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Q: Defaulting on credit cards. ( Answered 5 out of 5 stars,   7 Comments )
Subject: Defaulting on credit cards.
Category: Business and Money > Consulting
Asked by: aj10-ga
List Price: $10.00
Posted: 06 Dec 2003 17:53 PST
Expires: 05 Jan 2004 17:53 PST
Question ID: 284276
Can you help answer an argument I am having with a friend? He is
talking about defaulting on his credit cards because he is in
financial trouble. I told him he needs to either file bankruptcy or
get help from a debt consolidation agency. He says that credit card
companies can't do anything if you just stop paying, all they can do
is harass you. Is this true, and if it is please help me to convince
him that it is still not a wise course to take. Thank you for your
Subject: Re: Defaulting on credit cards.
Answered By: clouseau-ga on 06 Dec 2003 19:32 PST
Rated:5 out of 5 stars
Hello aj10,

Thank you for your question.

First, let me remind you of the disclaimer at the bottom of this page:

"Important Disclaimer: Answers and comments provided on Google Answers
are general information, and are not intended to substitute for
informed professional medical, psychiatric, psychological, tax, legal,
investment, accounting, or other professional advice. Google does not
endorse, and expressly disclaims liability for any product,
manufacturer, distributor, service or service provider mentioned or
any opinion expressed in answers or comments. Please read carefully
the Google Answers Terms of Service."

So, I am not a lawyer, but have done careful research on your question.

First, from the 'Lectric Law Library's stacks
Bankruptcy Questions - Basic Information & Answers you will find a
small discussion of secured vs. unsecured debt:

"...there are two types of loans: secured and unsecured.  A secured
loan is one that requires you to pledge something as collateral.  For
example, if you purchase a car, the creditor will usually require you
to put up the car as collateral.  On the other hand, an unsecured
loan, does not require collateral.  Using a credit card is usually an
unsecured loan.

If you default on an unsecured loan, the creditor's only recourse,
after the letters and the collection agency efforts fail, is to sue. 
But if you default on a secured loan, the creditor can repossess the
collateral and sell it. If the money from the sale isn't enough to pay
off the loan, the creditor can sue you for the balance of the loan..."

Most sites will support that claim, that the next level of recourse is
suit. And defaulting on unsecured credit card debt can then attach
your real estate, bank account or salary if a judgement is granted.
And it most likely would be.

Now, not ALL credit card debt is unsecured.

The USF Federal Credit Union terms for their Visa card states:

"...8. Default. You will be in default if you fail to make the MINIMUM
PAYMENT within 25 days after your monthly statement closing date. You
will also be in default if:

(a) you breach any other conditions of this agreement; 
(b) your creditworthiness has become unsatisfactory to us because of a
change in your employment status, an increase in your other
obligations, bankruptcy or insolvency proceedings involving you, or
other reasons;
(c) you die, become incapacitated, or you fail to abide by this agreement.

In the event of default or if this agreement is terminated by you or
by us, the entire balance becomes immediately due and payable. The
Debtor, jointly and severally, agrees to pay reasonable attorney's
fees, court costs and/or collection agency fees and costs to the
extent allowed by applicable laws and regulations. I agree that my
salary or earnings may be subject to attachment or garnishment to the
extent allowed under applicable law.

9. Security Interest. To secure your account: (a) you grant us a
purchase money security interest under the Uniform Commercial Code in
any goods you purchase through the account. If you default, we will
have the right to recover any of these goods which have not been paid
for through our application of your payments in the manner described
in paragraph 4; (b) you grant us a security interest in any of your
property currently or hereafter held by us, except for a home or any
of your property that would be defined as "household goods" by the
FTC's Credit Practices Rule; (c) if you sign or have signed a Pledge
of Shares which specifically pledges your shareholdings with us to
secure this credit card account, your credit card account will be
secured by your pledged shares in the Credit Union; (d) collateral
securing other loans with USF Federal Credit Union may also secure
this account..."

So you must carefully read the terms that accompany any credit card
agreement. In the case above, accepting this card means you have
agreed that the merchandise you purchase with the card is security
against the debt as if you had signed a UCC Filing statement for
securing the debt with the purchase.

A page entitled "Secured vs. Unsecured Assets FAQ" talks about credit cards here:

"...Q. How do unsecured creditors get paid?
A. Either by you paying them voluntarily or by court order. Remember,
unsecured creditors may also gain secured rights through the courts.

