Life happens. Any number of things can occur that might cause you to fall behind with payments on credit cards or other loans. Lenders are sometimes willing to work with you. But if your troubles continue so you can’t make any payments at all, they will eventually take action.
First, the good news: The majority of creditors can’t get judgments against you without first suing you in court. You have the right to defend yourself and try to negotiate a resolution.
Now, the bad news: A creditor can use a judgment in a number of ways to collect what it’s owed.
First, the Judgment
Getting a judgment against you doesn’t always give a creditor an automatic carte blanche to use it. It just means the creditor won the lawsuit. It must then usually take at least one additional step and ask the court for permission to use the judgment to try to collect.
Although the rules can vary by state, the creditor must also ask the court for a writ or order of execution that acts as a means to use the judgment, typically to garnish wages or bank accounts. A creditor can also “record” a judgment, usually without further involving the court. It can file it with the county in which you own property or, in some jurisdictions, with the secretary of state. Recording the lien creates a lien against your property. But a judgment forms an automatic lien in some states simply because it exists – no filing is necessary.
The Potential of Garnishment
The most common method of collection is garnishment. The creditor gives a copy of the writ to your employer, obligating the company to withhold a portion of your pay and send it to the creditor until your debt is paid off – but only a portion.
“There are limits on what can be garnished and it varies from state to state,” according to Stuart Shiffman, a retired trial court judge in Illinois. Federal law also caps how much a creditor can take from you each pay period. The federal rule is that a judgment holder can garnish no more than 25 percent of your net earnings or anything you earn over 30 times the federal minimum wage. This works out to $217.50 a week as of 2017. A creditor can take whichever of these is less. For example, if your take home pay is $617.50, this is $400 more than 30 times the federal minimum wage, but 25 percent of your pay comes out to just $154.37, so this is what the creditor is limited to garnishing.
Your net earnings are what’s left over after mandatory deductions such as taxes, but not voluntary deductions like retirement contributions that aren’t required by law, union dues or insurance premiums.
Property Liens and Seizures
A creditor can also use the writ to claim your bank accounts up to the amount you owe, as well as your real and personal property, thanks to that lien it created when it recorded the judgment. The creditor can use the lien to ask the sheriff or other county official to seize the asset. This might be your home, your car or even your furniture. The creditor can then sell it to recapture the amount of money you owe.
This involves a lot of work on the creditor’s part, however, and it may not be worth it if you don’t owe a great deal of money. In many cases the lien will just sit there in place until you try to sell the property. Then the judgment must be paid to allow the sale to go through.
“The lien remains until the judgment is satisfied,” Shiffman said.
Some Assets Are Exempt
If this all sounds pretty dismal, pause and take a deep breath. A creditor with a judgment can’t take everything you own. Just as federal and state laws limit how much of your pay it can garnish, they also tag some of your property as “exempt.” This means that creditors cannot seize it to pay your debts.
For example, most states have homestead exemptions, a dollar value of equity in your property that is protected. If your homestead exemption is $50,000 and you have $50,000 equity in your home, it’s protected from seizure and sale because that $50,000 is yours. Even if your equity is $55,000, it’s unlikely a creditor would go through all the legal wrangling of forcing the sale of your home to collect $5,000, particularly because there would be costs associated with the sale so it probably would recoup less than that.
What Can You Do?
Creditors are required by law to notify you of a lawsuit by making sure you receive a copy of it. If you’re notified that you’re being sued, the first, best thing you can do is respond to the lawsuit. Create a written response and file it with the court. Even if you can’t argue with the facts – you do indeed owe the money – it’s very important that you file a statement saying so. You should also appear in court on the appointed date. If you do nothing, the court will most likely grant the creditor a default judgment, giving it everything it asked for because you haven’t bothered to object.
When you appear in court – or even before this, when you first receive a copy of the lawsuit – you can attempt to work out payment arrangements with the creditor. It doesn’t want to go through the hassle of going to court if you’re willing to voluntarily pay up, so most creditors are eager to enter into consent agreements to get their money. There’s one caveat, however: These agreements are filed with the court as part of the lawsuit, so you can be held in contempt of court if you don’t perform and do what you agreed to do. You could be fined or sentenced to community service or even sent to jail, although this is typically rare and would require extreme circumstances.
If the creditor has already received a judgment against you, consult with legal aid or look up your state’s laws online. Identify your exempt property so you can dispute the action if the creditor attempts to seize it or place a lien against it. Make sure any actions it takes are legal in your jurisdiction. You have the right to go back to court to protest illegal means of collection. A lawsuit isn’t necessarily a one-and-done event.
The Lifespan of the Judgment
Unfortunately, judgments can live for a very long time. First, there’s the initial time period during which a judgment is valid. This can range from five to 20 years depending on your state. Exactly when the clock begins ticking also depends on your state’s laws, so do your research. The time period might begin with the date the court first awards the judgment, or it may not start until the last time the creditor attempts to use it to collect from you.
Creditors can renew their judgments in many states when the clock begins winding down. This would begin a whole new five- to 20-year period during which it can use the judgment. Assuming the creditor doesn’t do this, the judgment will “lapse,” and this means you may be safe from further collection efforts. But some states also allow creditors to breathe new life into their judgments by going back to court to “revive” them before a certain deadline, and this can give them some considerable time. Creditors have 10 years after a judgment has lapsed to act to revive it in Ohio.
Don’t count on time being your friend. Educate yourself about the laws in your state and, if possible, try to get rid of the judgment by paying off the debt.