Avoiding default is a key component to maintaining a good credit standing. Default refers to missing payments or skipping payments. Creditors provide funds for borrowers to purchase homes, cars and other expensive items. Borrowers are obligated to repay these funds. But when a borrower defaults and doesn't make payment arrangements, creditors can take legal steps to collect on past-due balances.
Collection Department
Defaulted accounts aren't immediately sent to collections. Creditors usually keep the defaulted account for several months, giving borrowers the opportunity to pay the balance. Creditors will update account records and notify the bureaus when accounts are 30 days past due. But once an account is past due for six months, creditors typically charge-off the account and send the borrower's information to a collection agency. This process complicates credit scores because a collection account appears on the borrower's credit report and lowers his credit rating.
Credit Judgment
Not every creditor sues for nonpayment of debt. Some creditors keep the account in collections and continually pursue debt collection. But oftentimes, creditors go a step further and file a lawsuit against people who refuse to pay their accounts. A creditor requests a hearing in a court located near the borrower, and then the creditor explains the situation to a judge. The creditor presents the evidence to the judge, and the judge decides if the borrower owes the money. Borrowers can attend this court hearing and dispute the debt. Lawsuits tend to end with credit judgments, which are court orders to pay a creditor money owed.
Bank Account Garnishment
Disregarding a court order to pay a creditor often creates a complicated situation. A debtor may mistakenly think that judgements conclude the fight with a creditor. Since judgments remain on credit reports for seven years, a debtor may choose to ignore the debt and wait for the account to fall off his credit report. Creditors do have other options after obtaining a credit judgment. For example, creditors can notify the court of a debtor's unwillingness to pay or satisfy a court-ordered judgment. The court can then forward notification to the debtor's bank to have his account garnished -- withdrawal of funds to pay off the creditor.
Wage Garnishment
Creditors can also include your employer in this fight. If bank account garnishments aren't a doable option, creditors can go after your paycheck to satisfy an old debt. Creditors can't contact your job or employer on their own. All requests must go through the court. Creditors file a petition, and if the court agrees, a sheriff serves your job with garnishment orders. By law, your employer has to withhold up to 25 percent of your pay (after federal, state and other withholdings).
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