Buying new furniture can be thrilling. Nothing beats having the newest styles in your living room or your bedroom set up the way you’ve always dreamed of. Those monthly bills will keep coming in for years until the full amount is paid off. That new furniture doesn’t come for free. What happens if you fall behind on making those furniture payments?.
Unfortunately, if you don’t pay back a furniture loan, the consequences can be very bad. Furniture stores won’t just let you keep things they know you don’t pay for. Different stores have different rules about what happens if you don’t pay your bill on time. Not paying can cause late fees, penalties, items being taken away, and even legal action.
Falling Behind on Payments
Many shoppers are enticed by furniture store financing deals that allow you to take home furniture immediately with little or no money down This makes it easy to spend beyond your means Perhaps that zero interest for 24 months offer sounded great at first, But now the bills are piling up and it’s a struggle each month to make the minimum payments,
If you miss a payment initially the first consequence is usually a late fee. The fee amount depends on the retailer but may be $25-50 per late payment. You’ll also get a notice letting you know you missed the due date and asking you to pay immediately.
If you continue missing payments, late fees and penalties will pile up quickly. Additional costs may have been added to your original balance, and you may owe 2010-20% or more. The retailer will continue sending past due notices and demanding payment. If you don’t answer, the account may be given to a collection agency at some point.
Repossession of Furniture
For retailers offering in-house financing, failing to pay your bill can result in repossession of the furniture. Most financing contracts allow the store to seize items if you default on the terms.
Repossession means a truck will show up at your home and legally confiscate all the furniture you haven’t fully paid for yet. This can happen with zero notice if your account is sufficiently past due. You no longer have rights to furniture that’s been repossessed even if you originally paid a deposit or made some payments.
The embarrassment and disruption of having all your furniture forcibly removed is good motivation for doing everything possible to avoid defaulting! But once repossession happens, there’s usually no getting your furniture back except to pay the full balance owed.
Impact to Your Credit Score
Along with late fees and repossession, not paying your furniture financing on time damages your credit score. Whenever you miss a payment, it’s reported to the credit bureaus.
Too many missed or late furniture payments will cause your score to plummet. A low credit score makes it harder to get approved for loans, mortgages, credit cards, and other financing in the future.
Even after you get caught up on your furniture bill, those missed payments remain on your credit history for 7 years. Your score will be hampered until the delinquencies gradually age off your credit reports.
Potential Lawsuit or Wage Garnishment
If communicating with you fails to resolve a severely past due furniture account, retailers do have one final recourse – suing you. They can take you to court for breach of contract for violating the financing terms.
If they receive a court judgment against you, the retailer can then pursue aggressive collection methods like seizing funds from your bank account or garnishing your wages. Portions of each paycheck will be confiscated until the debt is settled. Lawsuits and legal judgments also appear on credit reports.
Obviously being taken to court over an unpaid bill is something to avoid! But furniture stores have the right to pursue this last resort option if you simply ignore the debt.
Options for Consumers Struggling to Pay
Defaulting on your furniture financing should not be the first choice if money gets tight. Consider these options to avoid repossession, score damage, and legal action:
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Prioritize payments – Cut discretionary spending to free up cash for the furniture bill. Get the account current to stop late fees.
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Refinance – Some retailers may let you extend the repayment term to lower the monthly dues.
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Sell items – Sell furniture you own outright to raise money for paying the bills.
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Return recently purchased items – If it’s within the grace period, returns may still be allowed.
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Debt management plan – Work with a nonprofit credit counseling agency to manage your debts. They try to negotiate alternate repayment plans with creditors.
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Consumer proposal – Make a formal offer to pay a percentage of what you owe over several years. This requires creditor approval.
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Bankruptcy – As a last resort, filing for bankruptcy stops collections and can eliminate some debts. But it damages credit severely.
If you’re proactive, you may be able to work with the furniture store directly to modify payment terms and avoid repossession. But the key is communicating with them right away, not ignoring the issue.
What Happens Once Your Furniture is Repossessed?
Losing your furniture to repossession is frustrating and upsetting. But even after it’s seized, you may still owe additional money. Here’s what you can expect:
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The store sells the used furniture and applies the sale amount to your balance. But used furniture won’t bring nearly as much as you paid.
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You will be billed for the “deficiency balance”, which is the difference between sale proceeds and what you still owed.
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The deficiency balance continues to show on your credit report as a past due amount.
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The store or collection agency will continue efforts to recover the deficiency balance from you directly.
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You may be sued for the remaining balance unless you can reach a settlement agreement.
So even after repossession, expect the creditor to aggressively pursue you for the money you still owe them. Don’t assume it just goes away once the furniture is gone.
Don’t Let It Get to This Point!
Clearly, defaulting on a furniture financing agreement has terrible consequences ranging from damaged credit, lawsuits, and wage garnishment to the humiliation of having your belongings confiscated. Make it a priority to avoid breaching your financing contract!
But if you do face struggles making payments, take proactive steps immediately. Stay in touch with the creditor, refinance if possible, return items you can’t afford, or consult a nonprofit debt management agency for help negotiating repayment terms. Ignoring the problem and waiting for repossession almost always makes matters far worse.
