If the debts are just piling up you may wonder what happens if you simply stop paying. Can you go to jail for not paying your debts? Can you lose your house? Will you end up on the street, homeless?
When the creditors start calling
Once you miss that first payment date, you will get contacted by your creditors. At first it will be a polite “We’re contacting you to remind you about your payment,” but after a few weeks it will get more frequent and more insistent.
After two missed payments the calls will become much more frequent and more than 10 per day when generated by a computer dialing program (sometimes it’s 10 per hour). If you allow the calls to go to voicemail, chances are the mailbox will fill up very fast.
If the creditors have your work number they will try to contact you there; same thing with your cell phone – they will try every phone number on file for you. Your credit report will show “30 days late” and your credit score will start to drop dramatically. If you haven’t missed payments before this, your credit score will take a bigger drop compared to someone who is habitually late.
After three missed payments you will start hearing words like “urgent” and “charge off” and “escalate” and “serious” and you will get reminders that your credit score is being badly affected. You will be urged to take “immediate action” to prevent “further collection action” and restore your good credit.
If you cannot pay by now, you may want to change your phone number to stop the incessant phone calls. (You may want to disconnect your phone but that’s completely up to you.)
After 90 to 180 days your original creditor will charge off the account and transfer it to a collection department (in-house) or sell it to a collection agency (outside firm). At that point the cycle starts to repeat, including all the phone calls and letters reminding you about the debt and urging you to take action promptly to pay the debt.
At some point here you may receive an offer to settle the debt at a lesser amount. If you have the money and if you like the offer, this is an easy way to settle your debt without any negotiation. Usually, however, you can get a better deal if you talk to someone and ask for less (and have a legitimate hardship that would explain why you need a better deal). A couple of years ago Bank of America was offering 20% settlements (meaning you’d pay $200 for every $1000 you owed them). These offers change constantly so you’ll have to see what you are offered when that time comes.
When the lawyers start suing
If you don’t pay, and if you have assets that can be used to pay the debt, you are more prone to receiving a lawsuit to collect the debt. Some categories of public are less prone to lawsuits. These are a few examples of “not worth it” to sue in court: retired, living only on Social Security, with no home ownership; medically disabled and no assets; no home ownership and insufficient income.
However, if you make a lot of money, if you have a home worth more than you owe on the mortgage, if you owe a large amount to one creditor, you are more of a lawsuit target. Essentially the lawyers want to go after the more profitable collection targets.
When your wages get garnished
After a court case where the creditor prevails, the creditor can try to garnish your wages to collect the debt if you don’t work out some other way to paying them. Exceptions to this: currently four U.S. states — North Carolina, Pennsylvania, South Carolina and Texas — do not allow wage garnishment except for paying child support or taxes or federal student loans or court fines. Florida allows an exemption from garnishment under certain circumstances. Some states limit the amount of wage garnishment. You should check with your local court to find out what rules are in your state.
When you lose your house
A mortgage is a loan to pay for your house. Until you fully pay the loan, the mortgage company technically owns the house. If you fall behind on your mortgage payments, they can foreclose on your loan, take back the property, and evict you. Different states have varying rules about how long that will take or how it can get done. Normally banks will start moving toward foreclosing on a home between three months and six months after your last payment.
If you have unsecured debt, such as credit cards, the creditors cannot foreclose on your home. However, they can get a court judgment to place a lien on your home. What that means is when you sell the property that has the lien, they must get paid before the sale is final.
When you go to jail
Being in debt is not a crime. You can be taken to court to collect a debt, but that doesn’t mean you could go to jail.
You can only go to jail if you commit fraud (a criminal action), if you don’t pay child support, or if you refuse to pay your taxes when you can pay them.
Should you stop paying your creditors?
If you can pay your debts, you should pay them. If you cannot pay your debts, you should find out your alternatives. You may be able to negotiate with your creditors to pay a lower amount and have them write off the rest of the debt as “uncollectable” – thereby eliminating it. You may be able to file bankruptcy. You might simply walk away from paying the debt and let the statute of limitations run out on the debt, making it uncollectable.
Whatever your choice, you will want to be well-informed and sure you are making the right decision for yourself and your family. Let me know if you need some help.