You likely know that if you stop paying your house payment, the lender can foreclose on your home. Or if you don’t make a car payment, a creditor can repossess your vehicle. If, however, you stop making your credit card payment, the lender might (or might not) be able to take the item you purchased, your wages, your personal property, or your real estate—but it probably won’t happen right away.
(If you’d like to start with the basics, read What Are the Differences Between Secured and Unsecured Debt?)
A Creditor Can Take Back Most Big Ticket Credit Purchases
The reason a lender can repossess a car or foreclose on a mortgage is that you agreed to put the property up as collateral for those loans. As part of your contract, you signed a security agreement spelling out the creditor’s right to recover the collateral, sell it, and apply the proceeds to your loan.
Sometimes when you open a credit account to buy a specific—and usually expensive—item, like a home appliance, jewelry, a mattress set, a computer, and sometimes, even tires for your car, the retailer will require you to agree to use the item as collateral. Often the sales slip you sign will have a simpler version of a security agreement. It will state that you agree to return the property if you fail to make the agreed payment.
Also, many states grant a lender a security interest in the item you purchased, called a purchase money security interest. As with a car loan, the appliance store will have the right to ask for that property back if you don’t pay.
General Purpose Credit Cards
Not all credit card companies require you to sign a security agreement. In fact, most “general purpose” cards used to purchase anything of your choosing—like a dinner out, groceries, a car repair, or clothes—are unsecured. You don’t agree to give the creditor an interest in the property that you purchase.
In that case, if you fail to make your payment, all the creditor can do is call you and send you letters asking you to bring your account current. Unless it sues you in court and gets a money judgment against you, that is.
The Money Judgment
Before an unsecured creditor can use collection tools provided by state law, the creditor must file a lawsuit and get a judgment against you. But not all creditors will sue. If your bill is high enough to make it cost-effective—and you have assets the creditor can get ahold of—the lender will hire an attorney to file a lawsuit against you. By contrast, if you’re judgment proof (you don’t have income or assets), it’s unlikely that the creditor will sue you.
If the creditor wins the lawsuit, the court will enter a money judgment against you for the balance of the account, plus the attorney’s fee and any other costs of bringing the lawsuit, which can add hundreds or thousands of dollars to your obligation. And, the judgment will continue to accrue interest until it’s paid in full.
(Learn more by reading Delinquent Debt Lawsuit: What to Expect When a Creditor Sues You.)
Satisfying the Money Judgment
Getting a judgment is just a part of the story for the creditor. It’s what the creditor can do with the judgment that many consumers don’t expect. A judgment gives a creditor the ability to take certain collection actions under state law. For instance, a creditor can:
- garnish (take) your wages
- levy (withdraw money from) your bank account
- levy (repossess) your personal property, including cars and other big-ticket items
- place a lien against your real estate (the creditor gets paid when you sell the property), and
- force the sale of your real estate.
(For more information about creditor remedies, see Collecting on Small Claims Judgments.)
Not All Remedies Are Available in Every State
State law determines what a creditor can do. For instance, in some states, a creditor can’t garnish wages but can garnish a bank account into which you deposit your earnings. In other places, a creditor can file the judgment in the land records but cannot force a sale. The judgment acts as a lien on the property that gets paid when the owner sells it. You’ll want to find out about the particular actions a creditor can take in your state.
Property Exempt From Creditor Action
A judgment creditor cannot leave you destitute. Every state has laws that limit what property the creditor can take and how much of your wages are subject to a garnishment.
- Garnishment. In general, a wage garnishment will be limited to 25% of your take-home pay for each paycheck until the judgment is satisfied or the creditor withdraws the garnishment. (For more specifics, see How Much Can a Creditor Garnish From My Paycheck?)
- Exempt property. State law protects (exempts) the items you need to carry on with your life, like household goods, clothing, necessary furniture, medical equipment, and tools required in a profession. The judgment creditor might be able to attach valuable or luxury items like antiques, jewelry, electronics, collectibles, artwork, recreation equipment, and unnecessary vehicles.
What to Expect
You’re likely wondering whether your creditor will file suit and employ these post-judgment remedies. It depends. Each lender has its own policy. Some will act on a $500 account. For others, the balance has to reach $5,000 or more. The more easily collected, the more nonexempt property you have available, and the higher your income, the more likely the creditor will put the time, money, and effort into bringing a lawsuit.
(Being sued by your creditor? Read Will Filing for Bankruptcy Stop a Civil Lawsuit?)
Questions for Your Attorney
- Do I have grounds to defend a credit card lawsuit?
- Will a garnishment take my entire paycheck?
- Can a creditor garnish my Social Security benefits or pension?