When you become late (“delinquent”) on payments, the creditor will usually start calling you. There are various departments within banks and credit card companies whose job it is to make you pay them. As your debt becomes more delinquent the frequency of calls will increase and you may encounter strong-arm tactics designed to scare you into paying money. Creditors use these tactics because frequently they work.

Initially when you are behind on payments creditors will be unwilling to work with you. As you fall further behind they may become more willing to make arrangements that are helpful to you. After six months of no payments creditors are obligated by law to “charge off” your account. This may mean that the account moves to a new division within the organization for collection. It may mean that your account is farmed out or sold to a debt collector for further collection action. Or your account may be referred to attorneys for collection.

Sometimes debts can go unpaid for very long periods of time with no more consequence than increased balance and annoying calls from debt collectors. Sometimes a debt is never paid and time runs out for the creditor to easily collect, due to statutes of limitation. However, in some cases a suit will be filed against the debtor—within six months of no payment, or up to six years.

Some creditors may never get around to filing a suit against you. If they do, it may not be for several years. However, sometimes a creditor does threaten to sue to collect debts. This threat may or may not be acted upon. If a creditor does sue and obtains a judgment, there are a variety of actions they can decide to take ranging from no action at all, to a demand letter for payment, to garnishment of wages or bank accounts, to executing on a judgment lien on your property to take and sell it. There is no way of predicting if a creditor will decide to file a suit or what action they may decide to take if they obtain a judgement. If you receive a collection letter or threat or suit from an attorney, contact an attorney. You may have limited time to act on this.

When is it in your best interest to try and settle a debt instead of filing a bankruptcy? That all depends on various facts. Some of the debts that are “written off” (cancelled or forgiven) by a creditor in a debt settlement may be considered income by the IRS. This cancelled portion of your debt may be taxable just as ordinary income would be. If your income is low this may not be a problem for you. But if you earn a lot of money in the same tax year that settlements are made you need to be aware that this may increase your tax liability. There are exceptions to this taxable cancellation of debt rule that we can discuss with you. We handle both of these areas for our clients, as well as tax issues and problems. If you have questions about any of these areas, call us to schedule a consultation and we will help you explore your options so you can make an informed decision that is the best one for you.