One of the biggest perks to using a credit card is that you can buy an item now and pay for it later. If you need money upfront for a large purchase, you can get what you need and repay it over time. But what happens if you don’t pay off the balance? Will someone knock on your door demanding the products back? In most cases, no, but that doesn’t mean you’re off the hook.

Unsecured Debt vs. Secured Debt

Before we can tackle the topic of repossession from credit card debt, we need to examine two common debt categories: unsecured debt and secured debt. Unsecured debt comes from a line of credit that is not backed by any collateral. Secured debt is ‘secured’ by a tangible item, such as property, a vehicle, a piece of furniture, etc. If you don’t make your car payment for a certain amount of time, your car may be repossessed because a car loan is a secured form of debt. Most forms of credit card debt are considered unsecured, so there is no specific item connected to the debt.

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When you purchase something with your credit card, that does not become collateral for the debt. There is one exception to this rule, and that’s if the card agreement has a security interest clause. We’ll explain more about that later. In the vast majority of cases, your credit card debt remains unsecured. The credit card company is not going to ask for your coffee, combo meal, or gas station candy back if you don’t pay your bill.

What Will Most Likely Happen If You Don’t Pay Your Credit Card Bill

If you miss one or two payments on your credit card, all you’ll incur is a late fee and extra interest. The credit card company will still keep your account open, and you can continue to pay off the debt. After three missed payments (90 days delinquent), the credit card company may close your account and sell the debt to a collection agency. That’s when the fear of repossession may start to kick in.

At this point, you can try to settle your debt with the collection agency or make a payment arrangement for the debt. If you are unable to do this, the collection agency can file a lawsuit against you. If the judgment goes in their favor, you could have your wages garnished, a lien put on your property, your bank accounts frozen, and other possible consequences. The items you bought with your credit card may not be at risk, but you could lose much more along the way.

Worried about liens and garnishments? We’ve got plenty of advice to help you pay off credit card debt and avoid debt collection altogether.

Security Interest Clauses in Credit Card Agreements

Some credit card agreements include security interest clauses, which are essentially terms for repossession. These clauses are most common among store credit cards, where the card can only be used with that specific merchant. The Costco credit card once had a security interest clause that said, “each good you buy using your account secures your entire account balance until that good is paid in full and may be taken from you if you don’t pay on time.” Most clauses are not that clear, but the intentions are the same. Making a purchase with the card turns the item purchased into collateral.

Read your card terms closely and look for any verbiage related to security interest. You can use the database of card agreements from the Consumer Financial Protection Bureau to find your card agreement, if you don’t have access to it otherwise.

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Unpaid Debt Could Lead to a Lien on Your Home or Vehicle

There is a bigger issue at hand than losing credit card purchases for failure to pay. If a judgment is issued against you for credit card debt, the collection agency may issue a lien on your home, vehicle, property, or anything else you own with a title. You cannot sell or refinance this property until the lien is repaid. The lienholder can force you to sell the property in order to fulfill the judgment, but you will only receive whatever the profits are in excess of the lien amount.

It’s important to note that the collection agency doesn’t want your property. Neither does the credit card company you originally had the debt with. They just want their money back, along with applicable court costs and fees. If they issue a lien on something you own, that doesn’t fulfill the debt right away. They’re more likely to garnish wages or settle for a reduced amount so they can recoup their losses quickly.

Installment Agreements for Specific Items (Rent-to-Own, Store Financing, etc.)

If you have an installment agreement for an item, that is a secured debt. The item is collateral for the debt, and the lender can repossess the item if you fail to pay for it. This is most common with rent-to-own furniture or store financing. Let’s say you buy a mattress on a six-month payment agreement but only make three payments. The store or third-party lender can repossess the mattress because you did not complete the installment agreement.

Will Creditors Repossess My Items If I File Bankruptcy?

If you plan to file bankruptcy, you may or may not be able to keep your purchases. It depends on the type of bankruptcy you file and the overall status of your debt. With Chapter 7 bankruptcy, a third-party trustee liquidates your nonexempt assets to pay off as much of your debt as possible. Everything else is forgiven. You can keep one vehicle, one home, and most personal belongings, but additional assets may be sold for debt repayment. The regulations for nonexempt assets vary from state to state.

With Chapter 13 bankruptcy, you develop a payment plan to cover your debts in a 3-5 year period. You make monthly payments to a third-party trustee, and that person disburses funds to your debt collectors. Chapter 13 bankruptcy does not create the instant ‘clean slate’ that Chapter 7 yields, but it protects your property from repossession.

Before you consider filing bankruptcy, look into debt consolidation. You might be able to consolidate credit card debt on a balance transfer card, or get a loan to cover your existing debts. This loan turns your old debt into new debt, which buys you time to avoid repossession. As long as you maintain your credit card payments or loan payments, you can keep your property and rebuild your credit.

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How to Manage Your Credit Card Debt

The fact that you’re reading this shows you might be in over your head with credit card debt. That’s alright. You still have options left. Whether your financial situation changed or your just weren’t smart with your spending, you can take small steps to get out of credit card debt.

  • Analyze your monthly budget, including everything you make and everything you spend. Take a hard look at your finances and get a grasp on how much money you’re spending each month. It may be time to make some sacrifices to devote more money to debt repayment. At minimum, this will give you an idea of how much you can pay on your credit cards and how quickly it will take to pay off credit card debts. See: How to Set a Monthly Budget
  • Choose one credit card to pay off first. This could be the card with the smallest balance, the highest interest rate, or whatever card you want. The goal here is to get you motivated about paying off your debt. Make minimum payments on all your cards, but pay extra on your target card each month. Repeat this until you’ve paid off the one card completely.
  • Use the money from your first card to pay off the second card. If you were paying $50 a month toward your first card and $15 a month on your second card, pay the full $65 to your second card now. This will pay off your debts even faster, and you can use the momentum to get out of credit card debt.
  • Avoid unnecessary purchases. Think carefully about any purchase you make with your credit card, especially if it’s not a necessity. Every $5 charge adds up, and that’s money you could use to become debt free.
  • Ask for a lower APR. After six months of on-time payments, contact your credit card company to request a lower interest rate. Most cardholders are successful with this request, and a lower interest rate means lower debt over time. In a worst case scenario, they say no and you maintain your current interest rate.
  • Learn from past mistakes. Review the decisions that led to your current debt situation. What could you have done differently? What habits do you need to break? You cannot undo the past, but you can prevent a repeat in the future.

If you’re trying to rebuild your credit, consider a secured credit card or a credit card for bad credit. Be sure to make your monthly payments on time each month. Better yet, pay off your balance each month so your debt doesn’t accrue interest. Keep up with these smart money habits, and you’ll be on your way to a fruitful financial future.

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