What are the consequences of no longer making payments on a credit card? And what rights do you enjoy, when facing collection of a debt? Let’s take a look.
The First Step: Missing Your Payments
Your credit card statement came and went, and you didn’t make a payment. There might be lots of reasons why. Perhaps money is tight, due to having lost your job, or having your hours reduced. Maybe you’re facing a medical emergency, or going through a divorce (and don’t believe you should be stuck with these bills). Whatever the reason, you are now over 30 days behind, on your credit card payment.
You might have received a call (and text and email notifications) from your credit card company, reminding you to make your payment. That doesn’t happen. Another statement comes and goes (this time with some late fees tacked on). You are now over 60 days past due.
At this point, your card issuer is quite likely to freeze your account, which will stop you from further spending on the card. After all, the card issuer doesn’t want you to rack up additional debt, which is likely to go unpaid.
Your card issuer can also increase your interest rate to a higher penalty rate (typically close to 30%), which will end up costing you even more. Thanks to federal laws, they cannot implement such an increase when you are just 30 days late – but after 60 days, it is perfectly legal.
If you are like a lot of folks these days, you might be checking your credit score regularly, on Credit Karma, Experian or elsewhere. Having a 30 day late payment can reduce your score as much as 110 points, and obviously, being 60 days late can do even more damage.
As the 90, 120, and 150 day late dates pass, you’ll continue to accumulate penalty interest, and see your credit score further reduced. At this point (if they haven’t already), other credit card issuers might begin reducing your credit limits. If these card issuers conduct a periodic account review (where they check your credit reports), your delinquent account will appear, and raise questions about your ability to make payments on your other credit accounts.
Charge Offs: What You Need To Know
When your account becomes 180 days late/past due, creditors will charge off your account. A charge-off is basically an admission by a credit card issuer, that they are unlikely to obtain payment on your account. So, for accounting / tax purposes, the amount owed is marked as a loss.
A charge-off will continue to appear on your credit report, and you are still responsible for payment of the debt. Your credit score will continue to be harmed by a charge-off, although the impact of the charge-off will be reduced over time.
A charge-off will remain on your credit report for up to 7 years and 180 days after the date when you first went 30 days late on the card. That date is known as the date of first delinquency. This is a very important point to remember, because often, credit card issuers miscalculate the date when the account first became delinquent. You’ll want to confirm that this information is correct.
Collections: Protecting Your Rights
Quite often, a credit card issuer will decide that they don’t want to put forward further efforts, towards collecting on a debt. In such a situation, the card issuer might sell the debt to a debt buyer. Debt buyers typically purchase debts for as little as 4% of the amount owed – that is, if $1,000 is owed, the debt buyer purchases the debt for just 40 cents. Debt buyers are typically large national corporations.
In the alternative, a credit card issuer might maintain ownership of the debt, but pay a fee to a debt collection agency, if they succesfully collect at least some of what is owed on this debt. The collector will try to get you to pay – and keep a portion of what is recovered.
At this point, a debt buyer / collector can take several different steps, to pressure you to pay the debt. For one, they are allowed to contact you, by phone, or mail, and demand payment of the debt. However, the must follow the rules of the Fair Debt Collection Practices Act, which offers a number of restrictions on when and how a debt collector can contact you, and what sort of information they must provide you with.
For example, a debt buyer / collector is not allowed to call you before 8 AM or after 9 PM. They cannot contact you at work, if you let them know not to.
Also, within five days of contacting you (whether by letter or by phone), a debt buyer / collector must send you a letter, which details the amount owed, whom it is owed to, as well as several other disclosures. If you have further questions as to whether you actually owe the debt, you can request verification of the debt, which requries the creditor to provide you with basic proof of what you owe, before they can resume collections efforts.
Debt Collection Lawsuits
It is also important to keep in mind that debt buyers can file a lawsuit against you, seeking payment of the debt you allegedly owe. A debt buyer can only sue for a certain number of years after you initially became delinquent on the debt (this is known as the statute of limitations). This number varies by state to state (there’s a complete guide here). It is crucial to remember that buyers often misrepresent how long a debt has been delinquent, so you’ll want to check on this.
Debt buyers don’t sue on every amount owed. If you owe over $1,000, you’re at some risk of being sued, and if you more than $2,000, that risk is much higher. Depending on the state where you live, a debt buyer might even be able to sue you in small claims court.
Additionally, attorneys for the debt buyer must inform you if they’ve filed a lawsuit (this is known as service of process). Unfortunately debt buyers have been caught violating this requirement often. This leads to being totally unaware that you were sued, and thus losing in court, because you never had an opportunity to show up and defend yourself.
If you find out that you’ve been sued (or already have a judgment against you), in a debt collection case, you should contact a lawyer immediately. Your local courthouse, or legal aid organization, often will provide free assistance for victims of debt collection lawsuits.
What can a debt buyer do, after obtaining a judgment against you? Depending on the specific laws in your state, they can freeze your bank account, and pull money out of it. Note that there are restrictions on the sorts of funds which can be withdrawn from your account, with Social Security, SSI, veteran’s benefits, and other sorts of federal funds exempted from collections.
A debt buyer can also seize money from your paycheck, to pay for the judgment against you. Again, there are limits on how much money can be seized, but, needless to say, this is not something that you want to happen to you.
By the time a case is in the judgment stage, your options are far more limited. If you didn’t know that you’d been sued, or that a judgment was entered against you, you might have the judgment set aside by the court, which would stop the garnishment or withdrawal of bank funds (you’ll want to speak with a lawyer, at this stage). If you did know about the lawsuit, and simply ignored it, your options are somewhat more limited.
Lawsuits By The Original Creditor
Thus far, we’ve focused heavily on the actions of debt buyers and collectors. However, it’s also important to keep in mind that original creditors can also sue you on a debt – in fact, they often do so.
The original creditor has your account statements and other records. They can easily hire a local attorney to file a lawsuit.
What’s more, original creditors are not bound by the requirements of the FDCPA – the FDCPA only applies to debt collectors. In some states, state debt collection laws are applied to original creditors – but this is not always the case.
Original creditors don’t always file lawsuits. However, when a debt of more than $1,000 is owed, and especially more than $2,000, there is a decent chance that a lawsuit will be filed.
Conclusion
None of this is much fun to think (or talk) about. As you can see, defaulting on a debt carries some very serious consequences, and might end up costing you a lot more money (and time), than you might have initially owed.
So what’s the solution? When you first run into trouble paying a debt, it makes sense to contact your credit card company, and see what can be worked out, in terms of an alternate payment arrangement. If that doesn’t happen, and your account ends up in collections or in court, it is crucial that you deal with this matter as soon as possible.