Paying for furniture on credit may be convenient and get you instant home upgrades. But only buy what you can realistically afford to pay off in a timely manner. Defaulting brings fast, severe penalties that can disrupt your life and trash your credit for years. Handle those enticing furniture financing offers carefully and maintain your payments diligently to avoid repossession!
Secured vs. Unsecured Creditors
A secured creditor is any creditor to whom you or your business has pledged collateral in exchange for a loan, line of credit, or purchase. Collateral might be business property, such as inventory and equipment, or your own property, such as your house, car, or boat.
There are also “involuntary secured creditors”—those who have filed a lien (legal claim) against your property because they have a judgment against you or you owe a tax debt.
Either way, if you or the business cant pay back the debt, a secured creditor can repossess or foreclose on the secured property, or order it to be sold, to satisfy the debt.
An unsecured creditor is one to whom no collateral has been pledged and who hasnt filed a lien. Typically, unsecured debts include credit card charges and amounts your business owes for inventory, office supplies, furnishings, rent, and advertising, as well as whats owed for services such as maintenance, equipment repair, or professional advice.
Many businesses owe secured debts—businesses typically pledge collateral for credit lines, and business owners often pledge their personal property for business debts. Lets take a look at how quickly lenders can call in or foreclose on collateral when a secured debt is not paid.
As you probably know, if you miss a payment or two on your car loan (and, as is typical, the loan was used to buy the car and is secured by the car), the lender has the legal right to physically repossess the car and sell it to recover the money you owe, plus the costs of the sale and attorneys fees. To do this, the lender doesnt have to get permission or a court judgment. Under the terms of the contract you signed with the lender, a repo man can simply reclaim the lenders property. (In many states, the lender doesnt have to give you notice of the repossession; you will just wake up and find your car gone.) When all is said and done, you will still owe the difference between what the lender sells the car for and what you owed on the loan, called a “deficiency.” Also, the repossession will appear on your credit report for seven years.
Cars are the most commonly repossessed type of property, but if you borrowed money to buy business equipment or machines and used the purchased equipment as security, the creditor will have the same repossession rights. Also, some department store credit cards provide that the creditor automatically takes a security interest in the property you buy, so if you dont pay the bill, the creditor might try to repossess the property. However, because creditors must get a court order to enter your house or business, repossession of property other than vehicles is rare.
Similarly, with leased vehicles or business equipment, if you miss a lease payment, the leased property can usually be immediately reclaimed without a court order.
If you have a mortgage or deed of trust on your house, or an open home equity line of credit, you must make payments on time to keep the house. If you dont, the lender can and probably will foreclose on your house, because it is collateral for your debt. But foreclosures are not as quick as vehicle repossessions. In half of the states a lender has to go to court before foreclosing, and in the other half, advance notice is required from the lender.
Similarly, if you pledge your house as collateral for a business loan or line of credit and you default on that loan, the lender can foreclose on your house. (In this situation, the lender must always file a foreclosure action in court, no matter what state youre in.) To avoid having the lender foreclose, you must either repay the debt or, if the debt is more than your equity in the house, at least pay the lender that amount so that it no longer has a reason to foreclose.
The foreclosure process works differently in different states. In some states, the lender must file a lawsuit to foreclose on a house (called judicial foreclosure). In others, it can foreclose on property without going to court (nonjudicial foreclosure). A judicial foreclosure typically takes several months longer than a nonjudicial foreclosure (though in California a nonjudicial foreclosure can take a year or more), giving you time to save some money and, if necessary, find a new place to live.
If youre behind on your mortgage, you might be able to negotiate a loan modification with your lender. For example, the lender might agree to add your missed payments to your loan balance, to stretch out your loan over a longer term, or to convert an adjustable rate mortgage to a fixed-rate one. Your other options are selling your home for less than you owe (called a short sale), returning the deed to the lender (called a deed in lieu of foreclosure), or refinancing through the Federal Housing Administration (FHA) or the Homeowner Affordability and Stability Plan. For up-to-date information about your options if you are facing foreclosure, see The Foreclosure Survival Guide, by Stephen Elias (Nolo).
Filing for bankruptcy can delay foreclosure. When you file for bankruptcy, all creditors, including mortgage lenders, must cease collection activities and foreclosures. However, the lender can ask the bankruptcy court for permission to proceed with a foreclosure if youre behind on your payments, so a bankruptcy may delay a foreclosure only a couple of months. (For more on bankruptcy in general, see Nolos Bankruptcy Center.)
Unsecured creditors such as credit card companies and most trade creditors must first sue you and win a money judgment against you before they grab your income and property. This is true whether you are personally liable for the debt (as is the case for sole proprietors and partners, or because you signed a personal guarantee for your corporation or LLC) or whether only your corporation or LLC is liable for the debt. (Learn whether youre personally liable to pay your businesss debts.)