Q. What about the threats from the collection agencies?
A. They are exactly that, threats. Only a lawyer can back them up. If
you would like to enter into a payment plan sometimes these agencies
can be helpful. If you can not enter into a plan their only choice is
to go away or pass the case on to an attorney for the creditor.

Q. Can they still call me?
A. So long as it doesn't become harassment they may call occasionally
to check on your status. One of the bonuses of your hiring an attorney
is that you just tell the agency once to call your lawyer instead and
you'll never get a call from them again, it will be your lawyer's job
to field their calls.

Q. What are some examples of unsecured debt?
A. Most credit cards, debts to stores and money owed for services.

Q. Can some credit card debt be secured?
A. If the card was secured by a savings account then the debt is
secured up to the amount of the savings. Sears card holders should
make special note that Sears will consider major purchases such as
appliances and computers secured transactions under the terms of their
credit agreement. I have seen them go as far as claiming old tires and
car batteries as secured..."

So, once again, a credit card transaction may be more secured than you
might have imagined. And if not, court judgements can be made against
you for defaulting. It is not as simple as avoiding the harassing
calls of collection agents and going scott free.

Additionally, depending on the agreement with the credit card company,
the interest rate can be raised once you are in default of making
payments. This will cause the debt to skyrocket. For example, this pdf
of an agreement with AmeriCU shows that their reasonable Platinum Visa
rate of 7.9% goes to 17.9% upon default: says the following:

"...Severe, long-term consequences
Besides taking a big bite out of your budget, late credit card
payments can have more severe, long-term consequences. Some issuers
raise interest rates dramatically if a cardholder is late even once.
Fail to meet the due date twice within six months and the annual
percentage rate is almost sure to be jacked up.

Consumer Action, a nonprofit education and advocacy organization,
recently surveyed 105 cards at 63 banks and found that penalty
interest rates, known as "default" rates, have reached daunting

For example, Washington Mutual's default APR is 28.7 percent; American
Express is at 24 percent, and AT&T Universal Card, Bank of America,
Household Bank's GM Rewards card and Wells Fargo have gone to 23.9

So, during whatever period that exists between defaulting on payments
and judgement, bankruptcy or debt consolidation, the amount of the
debt can skyrocket surprisingly quickly if a default interest rate is
put into place by the credit card company.

Now, I would recommend *legitimate* credit counselling to determine if
the amount of debt is sufficient to suggest bankruptcy. Quite often, a
payment plan can be worked out with the credit card company that will
allow for reduced interest and payments without the extreme measure of

On the other hand, not all debt consolidation agencies are totally
above board and if your friend decides to go this route, he will need
to carefully choose one with a quality reputation.

You will find numerous pages on the Internet offering debt
consolidation services or other programs. The following page contains
a lot of information and seems to be written legitimately. Note the
section on Bankruptcy:

In part, they note:

"...Q. What are the advantages of bankruptcy?
A. Once debts are discharged through the bankruptcy court they're gone
forever. With the other options you will most likely have to pay some
money even if it is pennies on the dollar.

Q. Is that better or worse for my credit?
A. Bankruptcy ranks as the worst thing possible on your credit report,
but once it's over you may start to rebuild credit immediately.

Q. How long will the case take?
A. Chapter 7 cases may be filed in days and finished in 4-8 months
most times. Chapter 13 cases may take many months until a plan gets
approved then three to five years for the plan to be completed. I've
seen chapter 11 cases take years for plan approval and even more years
to carry it out.

Q. How long until my credit gets back to the point where I might hope
to get a regular credit card or mortgage?
A. Rebuilding credit depends on how aggressively you try to get back
on track, but don't figure less than 1-3 years. Remember, you can
always get a secured credit card or a mortgage with a low loan to
value (LTV) and high interest rate, sometimes even still in the middle
of a bankruptcy..."

