Most debts are unsecured, that is, there is no collateral for them. For example, your credit card company can not come a repossess your car if you miss payments. A secured debt has collateral, two examples are a car loan and a mortgage. Your house can be foreclosed and sold, a car, repossessed and sold.
Unsecured creditors only have a few options on default
They can stop doing business with you, by cancelling your credit card or cancelling an agreement with you. Often another credit card company will be willing to extend you credit or another merchant will do business with you.
Nearly all creditors make reports to the major credit bureaus (Experian, Equifax, and Transunion). Negative credit reporting will lower your credit score. The impact of negative reporting is just one factor to consider in deciding whether or not to prioritize a debt.
If a creditor turns your account over to a debt collector, a common strategy of debt collectors is to make negative credit reports. Paying a debt in collections will not have a drastically improve of your credit score. The damage is done with the reporting, paying it does not do much to help. So if there is a debt that is more important to pay you should take the hit on your score and pay the most important debt first.
A creditor may contact you and ask you to pay. Typically, original creditors do not spend a long time trying to get you to pay. Most would much rather send your debt to a third-party debt collector to make collection attempts.
Third party debt collectors
Third party debt collectors are subject to the Fair Debt Collection Practices Act. They have to treat you with fairness, honesty, dignity, and respect. It is illegal for a third-party debt collector to lie, be dishonest, curse, be disrespectful, or to make any other misrepresentation to you.
Debt collectors like to call consumers deadbeats (sometimes worse). Don’t listen to them. The most common reason debts wind up the hands of debt collectors is job loss, illness, divorce, or unexpected life events. The debt collection industry knows this. They know how to take advantage of you. Making the right choices in the face of their threats is your best strategy.
Don’t let a debt collector harass you into a bad decision. Make well thought out decision about which debts to pay first.
Filing a lawsuit
Original creditors and third-party debt collectors can file a lawsuit to collect a debt. Most of the time original creditors leave this job to the third-party debt collectors. These collectors make mistakes, do not have records, or are otherwise sloppy with their collection cases.
It is important to respond to a lawsuit. Most consumers, when they are sued, do nothing. This results in a default judgment. A default judgment means that you did not answer. Given that debt collectors do not have the best records, its important to answer a lawsuit so that you can fight it and at least have a shot at it not turning into a judgment.
Judgment Collection and the Texas Homestead Exemption
If there is a judgment against you, then it can be used to access your bank accounts and to take any non-exempt property. Texas homestead exemptions exempts most property from collection on a judgment. The Texas homestead exemption applied to much more than your homestead. As you can guess it covers your homestead. For an urban homestead it covers not more than 10 acres with any improvements (houses) in that property.
Most people don’t have one acre, much less anything approaching 10 acres. Most people’s homes are not subject to being taken by a judgment. The Texas homestead exemption also covers personal property in your home. All home furnishings, including family heirlooms, provisions for consumption (food, clothes, etc), tools, equipment, books, boats, or motor vehicles used for work. It also includes two firearms, athletic and sporting equipment, a car or motorcycle for each member of the family that is a licensed driver. The law is so old that it also covers: two horses, mules, or donkey and a saddle, blanket, and bridle for each, 12 head of cattle, 60 head of other types of livestock, 120 fowl, and your household pets.
All of these things are exempt from judgment garnishment or from a creditor taking them. So if a debt collector or other creditor calls or sends you a letter telling you that they are going to take your exempt property, they are lying. That lie is a violation of both Texas law and the Fair Debt Collection Practices Act.
Unsecured debts make life easier. A credit card keeps you from having to keep cash on hand and you can make payments on things without having to establish credit at every merchant you go to. But, if you are too late on payments, then they can come back to haunt you. If nothing is done, these debts first land in the hands of debt collectors, then a court, and eventually get turned into a judgment. The Texas homestead exemption protects Texans from having their homestead and personal belongings (including horses and chickens) from being taken by a judgment creditor.
If you have problems with a debt collector, whether they are collecting a debt or a judgement, give us a call and lets talk about how we can help you.