If you stop paying a debt, what creditors can do if you don’t pay usually follows a predictable ladder: a late mark on your credit report, calls and letters from a collector, and, if the debt isn’t resolved, a lawsuit that can turn into wage garnishment, a bank levy, repossession of a car, foreclosure on a house, or eviction from a rental. Federal law gives creditors real power at each step, but it also gives you specific rights, deadlines, and dollar limits. Knowing where those protections sit is often what decides whether you keep property you could have kept.
Credit Report Damage Comes First
A missed payment is typically reported to the credit bureaus once you’re 30 days late, and the damage deepens at 60, 90, and 120 days. Payment history is the heaviest single factor in both FICO and VantageScore models, so even one late payment on an otherwise clean file can pull a score down sharply. When an account goes to collections, that collection entry lands on your report on top of the original late-payment marks.
A collection account or charged-off debt can stay on your credit report for seven years under federal law.1Office of the Law Revision Counsel. 15 USC 1681c – Requirements Relating to Information Contained in Consumer Reports The clock doesn’t start when the account went to collections. It starts 180 days after you first became delinquent on the underlying account. Paying off an old collection doesn’t restart that period or remove the entry early, though some newer scoring models weigh paid collections less heavily than unpaid ones.
Notices a Debt Collector Has to Send
A debt collector who contacts you must send a written validation notice within five days of that first contact. The notice has to include the amount owed, the name of the creditor, and a statement that you have 30 days to dispute the debt in writing.2Office of the Law Revision Counsel. 15 USC 1692g – Validation of Debts If the current collector is different from the original creditor, the notice must also tell you how to request the original creditor’s name and address.
Disputing in writing within that 30-day window is one of the most underused protections in debt collection. Once you send a written dispute, the collector must stop all collection activity until it obtains and mails you verification of the debt or a copy of a judgment.3Federal Trade Commission. Fair Debt Collection Practices Act Debts that have been sold multiple times often fall apart at this step because the collector can’t produce adequate documentation. If the collector keeps calling or reporting the debt after receiving your written dispute and before sending verification, that’s a violation of federal law.
Many states also require a “right to cure” notice before a lender can accelerate the full balance of a consumer loan. Cure periods vary by state and by the type of agreement, but they often run between 10 and 30 days. A formal demand letter usually follows if you don’t pay, and that letter is normally the last step before a lawsuit.
How Long a Creditor Can Sue You
Every debt has a statute of limitations, a deadline after which a creditor can no longer file a lawsuit to collect. Most states set the period at three to six years, though some go longer, and the exact number depends on whether the debt is based on a written contract, an oral agreement, or a revolving credit account.4Consumer Financial Protection Bureau. Can Debt Collectors Collect a Debt That’s Several Years Old?
Once a debt is past its statute of limitations, a collector is federally prohibited from suing you or threatening to sue.5Consumer Financial Protection Bureau. Regulation F 1006.26 – Collection of Time-Barred Debts The one exception is filing a proof of claim in a bankruptcy proceeding. Collectors can still call and send letters about time-barred debts; the ban covers only lawsuits and lawsuit threats.
Be careful before making any payment on an old debt. In many states, even a small partial payment or a new payment plan restarts the clock and gives the creditor a fresh window to sue. Check whether the debt is past your state’s statute of limitations before you pay anything on it.
Getting Sued and What a Judgment Means
When a creditor files a lawsuit, you’re served with a complaint that lays out what’s owed and why. The creditor has to prove the debt exists and that you failed to pay, typically through copies of the contract, invoices, or account statements. If you don’t respond, the court enters a default judgment, which gives the creditor almost everything it asked for without you ever challenging the claim.
Showing up matters more than most people realize. When a debt buyer sues, one of the strongest defenses is challenging whether the company suing actually owns your specific account. Debts are sold in bulk portfolios, and the buyer may not be able to produce a clear chain of assignment from the original creditor. Without that documentation, the plaintiff may lack standing to collect.
