Financial difficulties can happen to anyone at any time. Often, it can be unprecedented due to sudden unemployment (think Covid), an accident to self or loved ones, unexpected bills, and many other reasons, most unforeseen. In the United States, there are 191 million credit card owners, and 7 out of 10 Americans own at least one credit card. Considering the number of American credit cardholders, many credit card companies find unpaid debts a huge common problem.
What happens if you can’t pay your credit card bills? Will credit card companies sue you immediately? Or, does non-payment of credit card debt make the debt go away eventually, such as in a bankruptcy situation?
These questions may have crossed your mind from time to time. This article will discuss important points about credit card debt, non-payment cases, and other related topics.
So the short answer to the question “how often do credit companies sue for non-payment” is “not often”. Let’s explore a little deeper.
Will Credit Card Companies Immediately Sue You After Payments Are Skipped?
Hearing the word “lawsuit” can cause panic to almost any person. After all, who on earth would enjoy being sued? Whether you win or lose there will still be lots of stress and hassles. In this section, we will talk about when credit card companies may sue for unpaid debt. But to give you some consolation, credit companies don’t immediately sue you.
A lawsuit is not something that companies usually pursue when you’ve skipped one or two payments. They will just add interest and admin charges on to offset not getting the expected sum of money from you on time. In most cases, a lawsuit is an option of last resort. In other words, credit card companies don’t consider it as a major solution to collect debts.
But, how often do credit card companies sue for non-payment? According to WalletHub, credit card collection cases account for just 15 percent of all collections. And collections precede any form of lawsuit – if they can collect without going through the expensive and tedious process of suing you, that is the preferred option.
Credit card companies are businesses first and foremost. And you are their customer and as far as possible, they want to keep that good customer relationship going for as long as possible. You are a golden goose. They generate income from debts and interests, incur expenses from operations, and gain profits from the process. Lawsuits are expenses that they’d incur just to collect unpaid debt and it’s bad for business. So, credit card companies use the cost-benefit consideration to assess if suing is worth the legal expense.
Credit card companies consider the debt’s amount, its recoverability, and legal expenses before suing. However, this consideration doesn’t give you a get out of jail free card regarding credit card debt. If it was, many more people may choose not to pay.
So if credit card companies don’t immediately sue, what will they do about unpaid debt? Below are some actions that credit companies perform before suing. In the succeeding sections, you’ll know more about these in greater detail:
- Payment notices
- Charging penalties for late payments of overdue balances
- Loss of the benefit to avail the annual percentage rate
- Increase in interest rates
- Inability to use the credit card
- Disqualification from entitlement to avail of higher credit limits
Only when all non-legal actions have been tried and failed will they consider legal intervention. But in some cases, they’ll most likely sell your debt to a collection agency. If that happens, your debt may become a constant source of headache, and you may even wish that you had paid before it went to a collection agency. Collection Agencies make money from collecting money from you and they will be VERY persistent in achieving this goal. Who do you think will win in this struggle?
How Long Does a Credit Card Company Have To Sue You?
Credit card debt is not immune to legal actions and you also have your legal rights. You can stop a collection suit with the statute of limitations (SOL) on credit card debt. The SOL is like kryptonite to every collection suit. Once you correctly use the SOL as a defense, the courts may dismiss the case in your favor.
Assuming you won the case using SOL, will it affect your credit score even if you won the case? Market Watch says no, but it may affect your ability to get loans since judgements are public records. So if your credit score won’t be affected, will credit card companies blacklist you? Funnily enough, there’s no such thing as a blacklist for risky borrowers. Credit card companies only blacklist people who use credit cards for fraudulent purposes.
Now that everything's clear about judgements and blacklisting, what exactly is the SOL? In the next paragraphs, you’ll know how SOL works and how you can use it to suspend lawsuits against you.
Definition
The Statute of Limitations, in legal parlance, is a set of prescriptive periods for legal proceedings. In layman words, the SOL is a time limit for lawsuits. Just think of it as the expiration date in food items. Once the food goes beyond its expiration date, it’s technically spoiled and inedible.
