Creditors can’t throw you in jail just because you can’t pay some of your bills. Depending on the circumstances, though, they can turn over your account to collections, sue you, garnishee your wages
, repossess collateral, or foreclose on your home.
If you are behind on any of your bills, the rights and remedies that the collector uses to get you to bring your bill up-to-date depends on several factors:
1. Who is collecting the debt? A credit card company or another lender collecting its own debts can be really tough—worse, in some cases, than debt collectors. That’s because in most states they have more leeway than professional debt collectors. Debt collectors are covered by the Fair Debt Collection Practices Act
, a federal law that regulates how they operate. That law doesn’t cover creditors collecting their own debts.
Most creditors want to get you to pay and keep you as a good customer, at least at the beginning. (After all, people who carry balances are their favorite customers!) So you may be able to negotiate a reasonable compromise with a creditor until you can get back on your feet.
Collection agencies, on the other hand, have one and only one goal—to get you to pay.
2. Whether the debt is secured or unsecured. Secured debts are debts that are backed up by collateral—property that the creditor can take if you fail to pay the bill. If a debt is secured, you will probably know it because when you took out the loan, you will have signed a “security agreement” giving the creditor a “security interest” in your property. Your collateral on a secured debt may be repossessed, or taken back, if you don’t make your payments.
Many loans are unsecured; there is no collateral backing up the loan. Credit cards, medical bills, personal lines of credit, and student loans
are examples of unsecured debts. The fact that these types of loans are unsecured doesn’t mean that the creditor can’t go after your property to collect. It just makes it more difficult, since they generally have to go to court first.
3. Where you live, or where the contract was made. State laws often govern repossessions, lawsuits by creditors, bounced checks, bankruptcy, and creditors’ remedies. Sometimes a creditor can take you to court in the state where the contract was made, if it was made in a state other than where you are now living. Or if you move and a creditor has an outstanding legal judgment against you, the creditor may be able to transfer it to the state where you live and collect it under the state’s laws.
4. Who owes the bill? Generally, you can be held responsible for any bills incurred on any joint credit cards you hold (regardless of whether you or the other cardholder made the charges), other loans made jointly, any loans for which you have cosigned, plus your own bills. Some state laws also include a “Doctrine of Necessaries,” which holds both spouses liable for debts incurred for food, clothing, shelter, or other living necessities. If you live in a community-property state, you may also be held responsible for debts your spouse runs up during your marriage.