Typically, however, before seriously considering a lawsuit, a creditor will try to collect the debt for several months and then turn it over to a collection attorney or agency, which will restart the process. In some instances, the creditor will conclude that you dont have enough property that can easily be grabbed to pay off the judgment, and wont bother suing.
For instance, say your house is worth less than you owe on your mortgage, meaning that there is no equity in it for creditors to take. Also suppose that your consignment shop has few business assets and is doing so poorly that you dont anticipate having more than a few dollars of steady income that a creditor could grab (by ordering the sheriff or marshal to take money from the business premises). Your creditors, or any collection attorney or agency your debt is turned over to, may not sue you because they know its unlikely they could collect the money judgment. Thats called being “judgment proof.”
Instead, the creditor may simply write off your debt and treat it as a deductible business loss for income tax purposes. Typically, in five or six years, depending on your states statute of limitations, the debt will become legally uncollectible. (Some states have longer statutes of limitation, up to ten or 15 years.)
However, you can expect to be sued if there is significant money at stake and you have valuable personal or business assets (or just business assets, if your business is a corporation or LLC)—or if the creditor expects you to acquire significant assets in the future. For instance, if you are a sole proprietor and have an advanced degree, your creditor might assume youll eventually make a decent salary and will sue you now—and just wait for you to make some income. (In many states, a court judgment can be collected for at least ten years.)
What does a creditor think is worth suing for? Significant amounts of cash or accounts receivable, valuable business equipment and property, and, if youre personally liable for a debt, valuable personal assets such as jewelry, fine art, collectibles, antiques, motorcycles, expensive bicycles, boats, or a vacation house.
Dont try to hide assets. Sometimes, out of desperation, a business owner tries to protect personal or business assets by giving them to friends and relatives or otherwise trying to hide them from creditors. Although few small business people have the knowledge necessary to move cash to an offshore bank account, many try to hide it in the name of a parent, child, coworker, or friend. Dont do this. Creditors attorneys are experienced in ferreting out such hidden assets, and in extreme cases, these tactics can even give rise to civil and criminal charges of fraud.
If a creditor does take you to court and wins a judgment against you, it obviously makes sense to pay the court judgment before any other unsecured debts that you havent yet been sued over. (See Nolos article on Prioritizing Which Business Debts to Pay First.)
How a Creditor Must Collect a Judgment
Collecting a judgment is harder than winning it. If a creditor has gone to court and won a judgment against you for collection of an unsecured debt, theoretically the creditor (now called a judgment creditor) will be able to take any cash in your businesss bank account, your business income, and your business assets to pay off the debt. If youre a sole proprietor or partner, or you signed a personal guarantee for a debt, the judgment creditor could also garnish your wages and take money from your personal bank account, as well as take your nonexempt personal property, to pay off the debt. However, to take money or property, the creditor must first locate it and then get a court order and pay the sheriff to take it.
Probably the most common collection method is for a creditor to obtain a writ of garnishment, under which a sheriff could garnish 25% of your wages to pay the debt (except in Pennsylvania, South Carolina, and Texas, where garnishments are not allowed). But assuming you are a self-employed business owner without a side job, garnishing your wages will be pretty difficult since you dont get a paycheck (unless youre an employee of your corporation). However, your spouses wages could be garnished to pay your business debts if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), assuming your spouse is named in the court judgment.
Often a more effective collection technique (if your business sells goods or services for cash) is for the sheriff to come to your business and take any money he can find there—in the cash register (called a “till tap”) or on your person. Or a sheriff could be authorized to take business vehicles, equipment, or tools of the trade to pay your debts, something that will happen only if those items are clearly worth more than you owe on them. Its also possible that the creditor could get a court to order your bigger customers and clients to pay any money they owe you directly to the court.
However, most creditors wont go to these lengths to get your property. Instead, many will simply attach a “judgment lien” to any real estate or assets the business owns (or valuable personal property or real estate that you own, if you are personally liable for the debt). The lien will allow the creditor to collect the debt when you sell or refinance the property.
Check to see if any liens are recorded against your business. The Secretary of States office in every state maintains a registry of liens, listing judgment liens, tax liens, or security interests that creditors claim in your property. You can do a Uniform Commercial Code (UCC) records search online at your Secretary of States website to search for your personal and business names to see what liens have been recorded against you. If you find any incorrect information—say you have paid off a debt but it hasnt been reflected—ask the lender in question for a UCC release, something that is required by law.
If you do have regular wages coming in, perhaps from a side job or because you are an employee of your corporation, your wages can be garnished to enforce a court judgment. The total amount your creditors can take from your wages is 25% of your net pay. That limit applies whether you have one creditor or many. And if your wages are low, there are additional protections—you must be left with weekly income equal to 30 times the federal hourly minimum wage. (A few states have lower limits.) But if you owe back child support or back taxes and your wages are being garnished, expect to lose a much larger percentage of your wages—50% or more, depending on whether you are supporting others. Social Security checks, retirement plan proceeds, unemployment and disability benefits, or workers compensation awards cannot be garnished, except to pay federal taxes or child support (or unless they have accumulated in your bank account).
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