What’s Your State’s SOL?
There’s no standard SOL for the whole of the United States. Instead, they vary per State. Check out how long the SOL is in your State, and you’ll learn in the succeeding paragraph why it’s important to know.
| State | Written Contracts (in years) | Oral Contracts (in years) | Open-ended Accounts (including credit cards) (in years) |
| Alabama | 6 | 6 | 3 |
| Alaska | 6 | 6 | 3 |
| Arizona | 5 | 3 | 3 |
| Arkansas | 5 | 3 | 3 |
| California | 4 | 2 | 4 |
| Colorado | 6 | 6 | 6 |
| Connecticut | 6 | 3 | 3 |
| Delaware | 3 | 3 | 4 |
| D.C. | 3 | 3 | 3 |
| Florida | 5 | 4 | 4 |
| Georgia | 6 | 4 | 4 or 6** |
| Hawaii | 6 | 6 | 6 |
| Idaho | 5 | 4 | 5 |
| Illinois | 10 | 5 | 5 |
| Indiana | 10 | 6 | 6 |
| Iowa | 10 | 5 | 5 |
| Kansas | 5 | 3 | 3 |
| Kentucky | 10 | 5 | 5 |
| Louisiana | 10 | 10 | 3 |
| Maine | 6 | 6 | 6 |
| Maryland | 3 | 3 | 3 |
| Massachusetts | 6 | 6 | 6 |
| Michigan | 6 | 6 | 6 |
| Minnesota | 6 | 6 | 6 |
| Mississippi | 3 | 3 | 3 |
| Missouri | 10 | 5 | 5 |
| Montana | 8 | 5 | 5 |
| Nebraska | 5 | 4 | 4 |
| Nevada | 6 | 4 | 4 |
| New Hampshire | 3 | 3 | 3 |
| New Jersey | 6 | 6 | 6 |
| New Mexico | 6 | 4 | 4 |
| New York | 6 | 6 | 6 |
| North Carolina | 3 | 3 | 3 |
| North Dakota | 6 | 6 | 6 |
| Ohio | 6 | 15 | 6 |
| Oklahoma | 3 | 5 | 3 |
| Oregon | 6 | 6 | 6 |
| Pennsylvania | 4 | 4 | 4 |
| Rhode Island | 10 | 10 | 10 |
| South Carolina | 3 | 3 | 3 |
| South Dakota | 6 | 6 | 6 |
| Tennessee | 6 | 6 | 6 |
| Texas | 4 | 4 | 4 |
| Utah | 6 | 4 | 4 |
| Vermont | 6 | 6 | 3 |
| Virginia | 5 | 3 | 3 |
| Washington | 6 | 3 | 3 |
| West Virginia | 10 | 5 | 5 |
| Wisconsin | 6 | 6 | 6 |
| Wyoming | 10 | 8 | 8 |
How Does SOL Work?
If you want to know how to win a credit card lawsuit, you need to know how the SOL works. But here's a fair warning. The SOL does not provide ultimate protection from debt, but it can save you, depending on the case's facts.
Let's assume that John, a California resident, had outstanding credit card debt of $2,000. He had been a credit card holder since 2010. But unfortunately, in 2016, John experienced financial troubles, and he began skipping payments. His last payment was in May 2016.
CASE 1: John received a lawsuit in March 2020. He argued that the SOL has passed and the creditor cannot sue him anymore. Will the case succeed in his favour?
No. John's last payment was in May 2016. Based on California's SOL, the creditor has four years from the debtor's last payment to file a collection suit. In this case, the creditor can sue until May 2020. Therefore, John cannot use SOL as a defense.
CASE 2: John received a lawsuit in June 2020. He argued that the SOL has passed and the creditor cannot ask him to pay his debt anymore.
Will the case be dismissed?
Yes. The creditor failed to file a lawsuit within four years from the date of John's last payment. Thus, John can use it to dismiss the case.
Will John be forgiven for the debt?
