Failure to pay a debt can result in a civil judgment, which is a legal affirmation that you owe a debt. A creditor typically obtains a judgment by filing a lawsuit against you in your county magistrate or municipal court. If you fail to pay your debt after the creditor obtains a judgment against you, your credit may suffer in both direct and indirect ways.
Presence of Unpaid Judgment
After a court issues a judgment against you for a debt, the judgment becomes part of your public record. Public record items appear on your credit report and can severely damage your credit score. Unlike late payments, which only remain on your credit file for seven years, judgments can remain on your report for a much longer period of time. Specifically, a judgment stays in your credit file until your state's statute of limitations expires, or for seven years after you paid off the judgment debt. This means that a judgment can potentially affect your credit for a decade or longer if you fail to pay.
Wage Garnishment
Wage garnishment resulting from an unpaid judgment can indirectly affect your credit. Most states permit judgment creditors to garnish a portion of your disposable wages, which is the amount you earn after your employer deducts tax withholdings. Federal law permits judgment creditors to take up to 25 percent of your disposable income from each paycheck, although some states place additional limitations on wage garnishment. Because garnishment reduces your income, you will have less money available to pay other debts, which can cause you to fall behind on payments. As a result, your other creditors may report late payments to credit bureaus, causing additional damage to your credit score.
Bank Garnishment
Judgment creditors may also garnish your bank account funds for payment against a judgment debt. Bank garnishment involves ordering your bank to freeze your account, which prevents your from withdrawing some or all of your funds, depending on your state's laws. Like wage garnishment, bank account garnishment can indirectly impact your credit by limiting your funds available to pay other debts.
Foreclosure
Subject to your state's limitations, a judgment creditor may force the foreclosure of your home to pay a judgment debt. This strategy is less common than wage and bank garnishment; however, if you have enough equity in your home to cover the judgment debt, the creditor may view this as an option to recover amounts owed in a single payment. Foreclosure appears on your credit report and can dramatically lower your credit score for up to seven years.
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