If the creditor wins, the judgment typically includes the original debt plus interest, court costs, and sometimes attorney’s fees if the contract allows them. The judgment itself is just paper. To reach your money, the creditor has to take another step.
Wage Garnishment and Bank Levies
Wage garnishment directs your employer to withhold part of your paycheck and send it to the creditor. Federal law caps this at the lesser of 25% of your disposable weekly earnings or the amount by which your weekly earnings exceed $217.50, which is 30 times the federal minimum wage of $7.25.6Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment “Disposable earnings” means what’s left after legally required deductions like taxes and Social Security, not your gross pay.
Your employer cannot fire you because your wages are being garnished for a single debt. That’s a federal protection, and violating it is a criminal offense punishable by a fine of up to $1,000, imprisonment for up to one year, or both.7Office of the Law Revision Counsel. 15 USC 1674 – Restriction on Discharge From Employment by Reason of Garnishment The protection covers only one garnishment. If you’re garnished for multiple separate debts, federal law no longer shields you from termination.
A bank levy works differently. Instead of taking a portion of ongoing income, the creditor gets a court order directing a financial institution to freeze and turn over funds in your account. If your account contains Social Security, Veterans Affairs benefits, or other federal benefit payments, the bank must automatically protect the lesser of two months’ worth of those deposits or the account balance at the time of the levy.8eCFR. 31 CFR Part 212 – Garnishment of Accounts Containing Federal Benefit Payments The bank performs this review on its own; you don’t need to file anything to trigger it.
Repossession of a Car or Other Secured Property
When a loan is secured by collateral like a car, the lender doesn’t need to sue you first. Under the Uniform Commercial Code, a secured creditor can repossess the property without a court order as long as the repossession doesn’t breach the peace.9Legal Information Institute. UCC 9-609 – Secured Party’s Right to Take Possession After Default A repo agent can take a car from your driveway at three in the morning. If you come outside and object, though, the agent must leave. A physical confrontation or threat voids the repossession.
After taking the collateral, the lender must send a written notice before selling it. The notice has to say whether the sale will be public or private and give you enough information to calculate a payoff amount.10Legal Information Institute. UCC 9-611 – Notification Before Disposition of Collateral You have the right to redeem the property at any time before the sale by paying the full amount owed plus the lender’s reasonable expenses and attorney’s fees. Once the sale happens, the redemption window closes permanently.
If the property sells for less than what you owe, you’re still on the hook for the difference, called a deficiency balance. If it sells for more, you’re entitled to the surplus. A lender that sells a car at a below-market price in a commercially unreasonable way may lose the right to collect a deficiency.
Foreclosure on a Home
Mortgage defaults follow a slower and more regulated path than vehicle repossession. In a judicial foreclosure, the lender files a lawsuit and must get a court order before the property can be sold. In a non-judicial foreclosure, the lender uses a power-of-sale clause in the deed of trust, and a trustee sells the property after public notice, with no lawsuit required. Which process applies depends on your state and the terms of your mortgage documents.
Either way, the property is eventually sold, and the proceeds go toward the loan balance, interest, and legal costs. If the sale doesn’t cover everything, the lender may seek a deficiency judgment for the remaining amount, though some states restrict or prohibit deficiency judgments on certain residential mortgages.
If you’re renting a home that goes into foreclosure, you don’t automatically lose your lease. The federal Protecting Tenants at Foreclosure Act requires the new owner to give you at least 90 days’ written notice before you have to leave, and a bona fide lease signed before the foreclosure notice generally survives through its term, with a narrow exception if the new owner will occupy the home as a primary residence.11Office of the Law Revision Counsel. 12 USC 5220 – Protecting Tenants at Foreclosure Act The lease has to be an arm’s-length transaction at fair market rent, and you can’t be a close family member of the borrower.
