Can Unsecured Debt Be Collected Through the Court?

The default balance due on an unsecured debt obligation can be collected through the court system. A civil suit to collect the amount of the default balance due on an unsecured credit line usually is the last step in the collection process. For most consumer debt, a creditor will file suit only when the previous efforts of its collection agency to secure payment have proved futile.

Secured Debt Distinguished

Secured debt is collateralized by the assets of the debtor. The creditor's default risk is limited, because, in the event of nonpayment, he can sell the collateral as an offset to the total balance due. However, if the proceeds from the sale of the assets or underlying collateral that secures the loan are less than the total amount due, a secured creditor can, if he so chooses, elect to file a civil suit to recover from the debtor the amount of the deficiency balance.

Breach of Contract

A creditor/debtor relationship arises from the existence of a legally binding contract. The terms and conditions underlying most consumer unsecured credit card obligations are defined by the card agreement. The agreement will define the incidents of default and the remedies available to the creditor, which may include attorney's fees incurred in collecting the balance due. Once the debtor breaches the terms of the card agreement, the creditor is entitled to file suit. The provisions of the Fair Debt Collections Practices Act require the creditor to file suit in the judicial district in which the debtor resides.

Post-Judgment Collection

Once a plaintiff/creditor prevails in his action against a defendant/debtor, the court enters a judgment for the dollar amount of the default balance on its docket. The creditor can attempt to collect on the judgment by commencing post-judgment procedures authorized by law. These may include attaching the debtor's bank account, garnishing his wages and placing a lien on a debtor's real property. A judgment is valid for a specified time period designated by state statute. A creditor can use any of the collection procedures authorized by law until the judgment lapses.

Bankruptcy

An exception to the rule that unsecured debt can be collected through the court system occurs when a debtor elects to seek protection against his creditors by filing for bankruptcy. The statutory notice of bankruptcy filing to creditors has the effect of automatically staying all collection activity --- including pending legal proceedings --- against the debtor.