Monday, February 14, 2011

Credit Card Delinquency & Creditor Lawsuit Risks

Credit Card Delinquency & Creditor Lawsuit Risks

Credit cards are the most common form of unsecured debt. If you do not pay an unsecured debt, your creditor cannot place a lien on your home or take your belongings to cover the balance you owe. You can, however, be sued. A lawsuit can result in a judgment being levied against you. Your wages also may be garnished, depending on the laws in your state. You can minimize the risk of being sued for a delinquent debt by taking advantage of your right to debt validation and keeping up with the age of your debt.

The Facts

    When your credit card debt goes 180 days without a payment, your credit card company will "charge off" the debt. This means that the credit card company is writing the debt off as a tax loss. The debt will then be sold to a collection agency. It is the collection agency that is most likely to file a lawsuit against you--not the credit card company. Unless your debt is incredibly high, your credit card company gains more of a benefit from the tax exemption than from suing you. If you are sued for a debt and you do not show up in court, the creditor suing you receives a default judgment.

Debt Validation

    The Fair Debt Collection Practices Act (FDCPA) grants you the right to request that any third party debt collector prove to you in writing that you owe the debt. This is important because few collection agencies have the resources to maintain copies of the original credit agreements for each account they manage. Outside of a copy of the original credit agreement, any form of debt validation a collection agency sends to a consumer can be discredited in court. When you request a debt validation, you are sending the message that you are an informed consumer who is willing to take advantage of the rights afforded to you by the FDCPA. Consumers who request validation are more likely to show up in court to fight a lawsuit--and more likely to win. Collection agencies do not want a court battle, they want a default judgment. Thus consumers who demand validation of their debts are less likely to face a lawsuit later on.

Statute of Limitations

    Every state has a statute of limitations (SOL) regulating the amount of time a creditor can sue for a debt. The average SOL in most states is three to five years. The SOL begins 180 days after the last payment made on the debt. Once the debt passes the SOL, it becomes "time-barred." Although lawsuits over time-barred debts do occur, they are much less likely. In the event that you are sued, this gives you an airtight defense in court. Notifying the petitioner of the lawsuit prior to the court date that the debt has passed, the SOL will usually result in the lawsuit being dropped.

Considerations

    The higher a debt is, the higher your chances are of a lawsuit being filed on the debt. Demonstrating your status as an informed debtor may not be enough to save you from being sued if you have a $10,000 debt. It is rarely worth a creditor's time to attempt to sue for any debt less than $1,000. Regardless of the amount of the debt itself, creditors frequently use the threat of a lawsuit to coerce debtors into making a payment. This is a common tactic and does not increase your risk of actually being sued. Lawsuits over debts are more likely to get filed just prior to the expiration of the SOL.

Misconceptions

    Perhaps the most common misconception about debt lawsuits is that once the SOL of the debt has passed, the court system will disregard any lawsuits to collect the debt. A judge, however, has no way of knowing that a debt is too old to be sued over. If you receive a summons for a time-barred debt and do not respond or show up in court, a creditor can still win a default judgment against you.

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