If you’re worried about how to get out of debt, here are some things to know — and how to find legitimate help.
Falling behind on debt payments is an unfortunate but common situation for many people. According to a recent report, 78% of Americans are living paycheck to paycheck, meaning they do not have much wiggle room if an unexpected expense comes up If you find yourself unable to pay your debts, it’s understandable to feel stressed and worried about the consequences. However, it’s important to take action to deal with the situation strategically. In this detailed guide, we will walk through exactly what happens step-by-step when you cannot pay debt, as well as tips for dealing with debt collectors and minimizing damage to your finances
Your Debt Will Go to Collections
If you miss one or two payments on a debt like a credit card or loan, the creditor will start contacting you requesting payment However, once you are 30 days late on a payment, your creditor will likely stop contacting you directly. Instead, they will send the account to a collections agency The collections agency now owns the right to collect the debt and will report it on your credit report.
Being sent to collections severely damages your credit score. A single missed payment can cause a 100+ point drop in an excellent credit score. The collection will stay on your report for 7 years.
Debt Collectors Will Start Calling and Sending Letters
Once in collections a debt collector will be assigned to collect on the amount owed. They will start contacting you via phone calls emails, texts, and letters requesting payment. Their goal is to get you to pay back the debt, and they are usually very aggressive.
It’s important not to ignore calls from debt collectors, as the next steps become more serious if you refuse to engage. If possible, try to work out a payment plan, or consider negotiating a settlement for less than the full amount if you can pay in a lump sum.
Legal Action Becomes a Possibility
If a debt collector is unable to collect on the debt through calls and letters, they may decide to take legal action. The first step would be filing a lawsuit against you to obtain a legal judgment. If you do not respond to the lawsuit within the required timeframe (usually 20-30 days), the debt collector automatically wins by default.
Once they have a judgment, the debt collector has the right to pursue repayment by garnishing your wages and/or placing liens on your property. Wage garnishments usually take 25% of disposable income after taxes. They can also seize assets like your bank accounts.
The Debt Impacts Your Credit Score and Report
As mentioned previously, having an account in collections causes significant damage to your credit score. The collection account will show up on your credit report and public records for up to 7 years.
Even if you eventually pay off the debt, the negative item will remain on your report for the full 7 years. However, paying it off will stop the debt collector calls and legal action. Having bad credit closes off options for future lending and can negatively impact your ability to rent an apartment, take out insurance and more.
The Debt Could Potentially Follow You For Life
Statute of limitations laws determine how long a debt collector has to sue you for repayment of a debt. This ranges from 3-10 years depending on the state. However, even once the statute of limitations expires, you technically still owe the debt. Collectors may no longer have legal means to enforce repayment, but that doesn’t erase what you owe.
Debt collectors can still contact you requesting voluntary repayment even after the statute of limitations runs out. If you inadvertently acknowledge or make a payment toward the debt, it can restart the statute of limitations. Unpaid debts can also sometimes pass to your estate, so descendants may still have to deal with them.
Tips For Dealing With Unpayable Debt
Now that you understand the step-by-step process when you cannot pay debt, here are some tips to deal with the situation in the least damaging way:
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Prioritize living expenses like food, shelter, utilities and transportation over debt payments until you get back on your feet financially. You need to take care of your family first.
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Avoid taking on ANY new debt at all costs. Stop using credit cards and cut them up if needed.
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Try to increase income where possible by getting a side gig, selling assets, having a garage sale, etc. Any extra income should go toward paying debts.
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Contact creditors directly to explain the situation and try to work out alternate payment plans. Ask for reduced or waived interest and fees.
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Respond to any lawsuits quickly within the required time frame to avoid losing by default. Consider hiring a debt relief attorney.
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Be very wary of debt consolidation and settlement scams that often just take your money without actually settling debts.
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Once debts are paid off or fall off your report, work to rebuild credit by making on-time payments, keeping credit card balances low and not taking on new debt.
While dealing with unpayable debt can be overwhelming, having a plan and taking strategic actions can help minimize the impact as you work your way back to financial stability. The most important thing is avoiding self-blame and instead focusing energy on the steps needed to move forward. With time and diligent effort, you can eventually overcome debt struggles and regain control of your finances.
What does filing for personal bankruptcy do?
People who file for personal bankruptcy get a discharge — a court order that says they don’t have to repay certain debts.
Bankruptcy is generally considered your last option because of its long-term negative impact on your credit. Bankruptcy information (both the date of your filing and the later date of discharge) stays on your credit report for 10 years. That can make it hard to get credit, buy a home, get life insurance, or get a job. Still, bankruptcy can offer a fresh start if you’re in financial trouble.
What are some signs I’m dealing with a debt settlement scam?
Spot and avoid scammy debt settlement or debt relief organizations — whether they’re offering credit counseling, debt settlement, or any other service.
Never pay any group that tries to collect fees from you before it settles any of your debts or enters you into a debt management plan.
- No legitimate organization will guarantee to settle all of your debts or get you fast loan forgiveness.
- No legitimate organization tries to enroll you in its program without first reviewing your financial situation.
- No legitimate organization will guarantee you results from a “new government program.”
- No legitimate organization tells you to stop communicating with your creditors without explaining the serious consequences.
- No legitimate organization tells you it can stop all debt collection calls and lawsuits.
To learn more about the companies you’re considering, search online for the company’s name, plus “complaint” or “review.” Read what others have said. Also check out any company you’re considering with your state attorney general and local consumer protection agency.
Let My Credit Card Debt Go To Collections?
FAQ
What happens if you never pay your debt?
If you have not paid your debt after multiple notices, a creditor or debt collector may file a lawsuit against you.Nov 25, 2024
What happens when a person can no longer afford to pay back their debt?
… due on your debt for several months your creditor will likely write your debt off as a loss, your credit score may take a hit, and you still will owe the debt
What is the punishment for not paying debt?
While you won’t be thrown in jail for failing to pay your credit card debt, the consequences can still be serious. Lawsuits, wage garnishment, relentless collection efforts and long-term damage to your credit score can make life much harder.
What happens if you can’t repay your debt?
The consequences of not paying loans or defaulting on your loan instalments are that the lender can begin debt collection proceedings or take court action against you. Either affects your credit record, which will mean you are less likely to be approved for other forms of credit for years to come.