If you’re looking to deal with your debt, a good place to start is by deciding how to handle any debt collections. Ignoring collections on debts that are still within the statute of limitations could lead to lawsuits. And if you don’t respond to the court summons, you could end up with a default judgment against you.
In fact, studies show 70% of debt collection court cases end in default judgments. So seven in ten borrowers could be facing wage garnishment or worse. This guide explains what default judgments are and six ways to deal with them if you have one.
What is a default judgment?
You are legally required to pay back the money you borrow from a creditor, be it a credit card, store card, or loan. When you don’t pay back on time, creditors can choose to sue you or sell your file to debt collectors who can sue. If you don’t respond to the lawsuit—which you’ll often receive in the mail—the court can enter an automatic judgment against you, also known as a default judgment.
Why are creditors able to do this? Under federal and state law, judgments are classified as a lien on the property. Some fees associated with a judgment include the debt owed, interest, court fees, attorney fees, and collection costs.
How much creditors can collect and the types of property they can take hinges on your state laws, financial situation, and what the judge rules.
How to avoid a default judgment
How do you avoid a default judgment? By not ignoring a lawsuit. As intimidating as it may be, respond in a timely manner as ignoring it could create a snowball effect.
A 2017 report by the Consumer Financial Protection Bureau tells us around 15% of Americans have been sued by debt collectors. However, only 26% of those people attended the court hearing. This means many end up with judgments they might have avoided. When you don’t show up in court, your creditors automatically win the claim.
While showing up doesn’t guarantee you’ll win the case, you could settle for a lesser amount. After all, creditors would rather get back some of what you owe than risk getting nothing if you file for bankruptcy.
What can happen if you have a default judgment against you?
Default judgments are a way for creditors to recoup the money you owe them. After the judgment, they can get the money you owe them back through:
- Wage garnishment: When debt payments are automatically withheld from your paycheck.
- Bank levies: When your accounts are frozen until your debt is paid in full. However, your disability benefits, social security, pension benefits, unemployment, and worker’s compensation can’t be garnished from the account to repay private debt.
- Writ of Execution: A court order grants sheriffs permission to seize and sell your property. This could be anything from your assets to everyday items like your TV.
- Tax Intercept: Your tax refund is collected to pay for debts owed.
- Property liens: The creditor places liens on any real estate you hold, prohibiting you from selling or transferring the property without first paying off your debt.
What to do if you have a default judgment against you
There are several steps you can take if you have a default judgment. Some include challenging the judgment, seeking professional help, and settling with your creditor or debt collector.
Challenge the Judgment
After receiving a judgment, you may think there’s no way out. However, there are solutions. In some cases, you can challenge the judgment. Here are some questions you can ask to see whether that’s a viable option.
Was I notified on time?
When a creditor or debt collector files a lawsuit, you should receive a letter in the mail. If you didn’t receive any notification because you moved or mistakenly threw the letter away, you may be given a chance to contest the case or vacate the judgment (make it active again). This doesn’t mean the case will be dismissed. However, you get a chance to have your say and come to a favorable agreement.
Does the debt belong to me?
Mistakes happen, so it’s possible for you to get a default judgment for debt that doesn’t belong to you. Maybe someone opened an account using your information and racked up debt from unpaid bills. In another scenario, paid debt was mistakenly sent to collections.
To check whether the debt belongs to you, check the summons or the letter you got in the mail. Alternatively, you can also check the county recorder’s office. If the name of the creditor looks unfamiliar, keep in mind creditors often sell debt to different servicers.
If you find it isn’t your judgment, request proof of debts from the collection agency. Do so by writing a debt validation letter stating you don’t believe the debt is yours and would like proof.
Is the debt within the statute of limitations?
Creditors are given a statute of limitations—a set number of years debtors have to retrieve debt. The amount of time creditors have to pursue collection on a debt varies from state to state. If it turns out your debt expired before the time your judgment was issued, that could be grounds to dismiss the case.
Am I judgment proof?
People who don’t have enough assets for a creditor to take after a judgment are often excluded from garnishments. Who falls into this category? Unemployed individuals as well as low-income earners. Another category of people who may be judgment-proof are those with assets or income that are legally protected.
If you have no grounds for challenging your default judgment, you should consider settling. In the event that you can’t afford to pay what you owe, reach out to your creditor to see if you can come to an agreement. They may accept less than what you owe, making it a win for both of you. There may also be the option for you to pay in smaller increments if you can’t afford to pay what you owe in large quantities. It’s a better option than having your wages garnished or property seized.
Hire an experienced attorney
Hiring a lawyer and paying court fees can be financially exorbitant and sometimes cost you more than the debt you owe. However, it may be worth the cost if you win the case or settle for a lesser amount. You can also find low-cost services specifically designed to help people who can’t afford traditional legal defense costs.
When looking for an attorney, find one well-versed in the Fair Debt Collection Practices Act (FDCPA) and who has experience with default judgments. Here are a few resources you can use to find an attorney within your budget.
- State’s bar association
- State legal aid resources
- National Association of Consumer Bankruptcy Attorney
Debt relief options
Creditors can renew judgments, so to avoid years of hassle, explore these debt relief solutions.
If you have multiple debt accounts, you can try debt consolidation. This is when you take out a single loan or credit card to pay off multiple debts. Then, all of your payments are rolled into one so you don’t have to worry about paying different creditors every month. Not only does it save you time, but you can also save money. This would allow you to pay off the entire debt from the default judgment in a single lump sum.
Debt management plan
Sometimes, you need help to manage your debt, especially when you’re struggling to make progress. If you opt for a debt management plan, you’ll work with a credit counselor and come up with a plan to tackle any outstanding debt you have. Some solutions will include rolling all of your debts into one monthly payment, cutting your interest rates, and putting a time limit on your repayment plan.
Be aware that the collector or creditor must agree to accept payments through the credit counseling agency. However, since this solution will repay everything you owe on a debt, a creditor or collector may be more willing to accept this type of agreement.
This is when you pay a lump sum to settle your debt. It’s typically less than the amount you owe, and a third-party company will negotiate your debt with your creditor. This option may be available. However, be aware that with a default judgment against you, the collector has the right to recoup the full amount you owe. So, it may be a hard negotiation to get them to accept less than the full amount.
To prevent creditors and debt agencies from pursuing you for owed debt, you can file bankruptcy. If your debt is significantly high and you can’t afford to repay the debt, contact a bankruptcy attorney. Declaring bankruptcy may discharge the unpaid debt.
Another advantage of bankruptcy is that once you file, the court will issue an automatic stay on collection actions. This will immediately stop any wage garnishments and levies as your case is processed. Thus, you can use bankruptcy to stop some of the negative affects of a default judgment.
Will a default judgment affect your credit? In the past, a default judgment or any civil court judgment relating to a debt would appear in the public records section of your credit report. However, the credit bureaus have changed their policies within the past few years. Default judgments no longer appear on consumer credit reports.
However, the charged-off account or collection account will remain on your credit report for seven years from the date that the account first became delinquent. So, while the default judgment will not negatively affect your credit, the bad debt will.