High interest rates and the rapid growth of Buy Now, Pay Later services are putting financial pressure on borrowers across the US, leading to increased missed payments and rising caseloads in state courts. As more Americans fall behind on loan obligations, understanding how late payments can escalate into legal action has become critical for borrowers trying to avoid serious financial consequences.
In January 2026, RadCred conducted a study to map this escalation process across all 50 states. The research team reviewed debt-collection laws in each state, analyzed court-filing trends from 2024 and 2025, and examined borrower experiences shared on consumer forums like Reddit. Together, these sources reveal the typical path from a first missed payment to potential lawsuits or asset seizure.
Key Findings
- Most loans move to default after 90-120 days of missed payments.
- Credit cards and personal loans account for most lawsuits because they lack collateral.
- Over 70% of debt cases end in default judgments because borrowers do not respond.
- States vary widely: statutes of limitations range from 3 to 10 years, wage garnishment rules differ, and homestead protections vary.
- Following the overturning of the 2025 CFPB medical debt rule, small medical debt claims rose by 15% in state courts.
- Data-driven interventions, early repayment plans, and prompt borrower responses can cut the risk of court action by up to 50%.
- Structured repayment plans that use state-specific income data reduce financial strain and prevent escalation into litigation.
How Missed Payments Turn Into Lawsuits?
The researchers explained when late payments become a legal risk for borrowers, and which debts are more likely to end up in court.
Late vs. In Default
- Delinquent: A borrower becomes delinquent the day after a payment is missed. Even if a lender allows a 10-15-day grace period, the account is usually flagged as risky right away.
- In Default: Most loan contracts move into default after 90 to 120 days of missed payments. This is the point when lenders often stop focusing on customer support and begin preparing for legal action.
Types of Debt That Lead to Lawsuits
- Higher Risk (Unsecured): Credit cards and personal loans are the most common causes of lawsuits. Because there is no property to take, lenders go to court to recover the money.
- Lower Risk (Secured): Auto loans and mortgages rarely begin with a lawsuit. Lenders usually repossess the vehicle or start foreclosure before considering court action.
Medical Debt Lawsuits Increased in 2026
After the CFPB’s 2025 medical debt rule was overturned, healthcare lenders adjusted their approach. Radcred’s research shows a 15% increase in medical providers filing small claims cases in state courts to pursue wage garnishment directly.
What Makes a Lender Decide to Sue?
Radcred found that lenders usually review a set of practical and legal factors before filing a lawsuit. These checks help them decide whether a case is likely to be profitable and successful.
Is the debt large enough to justify court costs?
Most national banks and card issuers avoid suing for balances under $500-$1,000. Filing fees, attorney costs, and staff time can exceed the value of small debts. An exception is high-volume collection firms, which rely on automated filings and standardized paperwork to make small claims profitable at scale.
Have all legal notice requirements been met?
Some states require lenders to send a formal “Right to Cure” notice before suing. For example:
- Wisconsin: 15-30 days, depending on the loan type
- Maine: at least 21 days
Radcred’s case reviews show that debt buyers frequently overlook these notices, which can lead to case dismissal if the borrower responds.
Does the borrower appear collectible?
Before filing, many institutional lenders run database checks to estimate income, employment status, bank accounts, and property ownership. Borrowers with steady wages or real estate are far more likely to be targeted than those with no visible assets.
How a Lawsuit Works: From Filing to Judgment
Researchers also explained what steps lead to a debt lawsuit, from the first court filing to a final judgment, and where most cases are decided.
Step 1: The case is filed, and papers are served
The lender or debt buyer files a complaint in state court and sends the borrower a summons and a copy of the claim. Debt filings increased by about 20% in 2024-2025 in states such as Texas, Connecticut, and North Dakota, showing how common this step has become.
Step 2: The borrower has a short window to respond
Most states give borrowers 20-30 days to file a formal written response called an “Answer.” If no response is filed, the court usually rules in favor of the lender automatically. This is why more than 70% of cases end in default judgments, not because the lender proves its case, but because the borrower does nothing.
Step 3: Proof is required if the case is challenged
If the borrower responds, the lender must provide valid records of the debt. In states like New York and California, this includes proof of ownership and the original contract. About 40% of challenged cases are dismissed or settled due to missing or incomplete paperwork.
Step 4: Judgment and collection
If the lender prevails, the court issues a judgment authorizing wage garnishment or asset seizure under state law.
