You’re overwhelmed by credit card debt and are afraid creditors will come after your home to collect what’s owed. Before you go into full-blown panic mode, understand that the chances of this happening are slim to none. However, the creditors may use other aggressive tactics, like wage garnishment, if they get a court judgment against you.
Understanding Credit Card Debt
It’s best to pay off your credit card debt at the end of each month. However, it’s also good to know what happens with any lingering debt and how that can affect your assets.
Credit Card Companies and Collection Agencies
Credit card companies are your original creditors. If you make payments on time, credit card companies will receive the cash. Issuers use late fees and interest rates to incentivize early payments, but that’s not always guaranteed.
Credit card debt that stays unpaid for too long can find its way to a collection agency. Creditors hire these agencies to retrieve unpaid debt.
Legal Procedures Credit Card Companies Must Follow
Credit cards will initially contact you about making payments. You may receive a phone call, a letter in the mail, and inbox messages. After 30-90 days, the issuer may send your debt to a collection agency.
Additionally, issuers must send you a copy of your credit card statement 21 days before the due date. That way, it’s easier to stay on top of your bill. Debt collectors are not allowed to harass or threaten you to repay debt. Furthermore, a collector can only call your house from 8 a.m. to 9 p.m. You can also tell a debt collector what times you don’t want to be contacted, and the collector must follow suit.
The Debt Collection Process
Debt collection agencies can reach out to you through various ways. They can email, call, arrive at your door, get in touch through social media, or reach out to family and friends to confirm your contact information.
Some debt collection agencies will negotiate with you first. You can come up with a new payment plan or agree to pay less than what you owe. The former choice is more likely. You will then have to repay as agreed upon. A debt collector can sue you and take you to court if you continue to avoid debt payments.
Secured Debt vs. Unsecured Debt
There are two primary types of debt – secured and unsecured. Secured debt is backed by an asset, referred to as collateral, that the creditor can seize if you fall behind on your payments. However, unsecured debt isn’t backed by collateral, so defaulting on your obligations doesn’t give the lender rights to your possessions.
But how does this relate to credit card companies and their rights to your home if you fall behind on payments? Well, most credit cards are unsecured.
If you happen to experience financial hardship that causes you to miss multiple payments, the credit card issuer could attempt to transition from an unsecured creditor to a secured creditor who has rights to your property to recoup their losses.
Note: There are some unsecured credit cards on the market that require a deposit equivalent to the credit line to get approved.
What Can A Credit Card Company Do?
Creditor Would Have To File A Lawsuit
When you miss your first payment, the phone calls and letters in the mail from the creditor will typically start. After 30 days, most creditors report the delinquency to the three credit bureaus – Experian, TransUnion and Equifax. Once the account reaches 120 days past due, the creditor may write the balance off as a bad debt expense to remove it from its books. This is referred to as a charge-off and could have severe consequences for your credit score and financial health.
Not only will the balance typically be sold off to a collection agency or law firm for pennies on the dollar, but your credit score will take a hit. You could also experience an uptick in the volume of collection calls and letters. At some point, the debt collector could threaten you with a lawsuit, especially if you send a cease and desist letter requesting that all communication be halted.
If they move forward with a lawsuit and you fail to respond, the debt collector could receive a default judgment against you. This means the court agrees you owe the debt, and they have a right to seize your assets to collect on the balance. But can your home be at risk for seizure? It depends on the exemption laws in your respective state.
Creditor Would Need To Collect A Judgement
The reality is that a judgment could mean you’ll need to sell off your home to repay creditors for what they’re owed. However, the process is lengthy and time-consuming, which may not make it a worthwhile pursuit for creditors.
Here are some actions creditors may take instead:
Put a Lien on Your Property
A judgment lien gives creditors the right to collect what they’re owed if you sell or refinance your home.
Garnish Your Wages
The creditor could garnish your wages, which means they’ll automatically collect funds from your bank account each time you’re paid. However, there are limits on the amount creditors can take, depending on your state.
Levy your Bank Account
Some creditors may levy your bank account upon receiving a judgment against you. Consequently, the bank will freeze your account and send funds to the creditor until the outstanding balance is paid in full.
Can a Credit Card Company Take Your House?
