Failure to pay on a loan, known as default, can have serious consequences to an individual's credit rating and future ability to borrow. The ramifications of a loan default vary depending on the type of loan. Although your tax refund can only be seized for specific debts, your bank account may be levied for most unpaid debts if the creditor obtains a judgment against you.
Tax Refunds
If you owe past due child support, delinquent federal taxes or defaulted federal student loan debt, your federal tax refund can be seized with only a written notice from the Internal Revenue Service. Your tax refund cannot be directly seized for other debts. Rules regarding state tax refunds vary by state.
Collections Activity
A lender will generally contact the borrower when her debt becomes past due. These contacts will escalate as the debt continues to age, and the account may ultimately be transferred to a collection agency.
If you have a secured loan, such as an automobile or mortgage loan, the creditor may take steps to repossess your vehicle or foreclose upon your home. For most other unsecured debts, if you do not communicate with your creditor and demonstrate intent to pay, the creditor or collection agency may file a lawsuit against you in an attempt to recoup losses.
Judgments and Garnishments
If a creditor files a lawsuit against you and wins the case, the creditor is said to have obtained a judgment against you. A creditor may garnish your wages or levy your bank account only after a judgment is issued against you by the court.
Most creditors can levy your bank account after a judgment is issued. However, in many states, creditors other than the federal or state government cannot attach to your wages. This protection varies among states, however, so be sure to check applicable state law.
Garnishment and Judgment Limits
Title III of the Consumer Credit Protection Act limits the amount of wages that can be garnished to 25 percent of disposable earnings, or 50 percent of disposable earnings for child support and federal or state tax payments. Title III also prohibits an employer from firing you for having a wage garnishment from a single creditor. You can still, however, be fired if you have multiple garnishments.
Certain funds in your bank account, including government benefits, retirement benefits and child support payments, are exempt from levy. A percentage of your earnings is also exempt, although this varies from state to state. The creditor will continue to levy amounts in the bank account until the debt is fully recouped.
Avoiding Default
You are technically in default of most loan obligations if you miss even one payment. In many situations, you can negotiate temporary payment arrangements by contacting your lender when you realize you will be unable to fulfill your original payment obligations.
The U.S. Department of Education is somewhat more lenient, defining default as 270 past due on federal student loans or 120 days past due on alternative student loans. If you default, student loan lenders offer a federally prescribed rehabilitation program to cure the default.
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