It may not rank alongside getting mugged or being on a raft surrounded by sharks, but finding yourself unable to pay off a lot of debt can be one of the scarier situations in life.
So what happens if you can’t pay? Just how panicked should you be?
It’s hard to say because it depends on whether the debt is your mortgage (that can be bad) or, say, your credit cards (not quite as bad).
If you owe money and are stressed out, just remember that the outcome that you’re imagining is probably worse than the reality. Still, it’s always helpful to know what lies ahead. So here’s what you can expect if you don’t pay your debts:
- Your debt will go to a collection agency.
- Debt collectors will contact you.
- Your credit history and score will be affected.
- Your debt will probably haunt you for years.
- You’ll pay off the debt or not, but life will go on.
Your Debt Will Go to a Collection Agency
Let’s tackle this scenario first. “Under federal law, an original creditor can send your account to a collection agency once it’s 31 days past due, though some creditors may try to collect the payment on their own for up to 180 days,” says Christina Lucey, director of product and financial advocate at the personal finance website CreditKarma.com.
Don’t be too panicked on day 31, however, or think you likely have half a year to figure this out. In most cases, according to industry experts, it typically takes about 60 days before an unpaid debt is sent to a collections agency.
This is probably obvious, but the debt collection agency has been hired by the company that’s owed the money. So if you pay the debt to the debt collector, that money will make its way back to the entity that is owed the money, though the debt collector will first take a sizable commission, often between 25% and 45%.
Sometimes, debt collectors will even sell the debt that they bought to another debt collector that feels it may have more luck convincing you to pay up. In any case, if a debt collector owns the debt you owe, it will seek you out.
Debt Collectors Will Contact You
The phone will start ringing, and the letters will start coming, in a campaign to get you to pay. If you’re able to pay the debt or negotiate with the debt collector, then your debt problem will rather quickly disappear. If you can’t, you may find your stress levels rising.
“Different types of debt have different consequences,” Lucey says. “For example, defaulted secured loans – including mortgages and auto loans – can likely result in having your home foreclosed on or car repossessed.”
There can be another indignity if your car is repossessed, according to Lucey. “Even if a consumer’s car is repossessed, their loan could still end up in collections if the car’s value is less than the debt owed,” she says.
Your Credit History and Score Will Be Negatively Impacted
Lucey points out that medical debt sent to collections is handled differently than other collections debt. “First off, bureaus must wait 180 days before listing medical debt on a consumer’s credit report,” she says. “Secondly, medical debt is removed from a consumer’s credit report as soon as it’s paid off. This is unlike other collections debt, which typically remains on a credit report for seven years regardless of when it is repaid.”
How much can you expect to see your credit score drop? Typically, one missed payment can make an excellent credit score plunge by 100 points. If your credit score was shaky to begin with, it won’t do as much damage, and it’s really impossible to say by how much it’ll go down. But it will go down.
Your Debt May Haunt You for Years
Now, keep in mind that there is a big difference between, say, a $70 debt and a $7,000 debt. It may be that an unpaid debt of $70 doesn’t haunt you at all or cause you much grief. You don’t pay it, and other than your credit score going down for a while, maybe nothing happens other than a few dozen phone calls, which eventually stop coming.
That’s not likely to occur with a $7,000 debt, though.
If you are late with a debt payment, at some point you could be sued, says George Simons, founder and CEO of SoloSuit.com, a website that helps consumers fight debt collection lawsuits.
Once sued, you tend to have around 20 days (sometimes less) to 30 days to respond, according to Simons. If you don’t show up, of course, you automatically lose the case.
“Now that the consumer has lost the lawsuit, their wages will be garnished at 25% out of every paycheck. A lien can also be put on their home or car,” Simons says.
He adds that none of this helps your credit score.
It’s also worth noting that you might have your wages garnished for less than 25% – but it won’t be more. Federal law limits it to 25%.
You’ll Either Pay Off the Debt or Not, but Life Will Go On
Just remember that if you’re feeling frazzled, at some point things will work out, and you will pay off what you owe and find debt relief. Or time will pass, and you won’t pay off your debts. There is a statute of limitations on credit card debt, incidentally. It varies by state, but it’s generally three to 10 years.
One way or another, though, things will get resolved. Yes, it’s scary to be on the hook for money that you owe, especially if debt collectors are hounding you and the threat of a lawsuit is out there, but it’s not like you’re going to jail. Unless, however, your debts are for tax evasion or failing to pay child support.
Simon Goldenberg, a New York City attorney who specializes in debt relief, offers three types of scenarios that you can expect. Generally, it all depends on the lender and the amount of money you’re behind on, in terms of what outcome will be likely.
Best-case scenario. “The debt becomes time-barred and falls off the consumer’s credit report. The creditor has limited remedies for collection. The consumer no longer has a fear of being sued or having their credit damaged,” Goldenberg says.
Middle-ground scenario. “The consumer reaches an affordable settlement on their debt that allows them to satisfy the balance at a reduced amount and in payments that are structured to match their budget. That way the consumer can eliminate the fear of potential litigation and will end all further collection efforts on the account,” Goldenberg says.
If you do end up opting for a middle ground, that could mean working with a debt relief attorney to negotiate debts or declaring bankruptcy – or working with a credit counseling service accredited through an organization like the National Foundation for Credit Counseling or the Financial Counseling Association of America. Credit counseling nonprofits can get those debt collector calls to stop and are generally pretty successful with helping people manage and settle debts.
Worst-case scenario. “A lawsuit is brought, and the creditor obtains a judgment. In New York, a judgment is effective for 20 years and accrues 9% interest annually. It can be collected through wage garnishment, asset seizure such as a restraint on bank accounts, and by placing a lien against the consumer’s real property.”
But keep in mind that the worst-case scenarios tend to happen to consumers who avoid the calls and letters from debt collectors – and do nothing to work on the financial problem until it becomes impossible to look away.