Credit cards are unsecured loans, which means the lender has no claim to any assets owned by the borrower. This is in direct contrast to a secured loan, for example a mortgage secured on the title to a house or a chattel mortgage for a car, which allows the lender to claim the asset under certain circumstances.
The most common circumstance for such a foreclosure is non-payment of the loan within the agreed terms. This safety feature for secured loans lowers the risk for lenders, making them more willing to both lend a higher sum and to charge lower interest rates. The unsecured nature of much credit card debt is one of the major reasons why it’s comparatively so much more expensive.
However, not being able to repossess a specific house or car doesn’t mean a credit card provider cannot sue a card holder who is not making payments. The card provider can sue for non-payment and as well has access to a number of other legal remedies. In many States and Territories these remedies can include claiming a portion of the borrower’s wages, or removing a certain sum from the borrower’s bank account.
If this doesn’t discharge the outstanding balance, the creditor can force the borrower into bankruptcy. In this circumstance, all the items owned by the borrower are sold and the money recovered is divided amongst his or her creditors. Lenders generally prefer not to take such drastic steps, and it is usually possible for the borrower to persuade them into other paths.
If a borrower is facing threats of legal proceedings, it can be a good idea to contact the lender and seek an alternative arrangement, such as repaying smaller amounts regularly. While this will affect the borrower’s credit rating and his or her ability to borrow additional funds, it can often be preferable to expensive legal proceedings.
Lenders generally prefer this approach, as it means they recover more of their money than they would through the courts. For borrowers considering this alternative, it is usually a good idea to communicate with their lenders via the mail, rather than emails or telephone, so that there is a paper trail of evidence regarding the agreement, or the willingness to make an agreement.
