Q: What are the consequences of credit card default? What does the law say and what will happen if there is a judgment?
A: Debt and credit card laws vary by state. Wherever you live the process is typically similar, but there are some important things unique to specific states, some of which we will discuss in a moment. Before the actual credit card debt default occurs, let’s first look at the process leading up to it.
1. Your account will be 30, 60, and 90 days late
After you don’t pay your first credit card bill it will be 30 days late, 60 days for the next billing cycle, and 90 days for the cycle after that.
Many wrongly conclude that “30 days late” means you are paying 30 days after the due date… that’s not correct. Days 1 through 30 after your due date are all classified as 30 days late (but most banks won’t report a late payment if it’s received during the first week or two after the due date).
As you can guess, the credit score consequences become exponentially worse with each tier. Having a 30 or 60 day payment will definitely wreck havoc on your credit, but once you get to 90 days the consequences are really going to hurt.
2. Your account will be late 120 days, 150 days, or charged off
Eventually your account will be charged-off; the bank will write it off as bad debt. Now when that happens may vary depending on the credit card company – not every bank will wait ’til after 120 or 150 days. Until the debt has been charged off, you should have the ability to still make things right and pay off the full amount and avoid the credit card default consequences. The late payments will still be on your credit record (unless you negotiated otherwise) but those will be a lot better than having a credit card debt default.
Regardless of your bank, in all 50 states the debt collection statue of limitations starts at 180 days, so it’s likely they will wait longer than 180 days to charge-off the account.
3. Your account will head to collections
After the account has been charged off it will head off to collections – usually sold to a third-party collection agency. Aside from the credit score damage, this is one of the most frustrating credit card default consequences for many. Why? Because it usually involves a barrage of harassing phone calls and letters in the mail.
The Federal Fair Debt Collections Act dictates what a collections agency can and cannot do to you. Unfortunately, you hear stories all the time about the rules not being followed. Here are some things the collections agency is supposed to abide be:
- You must be given 30 days to dispute the credit card default (they can’t just automatically assume it’s valid). If you are disputing it, that must be done in writing.
- If you have asked them not to, you can’t be called at inappropriate times (like 3 am) or at places you prefer not to be called (like at work).
- The debt collector is strictly limited in what they can say to family members, co-workers, etc. in the event they encounter them on the phone.
- If you ask them to stop communicating with you or to only communicate through your attorney, they must follow through with your wishes.
There are many other rules, too. For a full list please visit the Fair Debt Collections Practices Act
Warning: If you are married, credit card default in California and other community property states may affect both both spouses equally. That means both people in the marriage may be held accountable for the default, even if the credit card account is only in one person’s name. Community property states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, as well as Puerto Rico.
4. There might be the possibility of a lawsuit (and jail?)
This isn’t a common practice but it still is a possibility. If the collections process is unsuccessful a lawsuit may be filed.
So what are the default consequences if a lawsuit is filed by the creditor? Well assuming the debt is valid (it’s really your debt) then odds are a judgment will be issued against you. If you were properly served the court papers and choose not to show up, the judgment can still be issued against you.
Wage garnishment and seizure of bank funds?
If a judgment is granted against you, some states may allow the creditor to use wage garnishment or seize funds in your bank account to pay the debt. Such aggressive measures like that are not allowed in all states, so check with an attorney to see what is and isn’t allowed in the state you live. If such consequences are legal in your state, showing up for court would probably be a good idea so you can tell the judge your side of the story and why/how wage garnishment or bank account seizure will hurt you.
Can you go to jail for credit card debt?
Well “debtors’ prison” was abolished in the 19th century so it is not a crime. However during the Great Recession, we saw a rise of radical judges throwing people in jail for credit default (or at least trying to).
For example, Minnesota has some of the most creditor-friendly laws and according to their newspaper – The Star Tribune – there were 845 cases in 2009 where arrest warrants were issued for debtors. If a court-ordered judgment was issued against a debtor and they ignored it, some Minnesotans were arrested for contempt of court.
It’s important to remind you that being arrested is extremely uncommon and has only occurred in a few states. For those that are arrested, it sounds like the debtors were usually only jailed for less than 24-48 hours, with the aforementioned newspaper saying 8 hours was typical. Even if you do live in one of the few towns or counties that practice this, odds are probably very, very slim it will be an actual consequence for your defaulted account.
5. The effect of a credit card default on your credit
While wage garnishment, seizure of bank funds, and jail are things that only affect a very tiny sliver of those who default on credit card debt, there is one consequence you are 100% guaranteed to experience… the impact of the credit card debt default on your credit score.
The exact consequences a debt default will have on your credit depend on a few things:
- What was your credit like before defaulting? If you already had bad credit beforehand (perhaps you already had a bad debt) then the impact will be less noticeable. After all, “bad credit” and “really bad credit” are more or less looked upon in the same way by banks these days.
- One or multiple credit cards defaulted? Did you default on one of your credit cards or all of them? Having one credit card default will probably have less of an impact than having charge-offs on multiple credit cards.
- What was the amount of the default? Whether your default was $10 or $10,000 it is going to hurt your credit significantly. However, the higher the amount is in relation to your other accounts, the more of an impact it might have.
What should you do?
Most people would agree it’s best to avoid the credit card default consequences if at all possible. But at the same time, there are dire situations in life which really leave us few options.
Because credit card default laws vary state-by-state, make sure you talk to an attorney because this article is for general informational purposes only and is not advice (it’s neither legal advice or otherwise). Also, keep in mind that credit card settlement through debt negotiation companies may be just a painful. To understand why read this article about credit card debt settlement.