Debt is a word which makes people generally uncomfortable. To make matters worse, words like lawsuits, wage garnishment, summons and court dates basically end up scaring the living daylights out of most people. This is really not very unnatural since most people fear the law because they do not completely understand it. In most people's minds getting sued or receiving summons directly results in getting thrown in jail or worse.

Whenever money, lenders, banks and loans are involved and something goes wrong, people automatically tend to think that whatever legal redressal is ascribed to a bank robber is valid for his crime as well, which is, failing to repay a debt for whatever reason it may be. This is wholly untrue and a misconception shared by millions of Americans. The law clearly differentiates between civil and criminal offenses and debts are a civil matter, not criminal.

What is a judgment and how is it obtained?

So what legal action can a creditor take to exercise his rights? Your creditor can, at best sue you for the failure to repay the debt. Once the case is filed, you will receive summons to appear in court on a given date when a judge would be hearing the case.

In case you ignore the summons or fail to appear in court, a default judgment will be awarded to your creditor. If you do appear in court and the case is valid, your creditor will be awarded a money judgment against you. A default and a money judgment are essentially the same and the implications do not vary.

How is a judgment used to collect a debt?

In case a creditor wins a judgment against you, they would resort to a number of legal means to satisfy the debt. This would include the garnishment of your wages, a lien on your property (most commonly your house and your car) and a levy on your bank account. Each and every one of such actions would of course require a court order to execute, which is not very difficult to obtain once a judgment has been entered.

How does a judgment affect credit reports and credit scores?

Once a judgment is filed with the court, it becomes a matter of public record and in turn will most definitely appear on your credit report as a negative tradeline which would hit your credit score pretty hard. Your credit score would drop by something between 50 and 100 points as has been generally observed and documented. The dollar amount of the judgment has no effect on how many points you would lose.

An unsatisfied judgment can remain on your credit report for 7 years or for the length of time which is dictated by the state's applicable governing statute of limitations, whoever is longer. A satisfied judgment on the other hand has a fixed shelf life of 7 years on your credit report from the time it was adjudicated by the court.

How long are judgments valid for?

Most people incorrectly tend to assume that the statues of limitations for debts are completely valid and equally applicable towards judgments on account of debts. This is a financially lethal assumption which you should not make. The statutes of limitations applicable for judgments are completely different and usually last for a considerably longer period of time, somewhere between 3 and 20 years. Moreover, judgments can be renewed when it nears the end of its life as dictated by the statutes of limitations.

Is it possible to settle a judgment?

A judgment is usually for the full dollar amount of the debt (or the portion) which you already owe but is not limited to that. Most creditors also tack the court costs and attorney's fees that were incurred in the process of obtaining the judgment on to the judgment amount. On top of everything, the amount also carries interest as prescribed by state laws or defined by the original contract signed by the debtor.

Is it possible to avoid a judgment?

It is better to avoid reaching the stage where a creditor has to seek a judgment to make you repay a debt simply because the collateral damage is pretty costly. Most creditors who already have a judgment against you will not agree to a settlement (unless there is a chance that you might file bankruptcy) since a court order would allow them to collect the full amount of the debt plus extra. So the more prudent thing to do would be to try negotiating a settlement before it comes to the point of a lawsuit.

A creditor (especially if it is a collection agency or a payday lender) threatening to file a lawsuit may just be bluffing to scare you into paying up. As per the FDCPA, threatening a debtor is illegal and you should seek advice from someone who has experience in dealing with debts and collectors or from a consumer's law attorney (especially NACA).

Remember that judgments, most likely, do not go away by themselves. A judgment creditor might just be waiting around the corner so that the interest keeps building up. An unpaid judgment could also spell trouble, especially if you are looking to buy a house, a car or open a new line of credit in the near future.