A creditor filed a judgment against you but you weren't notified—now it's ruining your credit. What can you do?
Sometimes, the first time you find out you’ve had a judgment entered against you is when the judgment-holder seeks to enforce it. While due process is supposed to notify all parties to a court action ahead of time, there are many reasons why you may not have gotten that notice. You may have moved from the address where notice was delivered and it did not follow you to your new address. Or someone might have received your notice and simply tossed it away. Or you got the notice, but did not fully understand what it meant.
Looking at your credit report regularly is one way to see if there are any judgments against you. Judgments are listed in the public record section of the credit report. However, credit reports are not always completely accurate or up to date.
If there is any doubt in your mind, you should contact the court where you think the judgment might have been entered. Many courts have online access where you can check your name without leaving your seat. Others require an in-person visit to view the public record of judgments. Here’s a list of the various courts and what can be done to access them. And here’s what you need to know about dealing with a judgment.
When You Didn’t Know About the Lawsuit or Judgment
There are various scenarios that allow you to ask a court to reopen a judgment — for example, if you weren’t notified or served the original papers. However, as the judgment in the case gets older, the likelihood of succeeding under that argument goes down dramatically. The rules and time periods vary greatly from state to state. This is one of those times when it is best to consult with a qualified lawyer who knows the court rule and laws on the subject.
When the Judgment Is From Another State or a Federal Court
Federal court judgments are enforceable in every state, as the jurisdiction of a federal court is national. However, because the required amounts of a federal lawsuit are so much larger, you probably have a greater problem than just the entry of a judgment. You would know if you are being sued in federal court.
State court judgments, however, do not have power beyond that state’s borders. In order to enforce an out-of-state judgment against you in your home state, the judgment has to be domesticated, or registered in the courts of your home state. The requirements for that can vary from state to state and the process for the creditor can be quite expensive and time-consuming. It is not common for out-of-state judgments to be enforced in another state because the process can be daunting and expensive. But the record of that judgment will likely appear on your credit report.
Can a Judgment Be Enforced If You’ve Been Paying?
Many judgments will contain an order of payments. The court’s rules or state statutes may require that you be allowed to pay the judgment in installments. But an installment order does not carry a requirement that you receive a periodic statement like a credit card or loan. Some installment payment orders may require weekly, not monthly, payments. There is usually no grace period on the due dates for payment and no provision for changing the payment terms unless the court orders it. So if you are a day late in making your payment, or even a penny short in paying the full amount required, the judgment creditor may be entitled to ask the court for an order enforcing the judgment. This can mean a wage garnishment, a bank account attachment or a lien on your house.
Even though you may have been making payments on the account to the original creditor, it does not mean that you have been making the payment in the proper amount or paying on time. Or you may have been sending money to the wrong party. The account may have been sold or transferred and the place where you are sending money is the wrong place, which can be money thrown out of the window. Always make sure you know who you are paying, pay the required amount and pay on time. Your contract may require that you pay off the entire balance you owe at once if you default in your payment terms in place, amount or time.
Judgments Can Be Altered
Even if the judgment is final and cannot be reopened, it does not mean that the terms of the judgment cannot be changed. For instance, if the judgment does not allow installment payments, terms for installment payments may be added. Or if the payments are beyond your ability to pay, then they may be lowered to fit your income. Be aware however, since judgments typically allow for interest on the debt to continue running at some rate, too small a payment may be just throwing money away since it never covers the accruing interest. If you have insufficient income or assets to pay a judgment, then you may want to explore bankruptcy as an option. With certain limited exceptions, judgments can be discharged in bankruptcy.
Judgments Can Be Sold
Much like any other account receivable, a judgment can be sold by a creditor to another entity. When judgments are sold, the transfer must be recorded on the court docket or it is not valid. Before you make payments on a judgment, make sure that the payments are going to the right person. That is why it is so important to obtain from the court file the name and address of the judgment creditor. If you pay the wrong person, you won’t get credit for those payments.
