Creditors have several options for collecting a debt that you cannot pay. The creditor may call you and send late notices for several months. The creditor could also turn your delinquent account over to a debt collector. Debt collectors are aggressive and may cross the line into creditor harassment. Your creditor or a debt collection company that purchased the debt might pursue legal action to collect the bad debt. If so, you need to know how to deal with a default judgment.
If you cannot repay a debt, the creditor may file a debt collection lawsuit against you. The court enters a default judgment when you fail to respond to the lawsuit. A default judgment is a court order stating that you owe the debt to the creditor. The creditor can take various actions to collect the debt, including wage garnishment and seizing assets. Understanding how to deal with a default judgment can help you avoid losing property or income.
Ignoring a default judgment is the worst way to deal with a default judgment. Depending on the law in your state, the creditor could seize most of the funds in your bank account. Some states allow creditors to request a sheriff’s sale of your non-exempt assets to collect the default judgment. Also, your wages could be garnished to collect the debt, depending on your state’s law.
Instead of ignoring the debt, try one of these ways to deal with a default judgment:
File a motion with the court asking the judge to set aside the default judgment. Reasons why a judge might set aside a default judgment might include:
State laws vary regarding motions to set aside judgments. For example, there could be deadlines and other requirements you must meet to file a motion to set aside default judgment.
Paying the creditor satisfies the default judgment. Once the debt is paid, the creditor should file a satisfaction of judgment with the court. The judgment remains on the public record, but it shows that you satisfied the debt.
Some creditors could work with you to arrange a repayment plan. However, the creditor will not satisfy the judgment until the debt is paid in full. However, the creditor is not obligated to accept payments for the debt. Furthermore, judgments accumulate interest. Therefore, the amount you must pay increases with time.
If possible, offer to pay a lump sum to pay off the default judgment. Some creditors accept a lower amount to pay off the default judgment if you make the payment at one time. For example, if you owe $10,000 for a default judgment, the creditor might accept 70% or $7,000 to satisfy the default judgment.
Before making the lump sum payment, obtain an agreement in writing from the creditor. The agreement should state that for a lump sum payment of (specific amount), the creditor agrees to cancel the debt, satisfy the default judgment, and forgive the remaining amount of debt.
NOTE: When a creditor forgives a debt, the creditor notifies the Internal Revenue Service. You might need to include the forgiven amount as income on your tax return for that year.
If you cannot pay the default judgment, you may need to claim your assets and income as exempt to avoid the creditor seizing your property for the debt. However, exemptions and wage garnishment laws vary by state. Therefore, this option may or may not work for you.
For example, if you live in a state that allows wage garnishments, you might be able to protect some of your income. However, the laws in your state might allow the creditor to take some of your income to repay the default judgment. Likewise, the laws in your state might protect some of your assets, but not all of your property.
If you cannot protect your income and assets or pay the default judgment, you might want to consider filing bankruptcy to deal with a default judgment. Most default judgments are discharged in bankruptcy. A discharge means that you do not owe the debt after your bankruptcy case is completed and closed.
Many debtors complete a no-asset Chapter 7 case in four to six months. Therefore, you could get rid of the default judgment without making any payments. You can also get rid of your other unsecured debts. Default judgments are also discharged through Chapter 13 repayment plans, in many cases for pennies on the dollar.
Only a few types of default judgments are not discharged in bankruptcy. If the debt is related to a DUI accident, you cannot discharge the debt. Also, if the debt that resulted in the default judgment is non-dischargeable, you cannot discharge the default judgment.
Struggling with debts you cannot pay is stressful and frustrating. Our free bankruptcy and debt relief calculators help you compare your options for getting out of debt. You might also want to explore our Savvy debt payoff planner to pay off debts without bankruptcy or debt consolidation companies.
At Ascend, we provide free tools and resources to help you become debt-free. Call or text us at (833) 272-3631 or contact us online for a free case evaluation.