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In a NutshellIf a creditor or debt collector has sued you and gotten a court judgement against you, you have three main options: 1. You can pay the debt. You may be able to negotiate a voluntary payment plan with the debt collector. 2. You can file to have the judgment vacated or removed. 3. You can file bankruptcy to discharge the debt and stop all collection efforts, including those related to a court judgment.
Not making a payment by its due date is considered a default. If you're struggling to keep up with your monthly payments on your credit card debt and medical bills, and you end up defaulting, several things will happen as your account goes into collections.
First, your default interest rate will take effect, and the lender may charge you fees for defaulting. They’ll report the missed payment to the credit bureaus, which will cause your credit score to drop. Eventually, creditors usually end up hiring a collection agency to continue the debt collection efforts.
Collection agencies are not the only type of debt collectors you may encounter. While the collection agency works for the creditor, other debt collectors work for themselves. After a certain period of non-payment, banks and lenders routinely sell their claims to debt collectors.
Either way, if they’re not the original lender, they're subject to the Fair Debt Collection Practices Act (FDCPA), a federal law that applies to third-party debt collectors. While there’s nothing to prevent collection agencies from being annoying, the FDCPA doesn't allow them to harass debtors or be abusive.
After some time—how long depends on each lender’s internal policies—the creditor will hire a law firm to file a debt collection lawsuit against you. At this point, the party suing you becomes the plaintiff. They have to notify you that you're being sued. Most states require that is done by having a process server deliver the summons and complaint to you.
You’ll have a certain amount of time to respond to the lawsuit. How long you have depends on state law and the type of court the case is filed in. Many debt collection lawsuits are filed in small claims court. If you don’t respond to the lawsuit by filing an answer within the time given, the creditor will ask the court to enter a default judgment against you.
A default judgment is a legal forfeiture, the same way your favorite football team forfeits a game if they don’t participate. The game is automatically lost if they don't show up. The same applies to you if you don't respond in time to your lawsuit summons and complaint. Of course, this kind of forfeiture can lead to a wage garnishment, so the stakes are much higher for you.
You respond to a lawsuit by filing a legal pleading called an answer. In it, you respond to each one of the creditor’s allegations and let the court know what kind of defenses you may have. You may be able to pick up a blank answer from the court clerk, but they won’t be able to provide any legal advice on how to fill it out.
The answer will give you the chance to tell your side of the story and present the court with reasons for denying the creditor’s request for a money judgment. Some defenses are substantive. For example, you’ve paid off the debt or you can show it’s not your debt in the first place. Other defenses related to inaccuracies with the debt itself or the debt collector not following legal procedures properly.
If the debt collector filed the lawsuit after the statute of limitations expired, now is your time to tell the court. If you don’t think you owe the debt or that the statute of limitations has run, it may be a good idea to seek legal help, either by meeting with a private attorney or by speaking to a legal aid organization.
Once a creditor has a judgment, there are three primary ways to try to collect the judgment amount:
Judgment creditors can use wage garnishment to receive a portion of your earnings each paycheck. Exemptions limit the amount the creditor can take. Some states like Florida, Idaho, Oklahoma, Maryland, Ohio, and Utah follow federal wage garnishment limits to determine what is considered exempt income. Other states offer similar exemptions to judgment debtors but add more protections.
Alaska, Connecticut, California, District of Columbia, New Hampshire, North Dakota, New Mexico, and Oregon allow garnishment of wages above 75% of the judgment debtor’s disposable earnings or 40 to 50 times the federal minimum wage, whichever is greater.
Massachusetts, West Virginia, and Wisconsin protect 80-85% of the judgment debtor’s disposable income. In Texas, Pennsylvania, North Carolina, and South Carolina wage garnishment is prohibited.
A levy is a legal process that permits a creditor to take money out of a judgment debtor’s bank account. There is no federal limit as to how much they can levy; state law determines how much a creditor can take with a bank levy.
A judgment creditor may also put a lien on all your property, both personal and real. If you own your own home, that is an example of "real property." If a creditor records a certificate of judgment in the county records office, it can create a judgment lien.
If you try to sell the property, you may have to pay off the judgment lien before receiving any of the sale proceeds. The homestead exemption in your state impacts just what this would look like for you.
Even judgment creditors can only reach non-exempt property, so it doesn’t often happen that they seize personal property.
It means that even if a creditor has a judgment, they can’t take anything from you because everything you own is exempt. If your only income is in the form of Social Security benefits, you don’t own any real estate, and you don’t have any expensive personal property, you’re most likely judgment proof.
Even though the creditor can't collect their money from you, they can still try to demand payment, which can be irritating to deal with regularly.