No. The SOL only provides a time limit for legal actions. It does not extend to forgiveness of debt. So, the creditor can still demand payment from John, but it can no longer seek the courts' help.
What Is the Minimum Amount That Creditors Will Sue For?
That depends on the company. Every credit card company has its policy regarding the threshold. While some say that credit card companies won't sue for debts below $1,000, the decision still depends on certain factors like company size, legal expenses, and recoverability of the debt.
In most cases, nonpayment of credit card debt to credit card companies result in write-offs instead of lawsuits. Filing a collection suit can be expensive for small debts. Imagine spending $2,000 to collect a $200 debt. Would that be worth it in the end? Definitely not.
As a conservative stance, there's no minimum or a standard amount that would tell creditors when to sue. It still depends on the business and economic factors affecting the company.
You've Been Sued. Can a Credit Card Company Garnish Your Wages?
Many debtors are afraid of wage garnishment from unpaid debt because it decreases their take-home pay. And perhaps, you're also worried about wage garnishment. But from a legal perspective, garnishing your wage to settle your obligations is a legal remedy for credit card companies.
However, they can only garnish your wage after they have obtained a money judgement from a court of law i.e. you lost the collection suit, and the judge decides in favor of the credit card company. If that's the case, the credit card company or collection agency can get a wage garnishment order.
I Lost the Case. How Much Will They Deduct From My Paycheck?
Once the judgement creditor obtains a wage garnishment order, they can ask your employer to remit to them a portion of your wage as payment for your debt. But, they obviously can't garnish 100 percent of your paycheck as you will need some money to survive. Federal law dictates that judgement creditors can only take:
- 25 of your disposable income (or your take-home pay after taxes, social security, and insurance) or;
- The amount that your income exceeds 30 times the federal minimum wage, whichever is less.
For example, ABC Credit won the case against John, and they obtained a wage garnishment order. John's take-home pay per week is $400. The federal minimum wage per hour is $7.25. How much can ABC Credit garnish?
Since Federal Law elects the lower amount, you should compute the two components. First, 25 percent of John's disposable income is $100 ($400 x 25%). On the other hand, the federal minimum wage rate times 30 is $217.50. John's excess income above the federal minimum wage is $182.50 ($400 – $217.50).
Therefore, the creditor can only garnish $100 every paycheck since that is the lesser of the 2 scenarios.
Consequences of Unpaid Credit Card Debt Other Than Lawsuits
Lawsuits will have major implications on you. However, aside from legal fees, there are other fees associated with unpaid credit card debt. Here are some of them:
1. Late Fees
A late fee is a penalty for paying your credit card bill after the due date or paying a lesser amount. If you leave a credit card debt unpaid for several months, you'll be accumulating late fees, which can increase the amount payable.
As of 2020, first-time late fees are $29, and it can go up to $40 for succeeding defaults. Late fees may change per year because the Truth in Lending Act requires credit companies to review late fee limits annually.
2. Change in APR
The average annual percentage rate (APR) as of Dec. 1, 2020, ranges from 15.16 percent to 22.78 percent. If you default on payments, creditors can increase your APR until it reaches the penalty rate of around 29.99 percent.
Sometimes, creditors can apply the penalty rate to all of your credit cards even if you only defaulted paying one credit card. And much worse, an increase in APR is another top-up to late fees. So in total, you'll be paying higher interest plus late fees.
3. Damage to Credit Score
Having more debt doesn't necessarily affect your credit score. But, having more debt than you can handle affects your credit score. Skipping payments, moreover, adds fuel to your suffering credit score. So how much more for outstanding debts?
4. Sale of Debt to a Collection Agency
When your debt reaches a collection agency, everything will be stressful for you. The agency will not stop calling you, and they may even use illegal methods to make you pay. With your debt at a collection agency, you'll be subject to higher interest rates that compound continuously.
Preventing Suits in the Future
To avoid the hassle of all the things mentioned here, always pay your obligations on time. And more importantly, keep debts on a level that you can quickly pay off. Remember that there is a lot at stake if your credit card debt problem escalates. So, be wise and practical with your finances.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
