassing when you can’t meet your obligations. But if you can’t pay, you can’t pay. They can’t squeeze blood from a turnip.
But you can’t stick your head in the sand, either. Your credit card company expects to be paid. They have an established collection protocol in place to bring your account to a head one way or another.
And yes, credit card companies do file lawsuits to collect.
Most people experiencing financial difficulties have never been in this position before. So they’re not really sure what happens when you’re not able to pay.
As attorneys famously say, “Ignorance of the law is no excuse.”
Therefore, I’m going to give you a lay of the land so you know what’s coming and you’re not blind-sided.
A lot of pain can be avoided if you understand how the debt collection system works and take appropriate action.
Navigating The Credit Card Collection Maze
The first thing to understand is that credit card companies don’t take it personally. No offense, but you’re just a number to them.
They take a very pragmatic approach and understand that delinquencies just happen, whether we’re in a good economy or bad. They have systems in place and your account travels from one stage to the next in a very military-like manner.
It varies slightly from one credit card company to the next, but here’s the general pattern for most credit companies during the first 6 months of delinquency:
- For the first three months the credit card company will try to collect the money themselves.
- From three months to six months the credit card company may continue their own efforts, or alternatively they may outsource the collection work to a debt collection agency.
- At six months overdue, or more, the account is usually charged off.
Don’t get too excited. You’re not out of the woods because …
A Charge-Off Is Not The Same As A Write-Off
A write-off means the debt is forgiven and you’re free from any further obligation.
A charge-off is a mandatory reclassification (to comply with financial regulations) of a debt when it reaches 180 days past due. That’s all that means. You still owe the money.
Sorry to take the wind out of your sails.
Right after an account charges off credit card companies handle things very differently:
- Some credit card companies will still handle collections in-house for another few months.
- Some hire a collection agency to carry with the collection efforts (but the credit card company still owns the account).
- Some credit card companies go straight for the jugular and send your account to an attorney for litigation.
- Your credit card company might sell the debt to a debt purchasing company. The debt purchasing company then becomes the owner of your account and can pursue you however they see fit. Some will negotiate with you. Some will send your account straight to litigation.
As you can see, the further delinquent your account becomes the more uncertainty as to what will happen, especially the odds of getting sued.
The Dirty Secret of Lawsuit Factories
Recently the Consumer Financial Protection Bureau filed a lawsuit against a Georgia law firm, Frederick J. Hanna & Associates, accusing it of churning out 350,000 law suits since 2009.
Do the math. That works out to 1,400 lawsuits every single week.
The CFPB claims these lawsuits were filed without the law firm doing any investigation into whether the defendants actually owed the money.
Certain “collection factory” law firms simply get a spreadsheet from their client (the credit card company or debt purchaser) and crank out lawsuits like cars on an assembly line.
Lawsuits can be an effective form of debt collection because:
- Many people are scared to death of lawyers, judges, juries and the Court system in general. So getting hit with a lawsuit can sometimes shake money out of people where none would be collected otherwise.
- Many people do not understand how the legal system works. If you don’t respond to a lawsuit in a timely manner, the plaintiff can be awarded a Default Judgment for your failure to respond.
What To Do If You Get Sued
The first thing to do is take immediate action.
The Court Summons will state the number of days you have to respond. It varies from state to state, but it’s typically in the range of 21-28 days.
If you fail to reply to the summons the creditor will obtain a judgment against you by default.
Get competent legal advice. Don’t try and deal with legal matters yourself.
It’s true our Court system allows individuals to represent themselves, but it is not wise to do so. The legal process is complicated and the creditor’s attorney will run circles around you.
Investing in good legal advice is worth it.
What Happens If The Creditor Gets A Judgment Against You?
Now it gets ugly. Once a creditor has obtained a judgment against you, they’re in the driver’s seat and can attempt to satisfy the judgment by:
- Garnishing your wages. Your employer has to no choice but to deduct whatever amount the Court orders from your wages and pay it to the Court until you have paid off the debt and the costs.
- Seizing your property. The creditor can employ a bailiff who can visit your home and remove your belongings for sale at auction.
- Levying your bank account. If sufficient fund exist in your checking or savings account, the bank must comply with the Court order and give them your money.
- Obtaining a lien on your home or property. This may not have any immediate effect. But liens can last for years. Then when you sell that property a few years down the road, the lien gets paid first then you get what’s left.
- Issuing a subpoena for a Debtor’s Exam. The creditor can require a deposition where you must answer questions under oath as to your finances and ability (or lack thereof) to pay.
Remember that judgments also include Court costs and attorney fees. Unpaid judgments also continue to accrue interest. A $5,000 debt could easily turn into a $10,000 debt after it goes through the legal system.
Don’t let that happen. Nip it in the bud when you have the chance.
The Best Defense Is A Good Offense
If you’re having financial difficulties, be assertive and take corrective action as soon as possible. Don’t let them linger.
No amount of wishful thinking is going to fix your financial problems. They’ll still be there when you wake up in the morning.
There’s nothing to be ashamed or embarrassed about. Good people run into financial problems. Things can happen beyond your control.
Talk to professionals that know how to deal with these matters. You might think you’re situation is hopeless, but you might have more options than you realize.