Laws on Unpaid Credit Card Debt

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Laws on Unpaid Credit Card Debt
Laws on Unpaid Credit Card Debt (Image: holder: morguefile.com, Andres Rueda: Flickr.com, Yandle: Flickr.com, jppi: morguefile.com, Roy Halzenski: Flickr.com, Casey Serin: Flickr.com)

If you were to poll people who had recently filed for bankruptcy about their reasons for doing so, you would find unpaid credit card debt ranked high on the list. During times of financial trouble, paying off credit card debt is not as much of a priority as basic necessities. If you find yourself with any unpaid credit card debt, it is important to understand the laws that regulate it in order to prepare for the consequences you might eventually face.

Types

Two types of credit card debt exist: secured and unsecured debt. When you apply for a secured credit card, you must pay cash to cover the limit on the card. If you cease making payments on a secured card, the credit card company does not lose money, and, because of this, will not take legal action against you (See Resource 1). An unsecured credit card is a card that is extended to you with no collateral. Debt on an unsecured card that is left unpaid is subject to legal action.

The two types of credit cards are secured and unsecured.
The two types of credit cards are secured and unsecured.

Time Frame

If you do not make your credit card payment by the due date, you will incur a late fee. If your payment is 30 days late, you will receive a late payment notation on your credit report. You will continue to receive late notations every month until the debt is either charged off or 180 days have passed. A credit card company is not required to charge off your debt, but most will do so after 180 days as the loss is considered a tax write-off for the company.

Pay by the due date or risk paying extra in late fees.
Pay by the due date or risk paying extra in late fees.

Collections

After your debt is charged off, it will be sold into collections. Collection agencies are bound by the Fair Debt Collection Practices Act (FDCPA) to participate in ethical debt collection practices. They may send you letters notifying you of the debt and offering settlement plans. Collection agencies are allowed to call you at home unless you send them a letter forbidding them from doing so. As the owner of a debt, a collection agency may initiate a lawsuit against you in an effort to recover the funds (See Resource 2).

You can stop creditors from calling you at home.
You can stop creditors from calling you at home.

Lawsuits

Although a collection agency might sue you for your unpaid credit card balance, they can only do so if the debt is still within your state's statute of limitations for collection. After the statute of limitations expires, the debt is no longer legally enforceable. If the collection agency files a lawsuit anyway, you must appear in court to tell the judge that the debt is outside of the statute of limitations or you might end up with a judgment against you. If your debt is within statute and you are sued, you should still show up in court. As long as you appear, the creditor is required to prove that you legally own the debt. Many are unable to do this. Fail to appear in court, and the creditor is not required to provide proof that the debt belongs to you, but you will be automatically ruled against. If you lose the lawsuit, a judgment will be levied against you, and your wages might be garnished unless your state prohibits garnishment for unsecured debt.

Show up in court or risk a judgment.
Show up in court or risk a judgment.

Credit Score

Any time you are over 30 days late on a payment to a creditor, this information will be placed on your credit report and your credit score will drop. Each additional month that you do not pay will result in more late notations appearing on your report. When the debt is sold to collections, a new trade line will appear on your credit report identifying the debt as defaulted. This will also harm your overall score. The worst-case scenario for your credit score when dealing with credit card debt is if you are successfully sued and a judgment is entered on to the report. Judgments have almost as negative an impact on your credit to the same degree as a foreclosure or bankruptcy would.

According to the Fair Credit Reporting Act (FCRA), negative trade lines can only remain on your credit report for up to seven years from date of the original charge off. After the seven years have passed, the debt cannot legally reappear on your credit report (See Resource 3). Monitor your credit reports frequently to ensure that all creditors are abiding by FCRA laws.

Check your credit report to make sure creditors are abiding by the FCRA.
Check your credit report to make sure creditors are abiding by the FCRA.

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