And this page on Debt Consolidation Loans - A Consumer's Debt
Consolidation Loan FAQ:

And do spend time at a "Things You Need to Know About" page which
talks about Credit and Debt Management:

This is an excellent site with quite a bit of information including
how to sift through the various companies offering help with debt and
consolidation. For example:

"...Lets begin at the beginning. What is "Debt Management"? This name
has become an umbrella for a large group of debt-environment functions
and activities: debt reduction, consolidation, negotiation,
settlement, bankruptcy, credit repair clinics, and even deciphering
credit reports. Since a couple of these will not be discussed at
length in this article, here are a few brief notes which should not be

Credit Repair Clinics - Nolo Press and other notable consumer groups
for debt management issues strongly suggest avoiding credit repair
clinics. Many of these clinics are illegal. Some have been caught
stealing the credit files of folks under the age of 18, have died, or
live in far away areas. Others break into credit bureaus and change
files, and still others suggest you start a new IRS Employer
Identification Number (EIN) which besides illegal, blocks earning any
Social Security benefits. But the real bottom line even for the legal
operations is, that none of them can do anything for you that you
can't do for yourself... except charge you $250 to $5000 for
unnecessary services.

Deciphering Credit Reports - Credit reports can be intimidating but if
taken slowly with the use of materials sent with your credit report,
you will get through it. If you are going to try to correct your own
credit report as strongly suggested you should do, you are going to
have to understand it. To understand it, you are going to have to roll
your sleeves up and get intimate with it. There are additional support
materials for you to use in this site's "Credit Workshop" as well as
at the online sites of the credit reporting agencies.

Debt Reduction - Since my site probably falls more within this
category, probably little has to be said except that any site which
fosters debt reduction and/or wise credit use ideas has my vote. Such
sites are not my competitors... they're my allies.

Debt Settlement and Negotiating With Creditors Yourself - Though this
article does touch upon such topics by professionals, self involvement
may be the best thing for you. However, because of the length of the
current discussions, the debt settlement and/or negotiating on your
own cannot be covered until the next article..."

This site is packed with useful information. Two organizations they
recommend at their summary page are:

"...When this article began I said I would not endorse a debt managing
group but that I felt comfortable in suggesting that there were two
groups which I believed could be used as a standard to measure others.
Here are some reasons why.

National Foundation Consumer Credit (NFCC) is the umbrella for the
non-profit Consumer Credit Counseling Service (CCCS). All references
in this article to the proper handling of client accounts is part of
what NFCC and CCCS is all about. NFCC is the largest and oldest
non-profit group dedicated to credit education and counseling. In 1999
they counselled 1.6 million families enabling more than 1/3 of the
families to repay their debts on their own and repaying $2.352 billion
to banks, retailers, finance companies, and credit unions that might
otherwise have been lost to bankruptcy. Only 7% were referred to an
attorney for legal assistance.

In addition to the link below, NFCC has a 24 hour toll free phone
number at 1-800-388-2227. For Spanish Speaking: 1-800-682-9832.

Accelerated Debt Consolidation, Inc is a for-profit group out of South
Florida. Very few (if any) debt management groups have a spotless
record with the Better Business Bureau. Accelerated Debt
Consolidation, Inc does. Additionally, national statistics reflect
that only 4% of debt management clients actually make it past one year
in the program. Out of 380 clients at their former company, ERC, from
May 1999 to May 2000, 97% still remained after one year. I am also
strongly impressed with the company owner's record as well as their
consumer warning page (which they seem to strongly adhere to
themselves). They appear to be upfront, organized, and efficient.

In addition to the Accelerated Debt Consolidation, Inc links below,
there is a toll free phone number at 1-800-810-5250...."

So, to summarize a bit for you:

Not all credit card debt IS unsecured. Your friend's may and may not
be. Read the bank card agreements carefully.

Ignoring payments and collection calls WILL lead to lawsuits,
particularly if the debt is sizeable. And ignoring the problem can
lead to dramatically increased interest rates on the unpaid balances.

Bankruptcy or legitimate debt consolidation will allow a rebuilding a
credit after a period of time. Strongly consider that your friend will
most likely want to buy a car or home sometime in his future and
although bankruptcy or debt consolidation may delay these types of
purchases or raise the cost of credit, they will set the stage to
allow credit to be rebuilt.

Search Strategy:

unsecured +"credit card" +default
"credit card" +default +recourse OR penalty OR penalties
bankruptcy vs "debt consolidation"

I trust my research has provided you with some ammunition to help your
friend reconsider his position on his credit card debt. If a link
above should fail to work or anything require further explanation or
research, please do post a Request for Clarification prior to rating
the answer and closing the question and I will be pleased to assist


aj10-ga rated this answer:5 out of 5 stars and gave an additional tip of: $5.00
Good answer, very helpful, thanks.

