Say you were going to pay off a debt, but money was tight and you decided that paying off your mortgage was more important, and the debt was never paid. If you’re wondering which consequences you might face, there are plenty of unpleasant scenarios that could play out. The financial fallout could include a plunging credit score, higher interest rates on future loans and lots of fees. That’s why it’s key to understand potential repercussions before you’re tempted to ditch paying off an unpaid debt.
With that in mind, here’s a primer on what will happen if you have an outstanding payment, and why you should make paying off your debt a top goal to become financially secure.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
Your debt will go to a collection agency. Usually after 60 days of nonpayment, an unpaid debt will go to a debt collection company, hired by the company that’s owed the money. If you pay the debt to the debt collector, most of that money will go back to the entity that is owed the money, though the debt collector will take a sizable commission, often between 25 and 45 percent.
Collectors will contact you. If you don’t pay the collection agency, fortunately, you have some time before being impacted. It usually takes about 180 days of delinquency before, for instance, credit card debt is considered charged-off, or when a debt is declared by the creditor unlikely to be paid, says Richard Symmes, a consumer bankruptcy lawyer in Seattle.
After 180 days, “a consumer may be sued on the debt or simply called and mailed letters from collection companies who may settle debts for less than the full balance,” Symmes says.
However, that may not happen. “The creditor can stop all collection efforts, take the financial loss and just move on,” says Robert Foehl, a business law and business ethics professor at Ohio University in Athens, Ohio. Before going to Ohio University, Foehl worked for a large bank and was an executive at ACA International, an industry association for credit and collection professionals.
That’s your best-case scenario. But assuming the creditor doesn’t take the financial loss well, that’s when the creditor may well enlist the help of an attorney, Foehl says. And if you owe money to a company that doesn’t like that idea due to the time and expense of hiring a law firm, the creditor may sell the unpaid debt to a debt buyer, Foehl adds.
By selling unpaid debt, the original creditor is able to avoid a complete financial loss on the debt, Foehl says. The debt buyer becomes the new creditor of the unpaid debt “and has debt collection options that are similar to the options the original creditor had, including reselling the debt to another debt buyer,” Foehl adds.
At that point, your debt can be sold two, three or many more times. That said, as it becomes clear the debt isn’t going to be repaid, it may no longer make sense for a company to purchase the unpaid debt.
“A number of your largest creditors of consumer debts, such as financial institutions, prohibit the initial debt buyer from reselling the debt, or place significant restrictions on the practice,” Foehl says.
[See: Should You Invest or Pay Off Debt?]
Your debt can haunt you. “A debt that is reported to a consumer reporting agency can remain on the consumer’s credit report for seven years from the date the debt becomes delinquent,” Foehl says, “This time frame has no impact on whether the debt remains valid. The circumstance that has the most impact on the value of a debt is the effect of state law. Each state has a statute of limitations related to debts,” he adds.
If the statute of limitations has passed, you may not be legally liable for a debt, but it still may be on your credit report, Foehl says. Or, you could owe a debt that you incurred eight or nine years ago, and even though it has fallen off your credit report, you may still be legally liable for it.
“Of course, if the consumer debt is no longer being reported on the consumer’s credit report, and the debt cannot be enforced in court [due to the statute of limitations], the debt has very little value because there are no remaining adverse consequences to the consumer for not paying the debt,” Foehl says.
Your credit score can decline. As you can imagine, ignoring paying off a debt can cause significant financial damage even if you never actually pay it off.
For those first six months of not paying a debt, your credit score will drop, perhaps as much as 100 points, some experts say. But it’s after 180 days with the charge-off that some experts say is almost as bad for your credit score as a bankruptcy or foreclosure. How low your credit score will go will depend on a number of factors, including how high it was to begin with, but it’s safe to say that lenders don’t like to see a charge-off on a credit report.
“These debts can be extremely detrimental to your credit score, and you can typically expect more interest and penalties to be accruing,” says Jake Serfas, lead financial strategist at O’Dell, Winkfield, Roseman and Shipp, a wealth management and retirement planning firm in the District of Columbia.
“If you don’t pay them, your ability to borrow money in the future will be less likely. This may harm you when you go to buy a house or other big items,” he adds.
You could be impacted in other ways, too. A low credit score can raise insurance rates, affect your chances of getting a job if your employer does a credit check and hurt your ability to rent an apartment.
4 Mistakes People Make After Getting Out of Debt You could face a lawsuit. Yes, your creditor could decide that it’s worthwhile to hire an attorney and sue you, says Mark Billion, a bankruptcy attorney in Dover, Delaware, and founder of BankruptcyAnywhere.com, which helps people get through their bankruptcies.
“They almost always win because consumers typically don’t defend themselves well and collection law firms are pretty good at their stock and trade,” Billion says. “Once the attorney has a judgment, it depends on the state as to what they can do, but generally speaking, consumers face the risk of garnishments, where money is taken out of your paycheck; levies, where money is taken out of your bank accounts; and seizures of property like household assets and cars. And the calls — and credit reporting — will continue, for sure.”
[See: 8 Financial Steps to Take After Paying Off a Debt.]
Of course, you can avoid these repercussions by working out a reasonable payment plan with the creditor. By doing so, odds are you’ll pay only the principle and no longer be hammered with interest rates and fees. And you’ll probably find that once you start working with a debt collector, it’s a lot less stressful than avoiding paying off your debts and fearing negative consequences.
Foehl says that most debt collectors are ethical and want to work with creditors — and not be antagonistic. “Our credit economy is built upon the premise that legitimately owed debts will be repaid,” he adds.
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What Happens if You Don’t Pay a Debt? originally appeared on usnews.com
