5 Unexpected Legal Outcomes of Ignoring Credit Card Debt

It’s important to remember that you nearly always have options when you’re having trouble paying a credit card bill. They include debt consolidation, credit card hardship programs, and even debt relief, to name a few.

If you're struggling, it’s a good idea to explore debt solutions before you feel the legal impact of unpaid credit card debt. If you let it go too far, you could face legal actions by your credit card company, which could make it harder to deal with the debt in a way that works for you. 

Consequences of Unpaid Credit Card Debt 

You may be aware of some of the ways your account can be affected when you have unpaid credit card debt. These include:

• Late fees

• Interest penalties

• Reporting non-payment to credit bureaus, lowering your credit score

• Lowering your credit limit

• Canceling your account

Credit card companies could also take legal actions against you. Legal measures should never surprise you. Your creditor will contact you multiple times, probably through multiple channels of communication. Legal remedies cost money, so they’re usually a last resort. Here’s what to expect if you have unpaid credit card debt.

1. You could be sued

When credit card debt is overdue, you could be sued, especially if the debt is relatively large and way overdue.

A collection department or debt collector can't sue you until they’ve sent you a written notice detailing what you owe, who you owe it to, and how to dispute the debt. This is called a debt validation letter.

You have 30 days to respond before the creditor or debt collector can sue you. If you receive one of these notices, it may be a tip-off that a debt lawsuit is coming. At that point, it’s wise to respond. 

Read more: Sued for credit card debt: Learn the steps to protect yourself

2. Your creditor could get a default judgment if you don’t show up

Getting sued is usually an unfamiliar, sometimes expensive experience. To avoid the cost of hiring a lawyer and going through a civil trial, some people just don’t respond to the lawsuit. That’s the worst thing you can do.

If you don’t respond to a court summons, the judge could make a default judgment against you. That means the person suing you gets an automatic win. You lose without getting a chance to make your case. 

3. Your wages may be garnished

Wage garnishment is a court order that requires your employer to send part of your paycheck to a creditor.

This reduces your take-home pay, and makes it harder to pay other bills. It also makes your employer aware of your financial situation.

4. Money could be removed from your bank accounts

A creditor who wins a legal judgment can ask for a court order to garnish your bank account. They could freeze your accounts and collect the money you owe.

While there are legal limits to how much can be taken this way, it could mean a creditor takes away money you needed for something else. Also, having an account frozen interferes with your access to that account until the situation is settled. 

5. Creditors could put a lien on your home

Credit card debt is unsecured debt—the credit card company doesn’t have a claim on your property the way a mortgage lender would. Even so, there are times when unpaid credit card debt could result in a claim on your property.

When you sign up for a mortgage, you agree to put the property up as collateral. That means if you don’t repay the loan, you could lose your home. The lender could sell it to recover the money you owe. This is a voluntary lien, meaning you’ve consented to giving the creditor a claim on the property. You can’t get a mortgage without agreeing to the lien.

An involuntary lien is a claim that’s put on your property without your consent. If a creditor obtains a court judgment against you that you can’t pay, it can get an involuntary lien on your property. 

Having any lien against your home could interfere with your ability to refinance your mortgage or get a home equity loan. It also means that if you sell your home, the lienholder gets money from the sale before you do. 

Alternatives to Legal Outcomes

If you can’t pay a credit card debt, explore your options outside of legal actions. Depending on how much you owe and the full picture of your finances, one of these plans could be the right fit.  

Credit card hardship programs

It’s in the best interest of your credit card company to get paid—even if you need extra time or help to make those payments. It’s a better outcome than taking a customer to court. If you’re struggling, reach out to your credit card company and ask about programs to help customers struggling to pay their bills. 

Taking this route won’t reduce what you owe, and you’ll need to explain your situation and why you can’t make your payments as agreed. Your card issuer might pause your payments for a month or longer, waive fees, or reduce your interest rate to make your payments more affordable.

Your creditors add a note to your credit file indicating that you’re in a hardship program, which could have a temporary negative impact. 

Refinancing

If your credit is good, you may be able to use a new form of credit to pay off your old debts. This could make payments more affordable, and depending on how you approach it, you could even get a set payoff date for your debt.

Personal loans are one option to consolidate and refinance credit card debt. You could use the money from a refinance loan to pay off your credit cards, and then make payments on the loan. Personal loans rates are often lower than credit card rates, especially if you have strong credit, and they come with predictable payments. 

A home equity loan or line of credit (HELOC) is another option to refinance debt. This option could be open to you if you own a home and have enough equity. Home equity loans and HELOCs are mortgages. If you don’t pay back the loan, you could lose your home. 

Applying for a new loan typically has a small, temporary negative impact on your credit standing. 

The danger with refinancing debt is that it leaves you with paid-off credit cards that might burn a hole in your pocket. Before you use this approach, make a plan that helps you avoid new credit card debt. You don’t want to make your debt situation worse. Consider closing the credit card accounts after you pay them off with the new loan.

Debt settlement

Settling debts means negotiating an agreement to pay less than the full amount you owe. You can negotiate your own debts if you feel comfortable hammering out the terms of your reduced repayments. If you want help, you could work with a debt settlement company with experience and a good track record.

Debt settlement could significantly reduce your debt—that’s the negotiation part of this option. But it’s not quick or easy. 

Most people in a debt settlement program stop paying their creditors while they save up money for making settlement offers. If you stop making your payments, expect your creditors to ramp up collection efforts. They could even sue you, although many creditors will hold off on filing a lawsuit once they know you’re in a debt settlement program and doing your part to resolve the debt. Stopping payments also has a serious negative impact on your credit standing.

Bankruptcy

Bankruptcy is legal protection from your creditors. In some cases, it’s the most manageable way of handling debt. Bankruptcy also lets you organize claims from multiple creditors and pause a foreclosure on your home. 

Individuals typically file either Chapter 7 or Chapter 13. In a Chapter 7 bankruptcy, you could walk away from your unsecured debts in a matter of months. But you might have to give up some of the things you own. 

You won’t qualify for Chapter 7 if the court decides that you can afford a monthly payment. 

If you earn too much for Chapter 7, you could pursue Chapter 13 bankruptcy. Chapter 13 is a structured repayment plan that lasts five years (three years if your income is lower). You don’t have to give up anything you own, but the value of your assets will be a factor in how much you have to repay. At the end of your payment plan, any remaining balances on the debts you included in your bankruptcy are forgiven. 

Chapter 7 bankruptcy has a high success rate. About half of Chapter 13 cases end with no debt forgiveness. Bankruptcy filings are public. There are court fees, and most people pay an attorney to handle their case. In a Chapter 13 case, you’ll also pay fees to the bankruptcy trustee who manages your case and receives your payments.

Bankruptcy has a serious negative impact on your credit standing. Chapter 7 remains on your credit history for 10 years; Chapter 13 remains for seven years. 

Act to Avoid the Legal Outcomes of Ignoring Credit Card Debt

Considering each of these alternatives is better than not acting. There may be consequences to unpaid credit card debt, but you can take the first step and control the outcome.