What Happens After the Debt Collection Process?
Understand the legal pathways creditors pursue and your potential resolutions when debt collection escalates.
When initial attempts to collect unpaid debts are unsuccessful, creditors often escalate their efforts to recover what is owed. This progression can involve a series of formal legal actions, moving beyond phone calls and letters to more significant steps. Understanding these developments is important for anyone navigating debt.
Creditors Initiating Lawsuits
When direct collection efforts are not yielding results, creditors may initiate a lawsuit against the debtor. This legal action begins with the creditor filing a complaint with the court, outlining the debt and the reason for the claim. The debtor then receives a summons, notifying them of the lawsuit and instructing them on how to respond.
Responding to the summons and complaint within the specified timeframe is important. Ignoring these legal documents can lead to a default judgment, which means the court automatically rules in favor of the creditor. A default judgment can have serious consequences, allowing the creditor to pursue more aggressive collection tactics.
Obtaining a Court Judgment
A court judgment is a formal legal order confirming that a debt is legally owed. This judgment establishes the debtor’s obligation to pay the specified amount. Creditors can obtain a judgment in several ways after initiating a lawsuit.
One common method is a default judgment, which occurs if the debtor fails to respond to the lawsuit within the given deadline. In such cases, the court may automatically rule in the creditor’s favor without a trial. Another way is through a motion for summary judgment, where a creditor asks the court to rule in their favor without a full trial. If the court grants this motion, a judgment is entered against the debtor. A judgment can also be obtained after a trial, where evidence is presented by both sides and the court makes a decision.
Enforcing the Judgment
Once a creditor obtains a court judgment, they become a judgment creditor and gain legal authority to use specific tools to collect the debt. These enforcement actions are distinct from the initial lawsuit and are designed to seize assets or income to satisfy the judgment.
Common methods of judgment enforcement include wage garnishment, where a portion of the debtor’s earnings is withheld by their employer and sent directly to the creditor. Federal law limits wage garnishment to 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage, whichever is less. Another method is a bank levy, which allows the creditor to freeze funds in the debtor’s bank account and seize them to cover the debt. The bank will typically freeze the account for a period, often around 15 to 30 days, before releasing the funds to the creditor. A property lien is also a possible enforcement action, placing a legal claim against real estate or other significant assets. This lien must generally be paid off before the property can be sold or refinanced.
Considering Bankruptcy
For debtors facing overwhelming financial difficulties, especially in the wake of collection efforts or judgments, considering bankruptcy can provide a legal pathway for relief. Filing for bankruptcy triggers an “automatic stay,” which temporarily halts most collection activities, including lawsuits, wage garnishments, and bank levies. This stay provides immediate protection and a chance to reorganize finances.
Two common types of consumer bankruptcy are Chapter 7 and Chapter 13. Chapter 7, often called “liquidation bankruptcy,” aims to discharge most unsecured debts like credit card debt and medical bills. In Chapter 7, non-exempt assets may be sold off to repay creditors, though many individuals have little to no non-exempt property.
Chapter 13, known as “reorganization bankruptcy,” involves a court-approved repayment plan lasting typically three to five years. Under Chapter 13, debtors make regular payments to a trustee who then distributes the funds to creditors, allowing debtors to keep their assets while repaying a portion of their debts. Certain debts, such as most student loans, recent tax debts, and child support, are typically not dischargeable in either Chapter 7 or Chapter 13 bankruptcy.