Subject: Re: Defaulting on credit cards.
From: missy-ga on 06 Dec 2003 20:53 PST
Clouseau writes:

>>Ignoring payments and collection calls WILL lead to lawsuits,
particularly if the debt is sizeable. And ignoring the problem can
lead to dramatically increased interest rates on the unpaid balances.<<

aj10, tell your friend to listen to Clouseau, and to listen well. 
He's *not* kidding.  That's not all that can happen to your friend if
he ignores the problem.

Do you know what happens when you try to buy a car with slightly
damaged credit?  They give you a higher interest rate.  Sometimes as
much as three times higher than the prevailing rate.  Try to buy a
house?  You get higher interest, extra points, and require extra
mortgage insurance, all of which results in higher payments.  Do you
know what happens when you try to buy a car or a house with severely
mangled credit, brought about by just ignoring your credit card bills
and the collection agencies?

They say NO.  

It might also help if you let him know that badly mangled credit can
keep him from getting a better job - it's now common practice for
employers to check credit reports before even offering an interview. 
If your credit looks like you're irresponsible, they'll assume your
job performance will be similar, and won't even bother to interview
you, much less hire you.

Good luck with getting him straightened out.

Subject: Re: Defaulting on credit cards.
From: nelson-ga on 06 Dec 2003 21:31 PST
USF Federal Credit Union puts you in default if you die?  Gee, I don't
want bad credit in heaven!
Subject: Re: Defaulting on credit cards.
From: sunandwavs-ga on 07 Dec 2003 02:00 PST
In addition to the above, bad credit can stop easily you from getting
many of the following in certain circumstances

-a job!! (at least a job worth getting)
-a successfull marriage partner
 (they usually want people who have their sh*t together also)
-affordable car insurance (get ready to pedal or walk)
-a nice rental apartment deal (without 2 months security deposit)
-utilities like phone, electricity, gas, or trash turned on without a
large security deposit
-a rental truck/car without a large deposit
-most kinds of rental or equipment leases
-a checking, savings, stock trading account at banks
-almost any kind of favorable loan terms or credit card

So what does bad credit get you??... a lot as it turns out !

-familiarity with words like
-calls from your HR department notifying you of court orders and garnishments
-job offers from places with Golden Arches or Gold Crowns
-watching other people get ahead because their background checks passed
-suddenly you look for car dealers that advertise to people with bad
credit. not realizing the reasons why, until you go there.
-refusing to pick up the phone because of creditors calling
-refusing to check mail because of creditors, late fees, and other negative
-traveling by car because you don't have a credit card to book flights or cruises
-flagged checking accounts at credit unions because banks DENY you
-making excuses to your friends to cover up while they enjoy the
benefits of good credit
-always having to carry a lot of cash
-being the only person to pay in cash while your friends all whip out credit cards
-hiding your car so that repo folks can't find it
-walking out to your car in the morning only to find it's not there
due to repossesion
-familiarty with the differences between Ch 7, 11, and 13
-being the collection expert amongst your friends
-shame, humiliation, depression, anxiety, feelings of worthlessness

Does this sound like first-hand knowledge...  Hmmm...
Subject: Re: Defaulting on credit cards.
From: clouseau-ga on 07 Dec 2003 08:34 PST
My pleasure to assist aj10.

Thank you for the rating and tip. And best of luck working through this situation.


