Although consumer credit can provide several important benefits, such as increased purchasing power and the ability to handle financial emergencies, credit is only beneficial if you handle it responsibly. Responsible credit management includes paying at least your minimum debt payments when they are due. If you fail to pay your consumer credit, several negative occurrences can result.
Collection Activity
Once your credit account reaches past-due status, your creditor will typically initiate collection activity. It will send you a letter stating that you need to make a payment to bring your account current. The creditor may also use in-house collection agents to call you at your home or place of employment. If initial efforts fail, or if the company does not have the resources to initiate in-house collections, the creditor may forward your account file to a third-party collection agency to carry out collection activities.
Legal Action
If your account becomes severely past due, typically six months or more, and you have not made arrangements to bring your account current, the creditor may decide to pursue legal action against you. The creditor usually hires a debt-collection attorney to make a final demand for payment. If you do not respond or refuse to pay, the attorney can file a lawsuit against you in your county's civil court. The court then notifies you of the lawsuit and gives you time to respond -- about 30 days in most states. If you do not respond, the court awards a judgment against you for the amount you owe, plus interest, court costs and attorney fees.
Post-Judgment Collections
When a creditor obtains a legal judgment against you for a debt, it may use additional strategies to collect from you. In most states, the judgment creditor can contact your employer to have as much as 25 percent of your post-tax wages garnished to apply to the debt. It may also order your bank to freeze your accounts and send most or all of the funds to the court for payment to the creditor. A judgment creditor also typically places a lien against any real estate property you own, which prevents you from selling or transferring the property until the judgment is paid. In most cases, you can only end a garnishment, bank freeze or judgment lien by filing for bankruptcy protection.
Credit Damage
Each collections phase also damages your consumer credit score. After an account reaches 30 days past due, the creditor can report the delinquency to TransUnion, Equifax and Experian, which are the three primary credit bureaus in the United States. It may report your delinquency again when your account becomes 60, 90 and 120 days past due. Your report will also show transfers of debt to third parties, as well as public records such as judgments and bankruptcies. All of these reports damage your credit score, impairing your ability to obtain new credit, obtain insurance and even secure employment.
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