When you're behind on payments, lenders can take several approaches to try to collect. You might hear threats about garnishing your wages or taking money from your bank account, and it's critical to take those threats seriously. You need to understand if your money is truly at risk, as lender collection actions can cause significant financial hardship.
When You Stop Paying
Creditors can’t really force you to repay after you default on a loan. Making payments is something only you can do (voluntarily). However, lenders do have several ways to “motivate” you to pay, and they can enlist tools to help them collect money indirectly.
Your Credit Scores
When you stop making loan payments, damage to your credit is one of the first impacts you'll notice. The missed payments appear on your credit reports, and as a result, you end up with lower credit scores. If you try to borrow more money, it will be difficult, because lenders will see that you’re already behind on your existing obligations. Even if you eventually get caught up, a history of missed payments or late payments can count against you.
Lenders and creditors can bring legal action against you to try and collect from your wages. If a lender successfully wins a judgment against you, the court can authorize the lender to contact your employer and demand a portion of your pay (generally up to 25%, or 65% for child support obligations—but there are other limitations that can keep the amount lower). Your employer must then divert some of your pay to the creditor, which gradually reduces the total amount you owe.
Wage garnishment can cause several problems. Obviously, you get less pay, making it harder than it already was to manage cash flow each month. Plus, your employer finds out that you’ve got financial troubles that are leading to legal judgments.
While many employers are understanding and treat all employees fairly, it’s best to keep your employer out of your personal life.
Taking funds from your bank account, also known as garnishing your bank account, is another option. Technically, removing money from your financial accounts is called a levy. As with wage garnishment, this is generally only an option after creditors successfully bring legal action against you. However, the IRS is an exception: They can levy your bank account without a judgment if you're behind on tax payments.
Creditors like banks and credit card companies don’t often pursue bank levies, but it’s always a possibility. However, federal agencies such as the IRS and the Department of Education are more likely to collect from bank accounts (for unpaid taxes or student loans, for example).
If you’re subject to a bank levy, the creditor will contact your bank to demand the funds. Your bank must review your account to see whether any of the money is “off-limits” from the creditor. (Sometimes your Social Security or Veteran’s benefits are protected.) Any unprotected money in the account will be frozen, seized, and sent to the creditor.
Notification and Negotiation
When a creditor wins a judgment against you, review your situation with a local attorney. Don’t get caught by surprise—you need to know if wages will be garnished or bank accounts will be frozen. Creditors don’t always notify you when they take action–you might hear about it from your employer or your bank.
Once you receive notification of a garnishment or levy, you might be able to stop or reduce it. Again, speak with a local attorney for legal advice that's tailored to your situation and your state laws. Federal and state rules limit how much of your income (or which assets in your bank account) can be taken, and you might need to file paperwork to reduce what your creditor has access to.
You can also try to settle things with your creditor—negotiation is always an option. Make an offer to your creditor, whether it’s a lump sum that you can pay right now or a monthly payment plan that provides funds over time. Consider using a reputable service to help you negotiate with your bank or credit card company, but start with nonprofit credit counselors whom you can easily research and vet.
For-profit debt settlement offices may have attorneys who specialize in debt, and they can explain your rights and obligations as well as handle negotiations lenders. However, it can be risky to go this route, and the fees for service may be substantial.
Get everything in writing, and (in addition to stopping garnishment) see whether you can get negative items removed from your credit reports.