Document Your Payments On the Judgment
It is vitally important to keep good records of every payment you make on the judgment. Accounting errors occur and you want to make sure that you get credit for every payment you make. Since interest may still be running on the debt and there will be additional amounts added to your balance for court costs and attorney fees, you must keep track of the balances and the payments. It’s not a bad idea to periodically contact the holder of the judgment to determine your balance if you are paying on it to make sure your numbers jibe with theirs.
Don’t Ignore a Judgment Once You’re Aware of It
Judgments do not have a short lifespan. A judgment in Connecticut, for example, is good for 20 years, and it does not end there. Before the judgment expires, it can be renewed for another 20 years. For many people, 40 years is the length of an adult working life. Again, the duration of a judgment varies greatly from state to state, so consult with an attorney and do not ignore it. While a judgment might stay on your credit report for seven years, it may remain effective long beyond that date. Like zombie debt, a judgment may come back to life when you least expect it.
When You Pay the Judgment in Full, Get a Release
Unless you are making your payments directly to the court, the judge has no way of knowing that you have paid the judgment off. When a judgment is paid in full, the person holding the judgment should file a satisfaction of judgment with the court to show that it is paid in full. When making your final payment, not only should you document that it is your final payment, but you should request a copy of that satisfaction of judgment document and make sure that a copy is filed with the court. Do not assume that anyone else will take this step.
Similarly, if a lien has been filed on any property to secure the judgment payments, you will want an original of a release of judgment so that you can be sure that it is filed with the appropriate authorities. Some states require a filing in the land records in your town or county clerk’s office or with the Secretary of State where the property is located. Again, without proper documentation, the records offices will have no knowledge that the judgment is paid. Although bankruptcy can discharge most judgments, you must take additional steps to get a release of the lien in a bankruptcy case so the record is clear that there is no further claim against your property.
When the judgment is paid in full, be sure to get a fresh copy of your credit report to determine that it is being reported on your credit report as paid. Nothing will hurt your creditworthiness more than to have a credit report showing that you have a judgment against you that remains unpaid.
You can get your free annual credit reports on AnnualCreditReport.com. You can also watch for changes by getting your free credit score every month on Credit.com.
Q: My wife is 62 and I am 65. She has a small pension of $21,000 and can take it as a lump sum or an annuity of $154 a month. We also have a credit card with $17,000 at 8% and two car loans of $17,000 at 8%. Should we use the money to pay off debt or roll it into an IRA? – Joe Skovira, Cheshire, Conn.
A: Choosing the right way to handle a pension payout is critical to your retirement success. It’s all too tempting to use that money to pay off debts, when your other sources of cash run short. But raiding your pension could be a mistake. “You should pay off the debt but don’t sacrifice the pension to do it,” says Rich Paul, a certified financial planner and president of Richard W. Paul & Associates.
Even though the pension income is small, that $154 monthly check adds up $1,800 a year, or a 9% payout. It would be hard to generate that consistent income on your own in an IRA. “Those are guaranteed dollars that you’ll receive for the rest of your life—you can’t get that kind of return with conservative investments,” says Paul.
There are also taxes to consider. If you take the pension as a lump sum, and don’t roll it over into an IRA, you’ll likely owe capital gains or income taxes. Moreover, the income from that lump sum might push you into a higher tax bracket, further eroding its value.
As for your debts, they’re clearly a drain on your cash flow. So look for ways to free up cash to pay off those bills by cutting your spending. For strategies on getting on top of that debt, see here and here.
It also makes sense to prioritize your credit card debt over the car loans, says Paul. That way, if you ever need extra cash, you’ll have a bigger credit line to tap. You could even use the $154 to step up payments on the credit card.
“It all comes down to cash flow. You’ll feel a lot more comfortable in retirement with more guaranteed income and less debt,” says Paul.
Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.
The nation's largest mortgage firms plan to once again buy loans where the borrowers put as little as 3% down.