The Process of House Foreclosure
The creditor will make several attempts to reach out and inquire about missing payments before proceeding with a foreclosure. After three months, the borrower will receive a demand letter that requests the missing mortgage payments be addressed within the next 30 days. A fourth month of missed payments results in a notice of default that starts the foreclosure process after 30 days.
State laws vary, which results in different time frames depending on where you live. However, the creditor will list your property for sale at a public auction if you continue to avoid payments. A qualified buyer will purchase the property during the auction, or it will become the bank’s property. The final step is eviction, which takes place when the property officially has a new owner.
Homeowners are given a few days to gather their belongings. A local sheriff may get involved if the homeowner does not vacate the property.
Instances When Your Home May Be at Risk
Your home may be at risk if you have fallen behind on several mortgage payments and haven’t made an effort to catch up. Negotiating with your creditor can give you extra time, and you may be able to work out a refinance to make the monthly payments more manageable.
If you have kept up with your monthly mortgage payments but are in significant credit card debt, the creditor cannot take your home. However, a debt collection agency can request the debt, and you may have to file for bankruptcy. A Chapter 7 bankruptcy can result in losing your home since you must liquidate your assets to cover debt. A Chapter 13 bankruptcy allows you to keep your house and other assets.
Are There Any Legal Protection for Homeowners?
Homestead Exemptions
Some states offer protection to consumers that prevents creditors from seizing property. Depending on where you live, the value of your home, car or other personal property could be exempt from seizure by creditors. Consult with a consumer lawyer in your area to learn more about how property and other exemptions work.
The Role of Personal Bankruptcy
Filing for bankruptcy can temporarily stop credit card issuers and other creditors from targeting your assets. Debt collectors are not allowed to contact you and try to collect unpaid debt while your case is in court.
You can end up with a Chapter 7 or a Chapter 13 bankruptcy. A Chapter 7 bankruptcy involves liquidating all of your assets, including real estate, and using them to cover your financial obligations. A Chapter 13 bankruptcy lets you keep your assets and allows you to establish a payment plan.
How to Manage Your Debt and Protect Your Home
Knowing your options can help you protect your home and avoid foreclosure. A cash-out refinance can be a great solution if you need more money and already have a good amount of home equity.
What is a Cash-out Refinance?
A cash-out refinance allows you to get a new loan and use those proceeds to pay off your current mortgage. The new loan has a higher balance, and the difference becomes cash that you can access right away. Many mortgage companies offer these financial products.
How a Cash-out Refinance Works
Knowing how a cash-out refinance works can help you make an informed decision and get more control over any financial issues. You will end up with a higher balance on your mortgage, but you will receive extra money equal to the difference between the two balances.
You will also have to extend the duration of your loan to reduce your monthly payments. Adding more years to the backend of your loan will compensate for a higher balance. Cash-out refinances keep you in debt longer but offer additional capital. You can even end up with a lower monthly payment depending on the length of the loan and your new interest rate.
The Benefits of Cash-out Refinance to Consolidate Debt
Cash-out refinances typically have lower interest rates than unsecured debt. You can pay off your credit card bills and get on a clean slate while keeping your monthly mortgage payment at a similar level.
The extra cash from a cash-out refinance can improve your financial situation and your credit score. Paying off your balances will reduce your credit utilization ratio and strengthen your payment history.
Conclusion: Using Cash-out Refinance to Manage Debt
A cash-out refinance can get you back on top of your credit card account and add more points to your score in the long run. You can keep your monthly mortgage payment the same and address present challenges. A cash-out refinance can also help with other expenses like vacations, medical bills, and other debt.
Top Flite Financial is a lender specializing in credit-challenged homeowners looking to refinance their mortgages. Their dedicated team of experts can assist you in exploring your cash-out refinance options to get the extra cash needed to pay your credit card debt and ensure you avoid foreclosure or losing your home, even if you have a low credit score. Submit this simple form to contact one of their mortgage refinance experts with no obligation.
Frequently Asked Questions (FAQs)
The statute of limitations in most states only lets credit card companies come after you for 3-6 years.
Credit card companies cannot come directly after your assets. However, an unpaid debt can result in bankruptcy, where your assets may have to be liquidated to repay the debt.
