Can Unsecured Debt Be Collected Through the Court?

According to the Federal Trade Commission, federal regulations require lenders to charge-off most unsecured debts after four to six months of missed payments. This accounting procedure lets your creditor clear uncollected debts from the company’s books, but you still owe the money. In some cases, your creditor continues to try to collect your debt using its in-house collectors or an outside agency. Sometimes, the lender sells your debt to a different creditor, or assignee, most often for pennies. The original lender or any company that buys your account can try to collect the balance you owe by obtaining a court order.

The amount of your debt plays a part in whether your creditor pursues legal action against you. Filing a legal complaint might not be cost-effective when your unpaid debt amounts to a few hundred dollars. Your creditor might charge it off and leave you alone. All courts charge fees for filing lawsuits, and when the case is put on the court calendar, the creditor incurs additional costs for a company representative or lawyer to appear in court. While few creditors can profit from a court action to collect $100 or $200, the stakes are higher when you owe thousands.

When your creditor wins a lawsuit for unsecured debt, the court judgment gives the creditor several unpleasant options for getting money from you. All but a few states allow creditors to garnish your wages to satisfy court judgments -- forcing your employer to withhold a portion of your earnings every pay period until your balance is paid. Winning a judgment also lets creditors obtain a writ to levy and clean out your bank accounts, up to the limit of the judgment amount. Some money, such as Social Security payments and veterans benefits, are exempt from this type of levy. If your bank releases your exempt funds in error, however, you might have to sue the creditor to get your money back. In some states, creditors that have secured a judgment may attach a lien to your home or car, which prevents you from selling it until you pay your debt.

Each state has a statute of limitations for how long a creditor can use the courts to collect unpaid consumer debts. This varies by state and the type of unsecured debt. For credit cards, the statutes of limitations range from three to 10 years, according to the Federal Trade Commission. For other unsecured debts, it depends on where you live. The statute of limitations countdown clock starts on the date of your last payment to your initial creditor. If you make a payment to this company, its collection agency or an assignee, the clock resets and starts again.