Perhaps you thought the days of putting little money down for a home were gone. Well, not so fast. On Monday the CEO of Fannie Mae, Timothy Mayopoulos, announced that the housing giant planned to once again buy loans for which the borrowers put as little as 3% down. Mayopoulos told the crowd gathered at the Mortgage Bankers Association conference in Las Vegas that Fannie, which along with Freddie Mac supports the bulk of the mortgage market today, is working to finalize the details of the offering and gain regulatory approval to proceed. “We want this business,” he said.
So far no details have been announced about what income or credit score requirements borrowers making such small down payments will need to meet the group’s standards. Mayopoulos said more information would be released in the coming weeks. Both Fannie and Freddie previously purchased loans with 3% down but had stopped in recent years. Today the firms usually require at least a 5% down payment on most loans.
Melvin Watt, director of the Federal Housing Finance Authority, which regulates the two government enterprises, said his group was working with them to develop “sensible and responsible guidelines” for the 3% loans, in an effort “to increase access for creditworthy but lower-wealth borrowers.” He cited “compensating factors” in evaluating such borrowers, though he didn’t say what those factors would be.
A 3% down payment is not exactly nonexistent today. The Federal Housing Administration has been offering mortgages with as little as 3.5% down for years. Traditionally, most borrowers were lower income, and the amount they could borrow was capped, but today even higher income folks use FHA loans to buy homes in expensive areas (loan limits vary by state but typically top out at $625,500). In recent years, these mortgages—which come with higher fees than traditional loans, as well as pricey mortgage insurance—have accounted for a larger than normal share of the market.
Now Fannie seems intent to grab some of that business. The low-down-payment loan, Mayopoulos promised, “will also be competitively priced, including against FHA execution.”
In a related move, FHFA’s Watt also announced that the agency is working to provide more details on when the housing giants can force a lender to buy back a loan that goes bad, which he hopes will encourage banks to loosen their lending standards. Over the past few years Fannie and Freddie have required lenders to buy back millions of dollars of bad loans, “sometimes for seemingly minor issues, such as missing a piece of paperwork,” said Keith Gumbinger, vice president at mortgage information publisher HSH.com.
“This clarification might allow lenders to look at riskier borrowers with less fear of having to buy these loans back in the future,” he said. He noted, though, that any changes are likely to be incremental: “It might let a few more borrowers in at the margin, but it won’t be like flipping a light switch where FICO scores down to 640 are now in.”
It’s important to note that Fannie and Freddie can’t force banks to lower their lending standards. In fact, most banks today require tougher standards than the government agencies impose, partially because they are fearful of having to buy back loans that go bad. For example, Fannie and Freddie will buy loans with FICO scores as low as 620, but most banks require at least a 660 or 680, Gumbinger said.
Similarly, lenders could always decide not to offer 3% down loans, even though Fannie and Freddie have agreed to eventually start buying them again. So it remains to be seen whether and how much the rule changes, when they are formally announced in the next few weeks, will ease the way for borrowers.
Q: Should I use my 401(k) for a down payment on a house?
A: Let’s start with the obvious. It’s rarely a good idea to borrow from your retirement plan.
One major drawback is that you’ll give up the returns that the money could have earned during the years you’re repaying the loan. Your home isn’t likely to give you the same investment return, and it’s difficult to tap real estate for income in retirement. There’s also a risk that you’ll lose your job, which would require you to pay back the loan, typically within 60 days, though home loans may have a longer repayment period.
Still, 401(k) borrowing has undeniable advantages. For starters, “they’re easy loans to get,” says Atlanta financial planner Lee Baker. You don’t have to meet financial qualifications to borrow, and you can get the money quickly. Interest rates for these loans are generally low—typically a percentage point or so above prime, which was recently 3.25%. Another big plus is that you pay yourself back, since the rules generally require you to fully repay within five years; 10 years if you buy a house. (Otherwise, the amount will be taxable, plus you will pay a penalty if you’re under 59 1/2.) So you eventually do replace the money with interest. Be aware, most plans limit your borrowing to $50,000 or 50% of your account balance, whichever is less.