Subject: Re: Defaulting on credit cards.
From: trueparent-ga on 08 Dec 2003 05:17 PST
Everyone has missed the most important fact here, which is of extreme
importance to all of us, whether we are presently in credit card debt
or not.
That fact is BINDING ARBIRATION.  Every single credit card now
requires you to agree to this, even if you do not know what it means.
It means that you have no right to sue the credit card company, (even
if they do something obviously illegal), and, (I believe in all cases
now), the company cannot sue you.  Instead, they can get a valid,
legally binding judgment against you by taking it to "arbitration".
Although they make it impossible to find out, from what I can
determine, over 90% of all cases that are taken to "binding
arbitration" are decided in favor of the credit card company.  Why? 
Because the "arbitrator/judge" is just any God-forsaken attorney, (or
whatever), and all the laws that exist, severely penalizing anyone for
bribing/influencing court judges, do not exist to protect you in an
"arbitration".  Also, the "arbitrator/judge" has nothing to lose,
since this is just a job to them, and they are not "appointed", or
"elected" to their position.  It goes without saying, that their
"boss" could easily be involved in wrongdoing, without fear of being
To make matters much worse, a person in the fraud division of a major
credit card company informed me in no uncertain terms that a credit
card with say a $5,000 limit can be run up to $30,000 or even
$100,000+, when it is done in the right way, from outside the United
To make matters much, much worse, the credit card companies are making
statements like, "You are zero percent liable for any unauthorized
use".  The catch, is that there must be "proof" that the use of your
account number and expiration date were "unauthorized".   That means
that you must prove a negative, which is impossible to do.  When the
credit card company asks you, "How did the thief get your account
number and expiration date?", and you answer, "I don't know", that is
not "unauthorized use".  If the disputed amount is small, the credit
card company will most likely "let it go", and you will be lulled into
thinking that you are safe.  But if the disputed amount is large, (as
is sure to happen if an "insider" or "identity thief" has struck your
account), then the credit card company will take you to "arbitration",
and, please believe me, YOU WILL LOSE.  At this point in my
explanation, the above words by clouseau-ga should burn themselves
into your brain, specifically:
"Most sites will support that claim, that the next level of recourse is
suit. And defaulting on unsecured credit card debt can then attach
your real estate, bank account or salary if a judgment is granted.
And it most likely would be."

To make matters much, much, much worse, you will forfeit your house,
or your bank accounts, or most of your salary for the rest of your
life, or what-have-you, to the credit card company, and you will not
even be able to really expose what has been done to you, because NO
Once I understood all of the above, I understood why, in recent years
the limits on my credit cards had been increased astronomically.  I
thought it was because the credit card companies trusted me, but the
real reason was that they know that they have nothing to lose, if push
comes to shove.
Subject: Re: Defaulting on credit cards.
From: proteosome-ga on 09 Dec 2003 09:02 PST
Beyond lawsuits and increased interest rates, if you default on
payment you will have a terrible credit rating that will last for 5-7
years (I forget the actual number).

With a bad credit rating it is near impossible to get another credit
card.  So who cares?  What do you need with a credit card?  There is
always cash right?

Well, if you have ever wanted to rent a car, get a hotel room, get a
blockbuster account, or anything else where they want to ensure money
in case of damages, good-luck.

Credit cards not only provide buying power but they provide security
for many companies against anything which you may do.

This might not sound like a big deal but when it happens, it will hit
home how much you cannot do without a credit card.

When it comes to purchasing items such as a car or house or stereo. 
You will not neet to worry about high interest rates because you will
NOT get financed.  A credit company has no need to finance a bad risk.
 There are many other fish in the sea, so to speak.

And all this will last for 5 years until it is erased from your credit
history assuming no more defaults within that time period.

So.. good-luck to your friend if they want to default.  It's a cold
lonely world without credit.
Subject: Re: Defaulting on credit cards.
From: jeremyj2e-ga on 20 Dec 2003 10:42 PST
I will give a different perspective. Bankruptcy exists to protect
assets, both those one currently has and can expect to have in the
future. The question then is: what assets do you wish to protect? If
there aren't any, then there is no functional difference between
declaring bankruptcy and not declaring. And I should be more specific
in that you should only be worried about US Assets. So if you have a
bank account in Mexico, it cannot be attached. So what can they do?
They can sue or take you to arbitration and then attach your property
and garnish your wages. They can only garnish your wages if you make a
decent amount of money and no more than 25% in any case. A decent
amount of money is defined differently depending on what district you
are in. Living costs matter.

However you must also think about the future. Bankruptcy does clean
the slate for future asset collection and growth (meaning you can make
money and keep it). There are ways to not declare bankruptcy and make
and sae money, but is it worth the hassle?

Credit cards are a business arrangement. You pay X interest for the
use of Y money. The bank sets the interest rate with full knowledge of
the likelihood you may not pay the debt off. As long as no fraud is
involved this is merely a business event and not a criminal event.
Don't take it so seriously. However be fully aware of the
reprecussions of any actions you take in choosing to deal with the

Conclusion: 1) Bankruptcy is a means of asset protection, if one has
no assets to protect then it has no legal relevence. 2) Lending and
debt are business matters, the risks are clearly known to the banks
that lend ahead of time. 3) No stigma should be placed on bankruptcy,
it's a useful and neccessary tool when used correctly. 4) If one does
declare bankruptcy or default on their loans, it is essential to
analyze the conditions which brought one to that situation. Don't
repeat past mistakes and don't rationalize poor financial decisions.

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