What Options Do Creditors Have if the Debtor Doesn’t Pay?

Use these links to jump to different sections:

• Debt Collection Outside Court: Secured Debt 
• Debt Collection Outside Court: Unsecured Debt 
• Debt Collection Through Court 
• Bankruptcy Proceedings 
• Questions for an Attorney 

When someone fails to repay their debts, the business or lender that is owed money (called a creditor) has various options to try to get their money back. 

Sometimes, creditors can successfully collect without going to court. Other times, a lawsuit becomes necessary to collect debts.  

“Usually, by the time you’re contemplating a lawsuit to collect on an unpaid invoice, you’re already behind the eight ball,” says Wisconsin creditors’ rights attorney Seth E. Dizard.  

The upshot is that it’s essential “to get specialized legal advice on collection issues” as soon as possible, says Dizard. 

“There are all kinds of collection options available to unsecured trade vendors,” he says. The best option will depend on a creditor’s specific circumstances.  

For example, “it always helps to know what sort of leverage you have in the marketplace. Are you a key vendor to a business? If you are, that might change your strategy.”  

Or, say a business is “looking for market share—that is, you need to get your product onto the market regardless of what the collection risks might be— that’s another factor to consider.”  

In any event, it’s important to realize creditors can’t just come and take a debtor’s property. Rather, unsecured creditors must get a court judgment against the debtor to collect what they are owed. Secured creditors must also follow legal procedures to collect. 

This article will cover some of the options that creditors have when a debtor doesn’t repay what they owe. Once you have an overview, it’s essential to speak with a debtor-creditor lawyer about your specific circumstances for the best outcome. 

Debt Collection Outside Court: Secured Debt 

Secured debt is debt that is backed by a particular asset. The property backing the loan is called collateral. 

When a loan or purchase is backed up with collateral, the creditor is called a secured creditor. 

Collateral could be: 

• Your car for a car loan 
• Your house for a mortgage 
• Another piece of property backing the loan (including real estate and personal property for individual debtors and business assets for business debtors) 

The advantage of secured loans for creditors is if the debtor fails to make payments on the purchase or loan, the creditor can take the collateral.  

For example, when your car is collateral on your car loan, the bank can repossess the car if you default on your payments. Similarly, if you default on your mortgage payments, the bank can take foreclosure action and repossess your house.  

While there are legal procedures to complete a foreclosure, for example, the creditor doesn’t have to get a court judgment establishing their right to the collateral. They already have the right to retake the property in payment of the debt owed to them. 

Debt Collection Outside Court: Unsecured Debt 

When a purchase or loan is not backed by collateral, the debt is considered unsecured, and the creditor is called an unsecured creditor.  

Common examples of unsecured debt include credit card debt and medical debt. 

When a debtor fails to pay on an unsecured debt, the creditor can’t directly take or repossess the debtor’s property since no property backs the loan. 

Instead, unsecured creditors have a couple of general options available to them: 

• Try to collect the debts directly by contacting the debtor and demanding payment. The creditor may be open to working out a new payment plan with the debtor or helping the debtor consolidate their debt to a lower interest rate loan.  
• Transfer the debt to a collection agency company. Collection agencies must comply with the federal Fair Debt Collection Practices Act (FDCPA) and any relevant state laws governing collection practices and consumer rights. If a debt collector violates the FDCPA or state laws through abusive or unauthorized collection actions, they can be liable.  

When it comes to debt collection, “if you’re not sure what the rules are and whether or not they apply to you, ask before rather than after you find yourself having inadvertently violated a state or federal law,” says Dizard.   

For example, the FDCPA only applies to debt collection agencies, not businesses trying to collect debts. However, some states also have debt collection practice laws that apply to companies.  

Businesses in states with debt collection laws that run afoul of legal practices can find themselves in serious legal trouble. Getting legal counsel before taking action is essential. 

Debt Collection Through Court 

If one of the out-of-court options doesn’t work, creditors can file a lawsuit seeking a court judgment against the debtor.  

With a court order, the creditor becomes a “judgment creditor,” and they can take practical steps to take the debtor’s property. Common ways to do this include: 

• Wage garnishment 
• Repossession 
• Taking funds from the debtor’s bank account 

Creditors can also ask the court to grant an involuntary bankruptcy. 

Whether a lawsuit makes sense for a creditor depends on many factors. For example, if a creditor realizes that the debtor doesn’t have the means or assets to repay, a lawsuit may not be worth the time and money.  

The decision to pursue a lawsuit should be made in consultation with an experienced attorney. 

Bankruptcy Proceedings 

Bankruptcy is established through federal law in the U.S. Bankruptcy Code. Generally, bankruptcy is intended to give debtors a fresh start by eliminating their debts.  

In addition to giving debtors a fresh start, bankruptcy also provides debtors with the legal protection of the courts. Bankruptcy courts are specialized federal courts that exclusively handle bankruptcy proceedings. 

Individuals that file for bankruptcy must go through several required steps, including credit counseling and a meeting of the creditors.  

Bankruptcy cases may involve liquidating assets to pay off debts or restructuring debt into multi-year repayment plans. This depends on the type of bankruptcy someone files for. 

For individuals, the most common types of bankruptcy are: 

• Chapter 7. In a chapter 7 bankruptcy filing, the debtor’s property is liquidated (sold) by a bankruptcy court-appointed trustee. The bankruptcy trustee then distributes the proceeds of liquidation to the creditors to repay debts. 
• Chapter 13. In a chapter 13 bankruptcy, the trustee works with the debtor and creditors to create a repayment plan. Instead of selling the debtor’s property to pay off debts, the debtor makes monthly payments in a payment plan until the debt is paid off. 

If you are facing bankruptcy, it’s important to be aware of a couple of things: 

• Exemptions. In a chapter 7 bankruptcy, exempt property is property you get to keep. Federal and state laws provide various exemptions and exemption amounts—for example, exemptions for a certain amount of home equity or personal property. It’s important to speak with a lawyer about the exemptions in your state and what you can keep in bankruptcy. 
• Debts that won’t be discharged. Bankruptcy doesn’t eliminate all debt obligations. For example, if an individual files for bankruptcy, they are generally still obligated to pay the following:  
  • Child support 
  • Alimony 
  • Student loans 

Questions for an Attorney 

If you are a creditor trying to get a debtor to repay what they owe you, consider speaking with a lawyer about your options as soon as possible. The earlier you strategize, the more options you are likely to have and the better the outcome is likely to be. 

Fortunately, many attorneys provide free initial consultations to prospective clients. These consultations allow the attorney to hear the facts of your case and for you to determine if the attorney meets your needs. 

To see whether an attorney is a good fit, ask informed questions such as: 

• What are your attorney’s fees, and how do you bill your clients? 
• What is the process for repossessing or foreclosing on a property? 
• What debt collection rules apply to me? 
• What is the statute of limitations for taking legal action in my situation? 
• What should I consider in filing a lawsuit? 

It’s essential to approach the right type of attorney—someone who can give you legal help through your entire case. You can visit the Super Lawyers directory and use the search box to find a lawyer based on your legal issue or location.  

For help with debtor-creditor issues, search for a debtor and creditor rights attorney.