What happens if a creditor wins a debt lawsuit against you?
Dealing with debt you can't afford to pay is stressful enough, but getting sued by a creditor can be downright overwhelming. If a debt collector has served you with a lawsuit over an unpaid credit card balance, you might hope the problem will somehow resolve itself, letting you avoid the judge, the courtroom and the other repercussions that can come with seriously delinquent debt.
Ignoring debt-related lawsuits rarely works out well, though. Each year, creditors file lawsuits against millions of consumers, with credit card debt being one of the most common triggers. And, in many cases, the creditors win these lawsuits by default — simply because defendants don't show up to court. So, if you choose to ignore a debt lawsuit, you're almost certainly going to face serious legal consequences related to that decision.
That said, while losing a debt lawsuit by default is serious, it isn't the end of the world. There are steps you can take both before and after a judgment to protect yourself and your finances. Below, we'll look at what happens if a creditor wins their case against you and explore your options for dealing with the debt before it reaches this point.
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What happens if a creditor wins a debt lawsuit against you?
When a creditor wins a lawsuit against you, they receive a court judgment that gives them powerful legal tools to collect the debt. In many cases, they can garnish your wages, meaning they can legally require your employer to withhold a portion of your paycheck and send it directly to them. That said, federal law limits wage garnishment to 25% of your disposable income or the amount by which your weekly income exceeds 30 times the federal minimum wage, whichever is less.
The creditor may also have the ability to levy your bank accounts, essentially freezing and seizing money directly from your checking or savings accounts. This can happen without warning, potentially causing checks to bounce and automatic payments to fail. There are laws in some states that protect certain amounts of money in your bank account from levy, but these protections vary widely.
Perhaps most alarmingly, with a judgment, a creditor may have the option to place liens on your property. This means they can claim a legal right to your assets, including your home or other real estate. While they typically can't force you to sell your primary residence, the lien will need to be paid off if you ever try to sell or refinance the property.
The judgment will also appear on your credit report for seven years, making it harder to qualify for loans, credit cards or even housing. Interest continues to accrue on the judgment amount as well, often at a higher rate than the original debt, making the total you owe grow larger over time.
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How to get rid of delinquent debt before a lawsuit is filed
If you're struggling with unpaid debt but haven't been sued yet, you have several options to avoid legal action, including:
Debt settlement
Debt settlement involves negotiating with creditors to pay less than what you owe. Many creditors may agree to lower your original balance by 30% to 50% if you can pay a lump sum in return. While this option can save you money, it typically requires having access to a significant amount of cash and can negatively impact your credit score.
Debt management
A credit counseling agency can help you develop a debt management plan, which typically involves working with your creditors to lower interest rates and fees and consolidate your monthly payments. While these plans can take several years to complete, they're generally less damaging to your credit than debt settlement or bankruptcy.
Bankruptcy
For those with steady income but overwhelming debt, filing for bankruptcy may make sense. Chapter 13 bankruptcy allows you to reorganize your debts into a manageable repayment plan while protecting your assets. Chapter 7 bankruptcy, while more severe, can eliminate most unsecured debts — but it may require giving up some assets.
The bottom line
Facing a debt lawsuit is intimidating, but understanding the process and your options is crucial. If you've already lost a debt lawsuit, know that you still have rights and options, including negotiating a payment plan with the judgment creditor or, in extreme cases, filing for bankruptcy to stop collection activities.
The best defense, however, is generally a good offense. If you're struggling with debt, try to take action before creditors resort to legal action. Seek help from a non-profit credit counselor, explore debt relief options and communicate with your creditors. You may find that they're willing to work out payment arrangements if you reach out before the situation becomes dire.
