Entering default on a credit card severely impacts the credit rating of the individual that does it. In some cases, the company may sue the defaulter to attempt to recover the full price of the loan. There are no criminal penalties for entering default on a credit card, but a lawsuit may happen in civil court. In most cases, collections does not use a lawsuit to collect, but if a lawsuit is successful, it can result in property seizures and wage garnishments to pay the cost of the collection and associated legal fees.
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The majority of credit cards are unsecured debt. When they are lent out, the lender is not given authorisation to collect on some property in order to cover the cost of the loan. If the companies want to collect on the debt, they must work through a lawsuit and receive a judgment in their favour. Any company that threatens criminal action for debts is violating the Federal Trade Commission's Fair Credit Collection Practices Act.
A credit card account can enter default if no activity has passed through the account in more than 60 days. In many cases, the credit card company will then sell the delinquent account to a collection agency, which will attempt to collect on the debt for an extended period of time. If the debt has not been collected after a certain period of years that differs from state to state, the statute of limitations on debt collection may prevent the company from suing to collect on the debt any longer. View the reference link below for more information about statute of limitations for each state.
From the perspective of credit card companies and collections agencies, going to court to collect on a debt is extraordinarily expensive relative to attempting to collect on the debt otherwise. Even though the law authorises them to collect on debts through lawsuits, the profit margin on going that route is much lower than coming up with a mutually agreed upon settlement for the debt.
Entering default on a credit card account opens up the legal possibility of debt settlement. This process does not have to involve going to court, although a lawyer can ease the negotiation process. In many cases, debt consolidation and credit counselling companies will actually advise their clients to enter default on their credit cards so that they can initiate debt settlement proceedings. In a settlement, the account is closed for a lower amount than the total amount owed on the delinquent credit cards.
Knowledge of the applicable default laws in your area instantly builds up the negotiating strength of the borrower. Many in default feel that they are helpless at the hands of their creditors. Although they may be vulnerable to lawsuit, the mere knowledge of that and the economics surrounding the issue increase the borrower's ability to negotiate a fair solution without needing to go to court. If a collection agency or credit card lender are given the option of settling a debt out of court with a borrower, they will make that choice almost every time. Avoid wage garnishments and account freezes by remaining in contact with lenders, educating yourself on your legal rights and keeping accurate paper records of all interactions with collections companies.
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