What Happens If You Cannot Pay Debt? A Detailed Guide

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

When calls and letters don’t work to get someone to pay their debt, a debt collector may decide to go to court. To get a court order, the first thing that would be done is to file a lawsuit against you. Debt collectors automatically win if you don’t answer the lawsuit within the required time frame, which is usually 20 to 30 days.

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

Laws called “statutes of limitations” say how long a debt collector has to sue you to get your money back. This ranges from 3-10 years depending on the state. However, you still technically owe the debt even after the statute of limitations has passed. Collectors may not be able to legally demand payment, but that doesn’t mean you don’t owe them anything.

Even if the time limit has passed, debt collectors can still call you and ask for voluntary repayment. If you accidentally agree to pay the debt or do so, it can start the clock going back on the time limit. Debts that haven’t been paid can also go to your estate, so your children and grandchildren 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:

• Until you can pay off your debts, put living costs like food, shelter, utilities, and transportation ahead of debt payments. You need to take care of your family first.

• Avoid taking on ANY new debt at all costs. Stop using credit cards and cut them up if needed.

• 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.

• Contact creditors directly to explain the situation and try to work out alternate payment plans. Ask for reduced or waived interest and fees.

• Respond to any lawsuits quickly within the required time frame to avoid losing by default. Consider hiring a debt relief attorney.

• Be very wary of debt consolidation and settlement scams that often just take your money without actually settling debts.

• 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.