If you breach the payment terms of your credit card agreement, the creditor may try to collect the balance from you by itself or sell the debt to a debt collector. Usually the creditor sells the debt after receiving no payment for at least six months. If the debt collector or creditor cannot get you to pay up, it can take legal action against you, but even if it receives a judgement against you, it cannot intercept your income tax return.
A Judgement Creditor Other Than an IRS Judgement Cannot Directly Intercept a Tax Refund
Only federal and state government agencies can take your tax refund to offset a debt that you owe. Under the Treasury Offset Program, your refund can be used to pay federal and state income taxes, income tax judgements, delinquent court-ordered child support payments, unemployment compensation that you must repay and other debts owed to the federal government, such as federal student loans. Individual and private creditors, including credit card companies, do not have the right to directly claim your refund. However, once the money hits your bank account, your state law may allow a private judgement creditor to garnish it.
How Creditors Can Collect from You
To collect a credit card debt from you, the creditor or debt collector must file a lawsuit, obtain a judgement and then execute upon the judgement through lawful means, such as wage garnishment or bank account levy. In Pennsylvania, North Carolina, Texas and South Carolina, wages cannot be garnished for credit card debt, but creditors can levy debtors’ bank accounts. If the creditor obtains a bank levy and your income tax refund is direct-deposited into your bank account, the creditor can legally take your refund out of your account.
Refund Offset Priority for Government Debts
If you owe several government debts, your refund can be used to offset those debts in order of priority. In most cases, federal income tax owed to the Internal Revenue Service has the highest priority. Child support payments are next in line, then non-tax-related federal debts and, finally, debts owed to the state.
Responding to a Collection Lawsuit
You can try to stop a credit card lawsuit by immediately settling the debt for a reduced amount if you can come up with the cash. If you cannot settle, the creditor might agree to installment payments. If you dispute any portion of the lawsuit, such as the interest rate or the way your payments were applied, respond to the lawsuit by filing an answer with the court. At your trial hearing, you must prove to the judge why you are disputing the case. Most cases do not make it to trial, because both parties usually find that it’s better to settle the matter before it reaches that stage. For the best way to pay off a judgement, consult with your attorney.
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