Active-duty servicemembers get additional safeguards. A lender generally cannot foreclose on a mortgage taken out before active duty without a court order, and this protection extends for one year after the servicemember leaves active duty.12Office of the Law Revision Counsel. 50 USC 3953 – Mortgages and Trust Deeds Servicemembers can also request that the interest rate on pre-service mortgages be reduced to 6% for the duration of active duty and one year afterward.
Eviction for Unpaid Rent
A landlord who wants to remove a tenant for unpaid rent has to go through the courts. Self-help evictions, meaning changing the locks, shutting off utilities, or removing belongings without a court order, are illegal in every state. The landlord files an eviction action (called a summary ejectment or unlawful detainer depending on the jurisdiction) and must prove that the lease required rent and that you didn’t pay it.
If the landlord wins, the court issues a judgment for possession and typically awards back rent and court costs. That judgment doesn’t put you on the street by itself. The landlord still has to obtain a writ of possession, which is served by a sheriff or marshal. The officer schedules a lockout date and usually gives a short window, often just a few days, for you to leave voluntarily before executing the order. Timelines vary significantly by jurisdiction; the whole process can run anywhere from a few weeks to several months depending on court backlogs and whether you contest the case.
Cancelled Debt Can Become Taxable Income
This is where non-payment catches people off guard. If a creditor forgives, cancels, or writes off $600 or more of your debt, the IRS treats that amount as taxable income.13Internal Revenue Service. About Form 1099-C, Cancellation of Debt The creditor sends you a Form 1099-C and reports the cancelled amount to the IRS. You owe income tax on money you never received in cash, because the IRS views the forgiven balance as a financial benefit.
Several exceptions can spare you from the tax. The most broadly useful is the insolvency exclusion: if your total liabilities exceeded your total assets immediately before the cancellation, you can exclude the cancelled amount from income up to the extent you were insolvent.14Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness You claim it by filing IRS Form 982 with your tax return.15Internal Revenue Service. What if I Am Insolvent? Debt discharged in bankruptcy is fully excluded.
A separate exclusion for homeowners previously sheltered up to $750,000 in cancelled mortgage debt on a principal residence. That provision expired on January 1, 2026, so mortgage debt forgiven after that date no longer qualifies for this specific exclusion unless the arrangement was entered into and documented in writing before that date.14Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness The insolvency and bankruptcy exclusions still apply.
Bankruptcy Stops Collection Cold
Filing for bankruptcy triggers an automatic stay that immediately halts virtually all collection activity. Lawsuits, garnishments, bank levies, foreclosure sales, repossession, and even creditor phone calls must stop the moment the petition is filed.16Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay A creditor who knowingly violates the stay can be held in contempt of court. For someone facing an imminent wage garnishment or foreclosure sale, the automatic stay is sometimes the only tool that buys enough time to regroup.
What happens after the stay depends on which chapter you file. Chapter 7 can wipe out most unsecured debts like credit cards, medical bills, and personal loans in a matter of months, but you may have to surrender nonexempt property. Chapter 13 lets you keep property and sets up a three-to-five-year repayment plan, useful if you’re behind on a mortgage or car loan and want to catch up over time.
Not everything can be discharged. Several categories of debt survive bankruptcy regardless of which chapter you file:
- Child support and alimony are completely nondischargeable.
- Certain tax debts, including recent income taxes and taxes tied to a fraudulent return or an attempt to evade payment.
- Student loans, which are dischargeable only if you prove “undue hardship” in a separate court proceeding, a notoriously difficult standard to meet.
- Debts arising from fraud, including money obtained through false pretenses or false financial statements.
- Debts arising from willful and malicious injury to another person or their property.
These categories are spelled out in the bankruptcy code, and creditors can file adversary proceedings arguing that a specific debt fits one of them.17Office of the Law Revision Counsel. 11 USC 523 – Exceptions to Discharge If you’re considering bankruptcy mainly to escape one large debt, check whether that debt falls into a nondischargeable category before you file.