Most of us don’t plan to get into debt and usually it doesn’t happen overnight. And yes, I know there are always exceptions to the rule. But, for most people debt just sort of sneaks up on them. One day they were doing okay and making ends meet, the next day they realized that they were in way over their heads.
If you are over your head in debt, you have probably had the thought: “What happens if I don’t pay my debts?” Well, that all depends on what kind of debt you have. So, let’s take a look.
You’re Not in It Alone
If the debt isn’t only in your name–if it’s a joint account or you have a co-signer–then you need to talk to the other person on the account. If you stop paying, your creditors will go after the other person. This is one of the surest ways to destroy a relationship with family members or friends. For this reason, I do not recommend co-signing a loan for someone. If they default, you can kiss your relationship-and your assets-goodbye at the same time. If this isn’t the only debt you owe, I would strongly suggest you find some way to keep this one current rather than stiffing someone who tried to help you out. You’ll have a little bit of time to make arrangements before they go after your co-signer, but trust me, they will take legal action against the other name on the account in order to satisfy the debt.
If the debt is tied to an asset, it is considered a secured loan. You are basically using the value of the item purchased as collateral, or as a guarantee, for the loan. If it is a mortgage or auto loan, for example, the creditor will repossess the item you purchased if you default on the terms of the loan.
The laws on foreclosure are regulated by the state you live in, so they vary from state-to-state. Probably a good rule of thumb is that you are in danger of foreclosure on your home if you are three months behind. At that point, the mortgage lender can start the process of foreclosure in basically any state. Once they have filed the paperwork, you usually have another 30 days before your home will be sold at auction. You’ll have to either come up with the money, or do a short-sale to avoid foreclosure. In most cases, the auto repossession process also starts when you are 90 days behind in your payments.
Your best bet in both cases, or with any other secured loan, is to contact your lender. Let them know you are having financial difficulties and see if they will work with you. Just remember, negotiation usually works best before you fall behind in payments. Sometimes the lender will shift your current month’s payment to the end of the loan letting you “skip” a payment for now. You may also be able to refinance the loan either through the same lender or a different lender. Again, this ill usually only work out in your favor if you refinance before you fall behind in payments.
If none of these are options, you should consider selling the item before it gets sold at auction. In almost every case, you will be able to get a higher purchase price than your lender will get. In any event, if you do not sell the home or car for enough to pay off your debt, you will still be liable for the difference.
Feeling a Little Insecure?
An unsecured loan has no collateral to back it up. A credit card is an unsecured loan. There is nothing to repossess because the items purchased are consumables, such as food, clothing, gasoline, etc. This is the riskiest type of loan for a lender, which is why an unsecured loan is usually a little more difficult to get and the interest rates are higher. In fact, my interest rates may be higher or lower than yours, depending upon our individual credit scores. The higher risk you present of defaulting on your agreement, the higher the interest rate you will have to pay.
But, just because there isn’t a physical item that can be repossessed, that doesn’t mean you have nothing to worry about from your creditors. The first step a credit card company will take when you fall behind on your payments is to charge you late fees and raise your interest rate. Then they will call you and send you threatening letters. As a general rule, you have to be several months behind, maybe even years, before they will take any legal action against you. It’s likely that they will charge off your account and send it to collections rather than pursue legal action themselves.
If you still do not pay after your account has gone to collections, you run the risk of being sued. If you lose the case, which you will unless you aren’t actually responsible for the charges, there will be a judgment against you. You will then be responsible not only for the original charges, but also for legal fees and court fees. If you appear in court, you may be able to make payment arrangements at that time. If you do not appear in court, you may end up having your bank account or your wages garnished. You definitely don’t want this to happen.
Your best bet when you have fallen behind on your unsecured debt is to contact the collector and try to reach a debt settlement agreement. Often they will agree to accept a lump sum payment for 50% or less of the total amount owed just to get you off of their books.