What Happens When You Don't Pay Your Debt

Debt can be a painful and terrifying aspect of adult life. This is especially true if you're aware of the consequences of unpaid debts

Whether it is a loan repayment or credit card balance, you don't want to be late on your debt payments. Missing or being late on your payments means guaranteed calls from the financier or collection agency.

If you somehow skip a few loan payments, it is hard to escape your accumulated debt, tarnished credit scores, and high-interest rates (some credit have default rates inbuilt). This often happens when you're behind on property rent, credit card payments, and mortgages.

So what actually happens when you don't pay your debt?

Although it depends on the type of debt you're in, there are some severe repercussions for not paying it off. If you're indebted and stressed out, keep in mind that the outcomes can be worse than what you imagine.


Still, it is always better to learn what may lie ahead. Here is a rundown of scenarios that may happen when you don't pay your debts.


What Happens When You Don't Pay Your Debts


Impacts Your Credit Scores Negatively


There is no way you can overlook how your unpaid debt collection impacts your credit scores. When you don't pay your outstanding payments for two to three months lenders may look to sell your debt to recoup some of their money. They may also start legal action.


Missing payments can also have a negative impact on your credit score. For countries with positive reporting missed payments can impact your credit score for months. The score drops, particularly in the case of credit card payments. Even if you pay the collection (after the due period), the subsequent charge-off or late-payments preceding your collection account damage the credit score.

Although paying a collection notice is not an exciting way to use your money, you can obtain some advantages from paying off your outstanding amount/s.

However, stopping collectors from hounding you is possible by writing to them. When you are in a position to make an offer or to start a payment plan this is the time to use Settled.app.

*Tip - Don't forget to review your credit card statement on a monthly basis. This allows you to review your spending habits as well as immediately dispute any transactions that need it.

Debt Goes to a Collection Agency


It is essential to consider this scenario if you have an outstanding debt collection. In the USA Federal law allows creditors to send your account details to a collection agency 30 days after the due date. Some creditors try to make the payment collection independently and wait for 180 days. In many cases, creditors take 60 days to send an unpaid debt to a collection agency.


However, if it is already the 31st day of your debt collection, you have a month to figure this out. Many companies or creditors hire debt collection agencies to do the job. That means if you pay the debt to the collector, the money will reach the entity after 10 to 15 days. The debt collection agency will take a commission, ranging between 20% and 40%.

Calls from the Collectors


Linked to the last point, it is the debt collection agency's job to get the payment back from you. They can't make a profit unless you pay your debt. Therefore, you must prepare yourself to receive numerous phone calls or debt collection reminders from them.

Companies usually hire a collection agency to assign a debt payment for a few months. If they fail to collect the debt in time, a new collector takes over the case. The process repeats itself as long as the entity receives the payment.

Increased Interest Rates


Debt collection on a credit report doesn't necessarily mean that future credit applications will automatically be declined, but it doesn’t help. You may be approved for new credit but at a higher interest rate. A lot of lenders are moving to risk based models where the interest rates between customers can vary significantly, based on a number of parameters – See our 5 c’s of Credit blog for further information.

Services like cable and cellphone billing, for instance, may charge you some upfront amount as a security deposit. But you get this amount back by making timely payments.

May Have to Face Lawsuits


Lawsuit or legal action is a hard-to-overlook aspect when you don't pay your debts. If your collector or creditor gets the judgment against your case, you may have to face legal consequences.


In most cases, creditors ask to garnish your wages to impose the decision. If you think the limitation statute has passed on the debt, and you don't need to pay attention to legal notices, you're mistaken.

Simply stated, ignoring a lawsuit summon is not wise. And if your creditor sues you, seek legal assistance from a professional attorney to find the best possible ways to proceed.


Remember that each country has a different set of laws for debt collection. This makes taking legal advice even more important when a debt collector contacts you or sends you a legal notice.


Problems in Job Hunting


Checking credit history before hiring someone is not uncommon. It is a standard practice in which employers run a check on credit reports of potential employees. If you have a collection on your statement, it may keep you from getting the job. It mainly happens when you apply for high management posts or financial positions.

Note that employers or hiring managers require your permission to view or check your credit history for a background check. Although you have an option to refuse him or her, it reflects on your candidacy and may heighten his suspicion regarding your credit report.

Also, employers or hiring managers can't turn down your job application because of your credit score. They need to officially inform you by sending you a copy of the credit report, just as creditors do when rejecting your loan application.

How Low Does Your Credit Score Go


Precisely, it may decrease to 300. This is the lowest score calculated by Fair Isaac Corporation (FICO). It is essential to consider this as your credit history impacts your financial state no matter where you go. This is your financial lineage and may or may not work against you.

How Creditors Calculate FICO?


In many cases, if an individual misses more than four payments or has accrued a heavy debt, the entity or creditor contacts the debt collection agency. The collectors report the credit bureau, which directly impacts the credit scores.

When credit scores drop, you will likely get a delinquency alert on the credit report. It serves as a red flag for creditors lending money to you. A delinquency alert is an indication that you have a history of not keeping up with payments.

Generally, banks remove negative information like bankruptcies and delinquencies from credit scores after seven years. That means you will not appear defaulter to the financial lender after this period.


What to Do If You Can't Pay your Debt

In case you're not financially able to to pay your outstanding debts in full or part payment, there are ways to help you overcome the situation:

  • Never Ignore the Issue

Note that if you're a defaulter or fail to pay debts, the issue will remain there until you think of a solution.

Even if you're not making payments, always be aware of the current happenings with your account. Reassess your bank statement and keep in touch with the creditors to not get caught off guard.

No matter how tempting it may seem not to check the mail that likely has bad news, you must stay informed about the actions a creditor may take against you.

  • Know Your Legal Debt Payment Options

Debt collection agencies often pressurize people into several debt settlement contracts. Opting for this solution may further require high-interest financing. It is imperative that you're aware of legal remedies and responsibilities before choosing any option.

  • Contact a Debt Professional

This is one of the most important steps you can take to deal with debt-related problems. Consult a licensed professional to seek assistance on how to protect your credit score and solve debt problems.

A qualified professional can help you explore various options regardless of your credit score.


What Else!


You will either pay off your debt or delay it. In most cases, things work out, and people somehow find some debt relief.


However, it is always better to keep looking for ways to get rid of your debts. There are options where you can pay a one-off fee of your total debt amount and resolve it at a discount. But you must inform your creditors by sending them a letter.


Summing Up


All in all, not paying debt may lead to several scenarios. It not only impacts your credit scores negatively but also creates legal problems. Thus, you may come up with a solution by consulting a debt relief attorney.


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