February 9, 2012

Can My Credit Card Company Sue and Take My Stuff If I Don’t Pay?

The Goal of Credit Card Lawsuits is to Strengthen the Lender’s Collection Position

Credit card debt, unlike mortgage debt, is unsecured debt. This means your credit card company can’t come immediately take your stuff when you don’t pay. Having said that, if you fall behind on credit cards, your lender will quickly try to transition from an unsecured creditor, who can’t take your stuff, to a secured creditor who can. Once an unsecured creditor obtains a judgment, they can then attach your non-exempt property in satisfaction of past due debts.
Nuts and Bolts Explanation

Need this explained in plain english? The bottom line is this: your credit card company can take your stuff if you don’t pay, but only after a fairly long process that will have to play out in the court system. Before a credit card company can take your stuff, they’ll have to sue you and obtained a judgment. Even then, it will only be your non-exempt assets that are subject to seizure. For more on exemptions in bankruptcy see: What Are Exemptions and How Do They Work?

Let’s break down each step in the process:
Falling Behind

First, you fall behind on your credit card bills. No lender is going to sue you after a few missed payments, but they’ll definitely start calling. If the collection calls don’t work, there is a decent chance that the credit card company or a debt collector will eventually file a lawsuit. More on that here.
The Lawsuit

Of course, you have the option of defending against the lawsuit if you don’t actually owe the debt or if you have some other defense against payment. Don’t necessarily take it for granted that you owe. Some collectors will try to illegally resurrect zombie debt. If you owe the debt and don’t file an answer to the lawsuit, and most people don’t, the court will enter what is known as a default judgment. The judgment is a court decree stating you owe the debt and that the credit card company has the right to take some of your assets to satisfy it. Now they have the right to come after your stuff, but exactly what can they take?
Exemption Laws

That will depend on your state’s exemption laws. If you haven’t done so already, take a look at the exemption article I linked to above. It explains how exemptions work in great detail. If you need a quick and dirty summary, it’s best to think of exemptions as laws that shield your property from creditors, both inside and outside of bankruptcy. Generally speaking each state has enacted its own exemption laws and a good consumer lawyer in your state will he happy to walk you through how they work.

Need an example? Let’s look at Texas. Assuming the property meets certain criteria, the Texas homestead exemption allows residents to exempt the entire value of their home from creditors. This means that, no matter how much you owe, you won’t lose your house because of debt in Texas. The Texas homestead exemption is generous, perhaps another state has a car exemption that allows you to protect up to $4,500 in a single car. If you have equity in your car above that, a judgment creditor may be able to sell it to get at the non-exempt equity. As a practical matter, there are costs associated with selling property at auction and creditors are often willing to settle for cash rather than go through with the sale.

Well, there you have it. Whether a credit card company can take your stuff after non-payment depends on whether they’ve obtained a judgment by filing a lawsuit and the size of your state’s property exemptions. If you are facing a credit card lawsuit, it’s always best to call a lawyer. Also be aware that filing for bankruptcy will eliminate your credit card debt and stop a lawsuit, even if it’s already been filed. For more information, see: When is credit card debt not dischargeable?