Given how easy it is to get a 401(k) loan, it’s no wonder many workers tap their plans for home buying, especially Millennials. About 10% of home buyers borrow from their 401(k) and another 4% use funds from IRAs, according to the National Association of Realtors. And overall some 17% of Millennials report borrowing from their company plan, according to a 2014 Ameriprise study, Financial Tradeoffs. “It is where they have accumulated most of their savings,” says Baker.
All that said, when it comes to buying a home, a 401(k) loan can make sense. If you can put together enough cash for a 20% down payment, you may able to avoid avoid mortgage insurance, which can your lower monthly bill. And with interest rates still low, having a down payment now can enable you lock in a good rate compared with waiting till you have more money when mortgage rates may be higher.
If you go this route, though, take a close look at your financial resources both inside and outside your plan. Will you have to tap all your savings, leaving you vulnerable if you have a financial emergency? Do you have enough cash flow to meet your monthly payment and pay the loan? Is your job relatively secure or do you have to worry about a layoff that will trigger the automatic repayment provision?
And if you borrow, don’t forget to keep saving. A common mistake people make is halting regular contributions during the pay back period, which puts you further behind your retirement goals. At the very least, says Baker, contribute enough to get your employer match.
More on Home Buying:
As far as unpleasant tasks go, asking a relative or friend to repay a loan ranks up there with getting your wisdom teeth pulled or spending a weekend alone with your in-laws.
The best way to avoid this awkward conversation?
“Don’t lend money to friends in the first place,” says Peter Post, director of the Emily Post Institute. Of course, that advice isn’t going to help if you’ve already ponied up the cash. Here’s what will.
THE GROUND RULES
Talk in person. Don’t text, email, or call; faceless communications are too easily misread. Instead, invite your friend or family member to chat over coffee or a beer so the atmosphere is more relaxed, says Randy Cohen, author of Be Good: How to Navigate the Ethics of Everything.
Let the relationship guide you. Decide what’s more important: getting your money back or staying on good terms with the borrower. If you care more about the person than the cash and you’re in a position to do so, you may be better off forgiving the debt.
YOUR BEST APPROACH
1. Opening gambit. “I was happy to lend you the money when you needed it. That’s what friends do.”
The strategy: You’re gently reminding your pal that you came through when he or she was in trouble.
“Putting it this way shows you sympathize with your friend,” says Cohen. “Chances are, the person feels bad about not paying you back. An understanding tone decreases your chances of a hostile response.”
2. Be direct. “When do you think you will be able to pay back the $500 I lent you?”
The strategy: Hinting will get you nowhere, says Philip Galanes, author of Social Q’s: How to Survive the Quirks, Quandaries, and Quagmires of Today, because the person may misunderstand (perhaps willfully) what you’re asking.
Like ripping off a Band-Aid, the process will be less painful if you do it quickly and directly.
Start off nicely; getting angry is more likely to result in the borrower pushing back than if you stay calm.
“There’s no sense in starting Defcon 3,” Galanes says.
3. Add urgency, as needed. “We’re going to get hit with some really big tuition bills soon and could really use that money.”
The strategy: Of course, you don’t need to justify asking for your money back, but it can be helpful to cite a pressing reason — as long as it’s true.
“Evoking a specific thing makes repayment seem more like a necessity than simply an option,” says Cohen.
4. Provide a deadline. “I’d really like to get the money back before the end of June.”
The strategy: Specifying a schedule for payback is crucial. Otherwise, the loan may hang out there indefinitely, even if the borrower has given lip service to paying you back — and you’ll just have to revisit the conversation at a later date.
5. Offer flexibility. “Would it be easier for you to pay me back over time, say, $100 a month?”
The strategy: If the borrower pushes back or you know he will have a tough time coming up with the cash, etiquette expert Cynthia Lett suggests breaking repayment into smaller chunks or reaching another compromise.
After all, you must really care about this person; otherwise, you would never have lent him the money.