Taking out a credit card and by simply signing on the documents prior to receiving the card, you bind yourself legally to the commitment to pay back your debt (alongside the accrued interest), or else face legal proceedings. While many of us tend to overlook the hefty chunk of content under the ‘Terms & Conditions’ heading, most of the points in there are really just trying to say ‘pay us the amount you’ve spent within the stipulated time or else get ready for a really bad litigation process’. And considering that credit card debt is among the top three types of debts that Americans find themselves stuck deep in, you might be tempted to ask questions like ‘how often do credit card companies sue for non-payment?
The simple matter of fact is this: neither the bank nor your friend who covered your share of that dinner at Dorcia is a loan shark; hopefully you’re not friends with a person with psychopathic tendencies and banks simply wouldn’t look good harassing clients to pay back the money with vig or interest. So, while this is good news, it also means that you’re now obligated to pay the money or else face the brunt of hurting your relationship with your friend, or be hounded by summons and court dates if you fail to cough up the money to the bank. And with banks, things go beyond just the word of mouth. Remember the documents that you signed before getting that sweet, shiny card? Yeah, it now states that you agree to not counter-sue should the bank sue you for non-payment.
To answer the question ‘how often do credit card companies sue for non-payment’, you first have to understand the motivation of the bank itself to pursue a potentially lengthy and resource-consuming legal battle between the client; its not going to spend thousands on a lawyer to get back at a $100 gift card purchase from GameStop. That’s not Business 101. Business 101 would be a client who’s racked up thousands in bills, thousands in interest on top of it, and has spent a good two or more months trying to dodge the bank. This is where their case is strong, they stand to gain money and where probably they’ll end up going to the court for.
So, here’s the answer, delivered ever so nonchalantly. No, a good majority does not bother with the litigation part, considering that debtors usually end up paying some part of their interests and their debt payments, or even manage to work out a repayment plan that keeps the bank happy and the debtor’s wallet happy as well. However, according to statistics from a finance-related website, there are 10-15 per cent of banks and credit card companies that do resort to litigation should such a situation arise and that too is limited to the debtors who rack up thousands in just interest repayments alone, because that is where the money lies and not pursuing it would cost the bank more. So, here’s your answer to ‘how often do credit card companies sue for non-payment’, but wait, there’s more.
How often do Credit Companies Sue for Non-Payment?
This small percentage of credit card companies going to the court to get their payments back are only willing to do so if the debtor has crossed a certain amount and interest that has accrued on top of it. Besides that, rarely has it been seen that a credit card company or bank wastes their time on anything that could bring them less than what the law firm would charge them. So, here’s a rundown of how credit card companies decide on whether to go for litigation or not.
Debt and Interest Amount is too Low
The first reason that might force a bank or credit card company to decide on litigation would be the amount that is to be recovered from the debtor. There are two ways to determine that; either the amount is high enough that litigation and its associated costs are then deemed feasible enough to be spent to recover the amount from the debtor, or, the amount is too low and pursuing such a case would be counted as a loss rather than anything profitable. So, the first factor is the amount. However, even for a deciding factor, there is a slim chance that credit card companies actually go through with such a decision.
This is largely because pursuing a legal case is an exhausting decision and a time-consuming path that should only be taken if the amount of the debt exceeds that of the cost of litigation. For trivial purchases and amounts that don’t equal or exceed the litigation costs, credit card companies and banks will simply write them off as a loss.
Debt Management Plans
There is a certain time before banks start considering litigation for recovering their money. Usually, this period can be determined by the debtor themselves or can be set by the bank or credit card company itself, but it usually does not exceed six months. Which means that a credit card company usually waits for six months before sending out a court summons to the debtor should they choose to pursue a case.
Now, it is the job of the debtor who can see the situation as it is and act in such a way that does not force the other party to resort to litigation. The first step to a debt restructuring or management plan, especially when it is unfeasible for the debtor to pay back their debt, would be to approach the bank or credit card company with a request for said purpose, with an application that details exactly what the financial situation is and a proposal that can sit well with both the parties.
Debt management plans or restructuring plans can only be offered before the stipulated time has passed i.e., before the passage of six months. After that, it is very unlikely that the bank or credit card company agrees to such a plan. If there are financial issues during the course of the repayment plan, it is advised to debtors to let their credit card company know of such issues and try to get them to restructure their debt, waive off the interest or simply write the debt off if not much is left.
If such a step has been taken, there is a slim chance that the company will try to pursue a case against the debtor.
Why don’t all Credit Card Companies Sue for Non-Payment?
As explained beforehand, not all companies sue for non-payment of debt. In fact, a good 85 per cent of credit card companies and banks write off a debt if its hasn’t been repaid after the passage of more than six months since the first reminder. Many credit card companies don’t even consider going for litigation and instead go straight to filing the debt as a loss, all for the sake of good accounting practices, which should tell you one thing; if you do fall behind on your repayments, there is a good chance that the bank or credit card company will be willing to settle and negotiate a new deal or a new payment plan, rather than go through the nightmare that is a public litigation case. This is because the public litigation process is not an easy one, and with tighter consumer protections and bankruptcy proceedings (should they be included in the whole process as well), banks and credit card companies themselves have to navigate tricky waters to make sure that they get what they want all the while staying on the good side of the consumer law, which gets a bit difficult considering that banks, since the 2008 financial crisis, aren’t exactly enjoying the best publicity.
So, rather than waste precious resources and time on cases that matter and could pay off huge, they instead tend to either write it off, or in the case of a bigger loan, sell it to a debt collection agency, which does exactly what its name suggests. The latter option is a bit concerning for the debtor because it means that now another party, possibly stronger than the previous one, would be pursuing the matter of repayments. Even if its not in the court, debt collection agencies are notorious for using unconventional means for squeezing out their share of the debt.
Should the credit card company decide to write the debt off, its usually a good sign that further litigation won’t be a problem anymore, and that whatever amount was remaining in the debt has been written off as a loss for the bank or credit card company. If its does happen, it usually means that the amount was either negligible or in that sweet spot where pursuing it is necessary and could prove profitable for the bank, but the litigation costs and associated costs drive up the second part of the equation too high up, rendering it unfeasible for the credit card company or bank to continue with it.