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A word of advice …
Don’t ignore past due debts.
Credit card companies expect to be paid.
If they can’t collect their money on a voluntary basis, credit card companies do file lawsuits.
Today I’ll explain how the debt collection process works so you’re not blind-sided if you encounter financial hardship.
Navigating The Credit Card Collection Maze
Don’t take it personally, but you’re “just a number” to your credit card company.
A typical credit card company has tens of thousands of account holders. And the only way they can efficiently manage this many accounts is to have systematic, automated protocols.
Credit card companies understand that a certain percentage of accounts will become delinquent, whether we’re in a good economy or bad. So when their billing system notices you’re past due, their debt collection procedures automatically kick in.
It varies a little from one credit card company to the next, but the debt collection process goes something like this:
- For the first 90 days of delinquency, collection are usually handled by the credit card company’s in-house collection department.
- From 90-180 days of delinquency, the credit card company might continue with their own in-house efforts or they might outsource collection efforts to an outside debt collection agency.
- When an account reaches 180 days of delinquency, the account is usually charged off.
When an account is charged off, unfortunately you’re not out of the woods because …
A Charge-Off Is Not The Same As A Write-Off
A charge-off is a mandatory reclassification of a debt (to comply with financial regulations) when it reaches 180 days past due.
A write-off means the debt is forgiven and you’re free from any further obligation.
A charge-off and a write-off might sound synonymous, but they’re totally different things.
When an past due account reaches the charge-off status, you still owe the money.
When past due accounts get charged-off, credit card companies handle it differently from company to company:
- Some credit card companies continue with in-house collection efforts for another few months.
- Some credit card companies outsource their collection efforts to a collection agency (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.
- Some credit card companies sell charged-off accounts debt to a debt buyer. The debt buyer then becomes the owner of your account and can pursue you however they see fit. Some debt buyers will negotiate with you. Other debt buyers will send your account straight to litigation.
The further delinquent an account becomes, the more uncertainty as to what steps a creditor might take to recover an outstanding balance.
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.
Conclusion
If you’re having financial difficulties, be assertive and take corrective action as soon as possible.
No amount of wishful thinking or ignoring the matter will magically fix financial problems.
Generally speaking, you can obtain more favorable outcomes if you act sooner rather than later.
When you force a creditor or collection agency to invest substantial resources trying to collect an outstanding debt, they often become less cooperative and less “enthusiastic” about working out an amicable solution.
The key to avoiding a credit card debt lawsuit is to nip it in the bud before it becomes a legal matter.
As they say, an ounce of prevention is worth a pound of cure.
Excellent post! Thank you for giving us an idea about this. Looking forward to the next one