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For millions of retired Americans, the Social Security benefits they receive each month serve as the financial foundation that keeps monthly bills paid and essential expenses covered. But as high and rising inflation continues to strain household budgets and borrowing costs remain elevated, some older Americans are finding it harder to fit all their financial obligations into the budget. That’s particularly true for those who are carrying debt in retirement, as today’s high-rate, inflationary landscape is driving up the costs of both essentials and debt, making it tough to stay current on credit cards, personal loans and other obligations.
Falling behind on your debt is never ideal, as a few missed payments can set off a chain of events that eventually leads to collection activity and, in some situations, a lawsuit. Being sued over unpaid debt can be especially impactful for someone living primarily on a fixed income, as, in many cases, there’s not enough leftover for expensive attorney fees or legal costs, much less to pay off what’s owed. There’s also a real risk of losing income or savings if a judgment is issued against you, which further complicates the issue.
It’s important to know, though, that what happens after a lawsuit is filed isn’t always straightforward, particularly when your Social Security benefits are involved. That’s because Social Security payments receive certain federal protections that don’t necessarily apply to other sources of income or assets. Below, we’ll outline what actually happens if a Social Security beneficiary is sued over unpaid debt.
Find out how to tackle your unpaid debt before a lawsuit is filed.
What happens when Social Security recipients are sued over unpaid debt?
When a creditor believes you’ve defaulted on a debt and collection efforts have failed, they may file a lawsuit against you in civil court. This process generally looks similar whether you’re employed, retired or receiving Social Security benefits.
The first step is typically a summons and complaint, which notifies you that legal action has been initiated. At that point, it’s important to respond within the timeframe required by your state. Ignoring the lawsuit can result in a default judgment, which gives the creditor additional legal tools to pursue collection.
If the creditor wins the lawsuit, collecting what’s owed from a Social Security recipient can be more complicated than collecting from someone who earns wages. That’s because federal law generally protects Social Security retirement, disability and survivor benefits from garnishment by most private creditors. That means credit card companies, personal loan lenders and medical debt collectors typically cannot garnish Social Security payments directly to satisfy a judgment.
There are important exceptions, however. Certain federal obligations, such as unpaid federal taxes, federal student loans and some child support or alimony obligations, may result in benefit offsets or garnishment under specific circumstances.
And, a judgment can still create challenges for Social Security recipients, even if their benefits can’t be directly garnished. For example, creditors may attempt to identify other assets that are not protected, such as money held in bank accounts beyond protected amounts, investment accounts or other non-exempt property. State laws also vary regarding what assets can be pursued after a judgment is obtained.
Another potential issue involves bank levies, which are a separate tool that creditors can use to freeze and divert a portion of the funds in a borrower’s bank account to satisfy a judgment. While banks are generally required to protect a certain amount of electronically deposited federal benefits during an account review, complications can arise if Social Security funds are mixed with other deposits or remain in an account for extended periods.
Learn more about the debt relief options you have now.
How debt relief can help before a lawsuit turns into a judgment
If you’re a retiree who’s struggling with unsecured debt, waiting until a lawsuit is filed can significantly reduce the number of options available to you. In general, it makes a lot more sense to explore the debt relief strategies available to you, and if possible, you should do so as soon as the financial hardship becomes apparent.
One option is debt settlement, which involves negotiating with your creditors on a lump-sum settlement that’s less than the full amount owed. This approach can be particularly useful if you’re facing financial hardship and have fallen significantly behind on payments, as it may help you avoid litigation altogether.
Debt management is another possibility to consider. These programs are offered through credit counseling agencies, and when you enroll, the goal is to consolidate multiple unsecured debts into a single monthly payment with reduced interest rates and fees. That makes it easier and more affordable to tackle your debt.
In some cases, filing for bankruptcy may be the most appropriate solution. While often viewed as a last resort, bankruptcy can stop collection efforts, pause lawsuits through an automatic stay and potentially eliminate certain types of debt. Because bankruptcy laws are complex, though, consulting a qualified attorney could make sense before pursuing this option.
The bottom line
Being sued over unpaid debt can be stressful for anyone, but Social Security recipients should know that their benefits generally receive strong federal protections from most private creditors. That doesn’t mean a debt lawsuit should be ignored, however. Creditors may still pursue judgments and attempt to collect from other assets that aren’t protected. So, if debt has become difficult to manage, exploring your debt relief options before a lawsuit progresses may help preserve both your finances and peace of mind.