How Laws Differ by State
Debt outcomes depend heavily on where the borrower lives. State laws control how long lenders can sue, how much income can be taken, and which assets are protected.
Key Differences by State (Overview)
| Legal Area | Short / Limited Protection for Lenders | Moderate | Strong Protection for Borrowers |
| Statute of limitations | RI, WV (up to 10 yrs) | Most states (4-6 yrs) | NH, DE (3 yrs) |
| Wage garnishment | Most states (25% cap) | States with higher exemptions | TX, PA, NC (mostly prohibited) |
| Home protection | NJ, PA (low exemptions) | Many states (fixed dollar limits) | FL, TX (unlimited for primary home) |
Time Limits to Sue (Statute of Limitations)
This sets how long a lender has to file a lawsuit after a debt goes into default.
- Short limits: New Hampshire, Delaware - 3 years
- Long limits: Rhode Island, West Virginia - up to 10 years
Wage Garnishment Rules
These laws control how much of a borrower’s paycheck a lender can legally take after winning a judgment.
- Very limited: Texas, Pennsylvania, North Carolina
- Most states follow the federal 25% cap
Radcred also notes that 19 states raised minimum wages in 2026, which increases the portion of income that is automatically protected from garnishment.
Protecting Homes (Homestead Exemptions)
These rules determine how much home equity a borrower can keep safe from creditors.
- Strong protection: Florida and Texas (unlimited for primary homes)
- Weaker protection: states like New Jersey allow more home equity to be taken
Ways Borrowers Can Protect Themselves
Borrowers are not powerless in debt lawsuits. A few simple actions can greatly improve the outcome and, in many cases, reduce or eliminate what is ultimately owed.
Responding to the Lawsuit
Filing a formal written “Answer” with the court forces the lender to prove its case. Radcred’s analysis shows this single step reduces the chance of a full judgment by about 50%. It can also open the door to negotiations, payment plans, or case dismissal if errors are found.
Strong Legal Defenses
Two defenses are especially effective:
- Time‑barred debt: If the statute of limitations has expired, the case can be dismissed even if the debt is real.
- Lack of ownership: Many debt buyers cannot prove they legally own the account or produce the original contract, which can block a judgment.
Settling the Debt
Settlement is common at all stages:
- Before judgment: typically 45%-60% of the balance
- After judgment: often 80% or more, due to added leverage and court costs
How Radcred Helps Mitigate Risks?
Radcred applies the findings of this research to address the main causes of debt litigation: unaffordable loan terms, delayed intervention, and lack of borrower guidance.
More accurate loan matching (AI-based)
Borrowers are matched with lenders using state-of-the-art AI, based on their credit profiles, income, and state-level rules. This reduces the number of loans issued with repayment terms that are unrealistic from the start, a common source of early delinquency.
Faster access to short-term funds
Same-day and next-day funding options help borrowers cover urgent expenses without turning to repeated high-risk borrowing, which often leads to cascading missed payments.
Structured repayment planning
Repayment options are evaluated using disposable-income estimates adjusted for each state’s 2026 cost of living, lowering the risk that payments become unmanageable.
Early risk detection
Accounts approaching serious delinquency (around 180 days) are flagged so payment plans or settlements can be offered before charge-off.
Legal and compliance alignment
Repayment structures account for local statutes of limitations and wage garnishment limits, reducing disputes driven by procedural errors and aggressive collection tactics.
Ongoing borrower guidance
Access to support resources and credit-use education helps borrowers adjust behavior after initial borrowing, which Radcred’s research identifies as a key factor in preventing repeat delinquency.
Key Takeaway
The credit environment in 2026 is challenging, yet state laws continue to protect borrowers. Radcred’s research shows how late payments can lead to lawsuits and identifies the key factors that affect outcomes. Prompt responses, knowing legal rights, and structured repayment reduce risk. Data-driven lender interventions can prevent unnecessary litigation, helping both parties manage delinquency toward resolution effectively.
Responsible Borrowing
Even with legal protections in place, missed payments can escalate into lawsuits. Respond promptly, use structured repayment options, and explore state-specific financial aid before taking high-interest loans to cover overdue balances. Staying proactive reduces risk and helps protect your finances.
Resources
- The Journalist Resource: Debt collection lawsuits are rising in U.S. states. Here’s what you need to know
- Legal Shield: The Hidden Dangers of Buy Now Pay Later Financing
