By Irene Dominguez (ACCION USA Consultant)       

What would happen if I stopped paying back my debt?

If you are wondering what would happen if you stopped paying off your loan or credit card debt, you are not alone. Many people who find themselves deep in debt today are asking themselves this question. However, before you decide to stop making payments on your credit cards or loans, you should take into account the potential consequences of doing so. 

The timeline below shows what would typically happen if you stopped paying off your debt. Please keep in mind that this timeline is not precise--each account left unpaid will be treated differently depending on the particular practices of each financial institution, the state where you live, the outstanding balance on the account, and whether you have any assets that can be repossessed by the bank.

When a payment is 30 days overdue...

• You will be charged late fees.
• You are likely to receive a reminder call from the bank.
• A late record may appear on your credit report, lowering your credit score.
• For credit cards, it is possible that your interest rate increases.
• For a mortgage loan, the bank will try to contact you after the first overdue payment. If they are unable to contact you, they might issue a foreclosure order. For more details on the particular process of mortgage loans, you can read "Foreclosures at a Glance" from Bankrate.com

When a payment is 60 days overdue...

• You will continue to be charged late fees.
• The bank will start contacting you more frequently.
• The lateness will now definitely appear on your credit report, lowering your credit score.
• For credit cards, the interest rate will definitely increase.
• For auto loans, the bank may issue an order to repossess your car at this point. This means that you will lose your car and yet most likely you won't be debt -free! You will still need to pay the difference between the value your car can be sold for and the amount that you owed at the time of repossession.

 When a payment is 90 days overdue...

• At this point, most financial institutions will consider the account officially delinquent. Their calls will become more aggressive.
• The total amount that you owe will keep on increasing, as late fees continue to be applied and interest payments accumulate.
• If the debt is not secured by an asset, the bank will probably offer you a payment plan option or a settlement agreement, where you can pay about 50% of the outstanding balance right away and this reduced payment can count as payment in full. Keep in mind, however, that you need to have all the cash on hand in order to settle. If the bank does not offer you these options, you can always ask about them. Keep in mind, however, that generally financial institutions will not negotiate with you until your payment is already 90 days past due. Also keep in mind that having past due debt damages your credit report significantly.

 When a payment is 120 days overdue ...

• If your debt is not secured, the bank may stop its efforts to seek payment from you at this point and sell the debt (the rights to collect it) to a collection agency. Collection agencies have much more aggressive collection practices than banks do, so make sure you know your rights when dealing with collection agencies. For this, you can review the information offered by the Federal Trade Commission.

 When a payment is 180 days overdue...

• Credit cards will be charged-off at this point. This means that the bank officially declares that the debt is unlikely to be collected. A charge-off has a significant negative impact on your credit score.
• The charge-off does not necessarily mean, however, that you are free of debt.  The bank may charge the debt off its books, but still sell the rights to collect it to a collection agency.
• If the debt is sold to a collection agency, they can re-sell it again to another agency, and so forth. Each sale creates an additional record on your report, further damaging your credit and your score.
• There is no imprisonment for debt in the United States, but since non-payment is a breach of a legal contract, the collection agency or the bank may take you to court. Typical results of losing such a judgment are:
  • Garnishment of your wages
  • Placement of a freeze on your bank account
  • Foreclosure
  • Significant damage to your credit history

After 7 years...

• You may have heard about the "7-year rule".  An account that has been paid off in full will usually be deleted from your credit report after 7 years. But if your account has not been completely paid off, it may not be deleted from your credit report.
• Legal judgments that have not been satisfied may remain on your credit report for up to 20 years (or even more!) depending on the state where you live.

Consequences of damaging your credit history

In sum, if you stop paying off your debt you will not only damage your credit, but there can be a myriad of hassles that can haunt you for a long time. Also, having a damaged credit history will negatively impact your odds of:

• Getting a job
• Renting an apartment
• Getting a cell phone contract
• Buying a car or a home
• Being approved for credit when you need it (for example, in a medical emergency!)

It is always worth making every effort to pay your debts. If you realize that you won't be able make payments for a limited period of time, like one or two months, it is a good idea to call the bank and negotiate a grace period with them. You would be surprised to see how flexible banks can be when they sense that you are willing to pay, especially given the current economic situation. Do whatever you can to save yourself from hassles in the long term. Act today!