When a creditor agrees to lend you money, it lists your debt as an asset for accounting purposes. The interest payments you make generate income for your lender. When you fail to repay your debt, the lender can no longer list your loan as an asset and it usually charges off the debt. However, your lender can still sue you even after it charges off your debt.
Charge Off
Depending on your state's laws, your delinquent debt goes into default at some time after you have fallen more than 30 days behind on your payments. Charging off a debt involves the lender closing your credit account. The lender uses its own money to repay the debt so that it no longer appears as an active account in its records. Many people believe that charged-off debts are erased, but accountants simply use the term "charge off" to describe inactive debts. The charge-off process has no impact on your actual debt obligation.
Collateral
Lenders typically only sue you as a last resort because of the legal expenses involved in that process. If you default on a secured loan, the lender may go to court and file a notice to seize control of the collateral. With a home loan your lender does this by foreclosing, while on a car loan your lender can file a motion to repossess the car. Your lender sells the collateral and uses the money raised to payoff your debt. If the sale does not raise enough money, or if you had an unsecured loan, your lender may attempt to sue you.
Suing Debtors
Laws vary from state to state, but the statute of limitations normally provides lenders with a window of opportunity that lasts for at least five years during which your lender can sue you. A judge reviews the details of your original lending contract and can order you to repay the debt. If you fail to comply with the order, the judge can allow your creditor to garnish your wages or your bank account. Federal and state laws prevent creditors from garnishing certain kinds of income, such as money you receive from Social Security or veteran's benefits.
Considerations
In some states, non-recourse laws exist that prevent your lender from suing you for the unpaid balance of a secured home loan after a foreclosure sale has occurred. However, if you are in a non-recourse state or if the statute of limitations prevents your lender from suing you for your charged-off debt, federal laws still allow your creditor to contact you requesting payment. Furthermore, the charged-off debt remains on your credit report as a negative event for up to seven years. This can make it very difficult for you to obtain new credit.
0 comments:
Post a Comment