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Charge Offs, Collections, & Judgments
American Middle Class

Charge Offs, Collections, & Judgments

The estimated reading time for this post is 212 seconds

A creditor with a default judgment against you can levy your bank account, garnish your wages, or both. If a creditor sues you, you must respond to the court summons, appear in court, and stay on top of the legal process.

If you fail to appear in court, the creditor will get a default judgment or judgment by default against you. Unlike collections and charge-off accounts, default judgments and judgments are harder to settle, and they stay on your credit report for up to 20 years, depending on your state laws.

Your best bet is to negotiate and settle the debt with the creditor while the account is charged-off or in collections.

Charge Offs, Collections, & Judgments

When lenders extend credit to you, they expect to get paid in total plus interest charges over the life of the loan. If you experience financial distress and stop paying back the loan, they can take numerous legal and non-legal actions against you, including lawsuits.

For installment, collateralized loans such as mortgages and auto, the creditor would foreclose on your home or repossess your vehicle if you fail to pay. Sometimes if the amount that they sell the repossessed property for is less than the outstanding debt, they might come after you for the deficiency value.  

For example, if you owe the bank $100,000 on your home and stop making payments, and the bank forecloses it and sells the house for $98,000, the deficiency value would be $2,000. Sometimes the lender comes after you for that amount, and sometimes they dont. 

For revolving and unsecured loans, charge-offs, collections, and lawsuits are ways creditors try to get you to pay them back.

When you miss your first payment or are at least 30 days late, the lender would report you to the credit agencies as being “past due,” which can drop your credit score.  

Equifax, Transunion, and Experian are the three major credit bureaus. FICO and Vantage Score are the two types of credit scores, but 90% of lenders use FICO, which ranges from 300 to 850.

The lender will continue to report the account being past due for up to 180 days, during which they will classify the account as being charged off, meaning the lender has written the account off as a loss. 

If you want to stop that derogatory mark from damaging your credit further, the charge of the state is the best time to get on the phone with your lender and offer them a settlement.  

The original creditor will make numerous efforts in-house to collect the debt during the 120 and 180 days after you become delinquent before transferring your account to a collection agency. 

Transferring the debt to a debt collection agency will add another derogatory mark to your credit profile, further decreasing your credit score. At this stage, settling the debt is more accessible.  

You might be able to settle the debt for as low as 50 cents on a dollar, meaning if you owe $5,000, you can decide on $2,500. Pay for Delete, where you pay the $2,500 and request the collection agency to remove the negative remark from your credit report, can be an available option.

A civil lawsuit against you is the creditor’s last resort, but it’s also quite effective because too many borrowers dont understand its effectiveness. More than 90% of borrowers who get sued by creditors fail to appear in court, resulting in a default judgment.

With a default judgment, the lender can levy your bank account, garnish your wages, or both. Moreover, they have zero incentives to accept a settlement from you at this stage since they have all the leverage.  

To prevent the actions mentioned earlier from being taken against you, you have to get on the phone with the creditor or its lawyers and work out a payment plan as soon as possible. The only silver lining is judgments no longer show on consumers’ credit profiles since Dodd-Frank.

Conclusion 

From the time of delinquency, your creditor gives you nearly six months to pay or settle your debt. You can prevent further damage to your credit report and save thousands of dollars if you settle your debt between the” “past d” “o” collection” stage.

Once the lender has a default judgment or judgment by default against you, you no longer have leverage.

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