Delinquent Debt: What to Expect in Debt Collection

By Cara O'Neill, Attorney
When you stop paying a bill, the debt collection process begins, and your creditor will attempt to informally collect the debt before filing a lawsuit.

When you stop making a payment on a loan, you can expect the collection process to proceed in a predictable manner. First, the creditor calls flood in; then, if you don’t bring your account current, the lender will take more drastic collection measures. For example, a creditor might foreclose on your house, repossess your car, or file a lawsuit asking the court for a judgment that will allow the lender to take money out of your paycheck or bank account. You can stop the debt collection activity at any time by filing for bankruptcy—but you’ll stand a better chance of preserving your assets if you assert your legal rights sooner rather than later.

Collecting Credit Card Debt, Utility Bills, and Personal Loans

Most of these creditors agreed to extend credit in exchange for nothing more than your promise to make timely payments each month. If you fall behind on your payments, the creditor cannot take back the property (or service) purchased on credit because, for the debts covered in this section (known as “unsecured debts”), you didn’t agree to this consequence of nonpayment. (By contrast, home and car loans are “secured” by the house and car, enabling the seller to get the house and car back if you don’t pay on time.) Here are typical examples of unsecured debt:

  • credit card balances
  • medical bills
  • personal loans, such as payday loans
  • utility bills for electricity, natural gas, or cable television, and
  • country club, gymnasium, and tanning salon memberships.

The Debt Collection Process

When you first fall behind on your payments, the original creditor will make an effort to collect your past-due balance. Don’t expect a lender to retain your account indefinitely, however. The original creditor’s collection attempts will usually last for six months or less. After that, the lender will “charge off” (sell) your debt to a debt collector for pennies on the dollar. You’ll remain responsible for the debt after it’s charged off and will pay the new owner, instead of the original creditor.

Negotiating Down the Debt

You can attempt to pay your debt for less at any point during the process—in fact, it’s expected. The original creditor might ask for proof of your income and assets before agreeing to reduce your obligation—especially if it’s a large bank. A debt collector will have more negotiating room than the original creditor and will be less likely to require financial documentation before settling your debt for less money. It’s important to understand, however, that if you successfully negotiate down your debt, the forgiven amount will be reported to the IRS, and you’ll pay taxes on that amount.

(To learn more about negotiating techniques, including the tax consequences of forgiven debt, see How to Negotiate a Credit Card Debt Settlement: The Process.)

What Happens Next: The Lawsuit

Your creditor can’t force you to pay your debt without first taking you to court and obtaining a money judgment against you (unless your creditor is the IRS). To find out more about what a creditor can do with a court judgment, read Delinquent Debt Lawsuit: What to Expect When a Creditor Sues You.

Foreclosure and Repossession

If you agreed to secure payment of your loan by putting up property as collateral, such as your house or car, then the collection process will proceed in a different manner. A lender can repossess or foreclose on the property, sell it at auction, and use the proceeds to satisfy (pay) your outstanding debt. If the property sells for more than what you owe, you’ll get the extra funds back (though this would be unusual). If it sells for less, the difference between the selling price and the balance owed is a “deficiency” balance.

Some states allow a lender to collect a mortgage deficiency, but not all. For instance, in California, a lender cannot collect a deficiency on a loan used to purchase a home (purchase-money loan). If your state allows for the collection of a deficiency balance (which is an unsecured debt), the lender will use the unsecured debt collecting process discussed above to recover the remaining balance.

(To learn about the foreclosure process, see Foreclosure and Your Home: Understanding the Process, Your Rights, and Your Options.)

Filing for Bankruptcy

One of the simplest ways to stop a collection action is to file for bankruptcy. Once you file, an order called a “stay” automatically prevents creditors from pursuing collection activities against you. It’s important to understand that some bankruptcy chapters work better for particular debt problems. For instance, although Chapter 7 bankruptcy will help you wipe out most credit card balances and utility bills, a Chapter 13 bankruptcy will help you catch up on your past-due car and mortgage payments.

This article cannot address all debt collection practices and bankruptcy options. If you’re unclear about your obligations and rights, you should consult with an attorney for advice about your particular case.

Questions for Your Attorney

  • How much would my tax bill be if I successfully negotiated down my debt?
  • Do I have debt that a creditor can collect without a judgment?
  • Would I be better off getting rid of my debt in bankruptcy?
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