I'm buried in debt. Can I just stop making payments?
Consequences of nonpayment are large, long-lasting
Dear Let's Talk Credit,
I am so far in debt with credit cards there is no way I can pay them. What will happen if I just stop making the payments? Since the debt is all unsecured, what actions can be taken by the credit card companies? -- Lisa
The short answer to your question of what happens if you stop paying your credit cards is that you will start a process that can be financially devastating for many years to come. In fact, the decision could also negatively affect your future employment and housing options. Let me explain why.
Once you stop making payments, your creditors will begin to contact you in an attempt to get you to pay. This contact will continue on a regular basis until after 180 days without payment. At that point, the credit card issuer will typically charge off the debt. This means the card issuer moves the balance on your account from an asset to a liability for accounting purposes. Some people think "charged off" means the debt goes away, but it doesn't. Make no mistake, a charged-off account is still very much owed. In addition, the original terms of the account will continue, which means fees and interest will continue to be added to your balance.
The balance due on your accounts after the debt has been charged off by the original creditor, is usually either sold to an outside collection agency or sent to in-house collections. Then you can more expect calls and letters seeking payment. At this point, many collectors will attempt to get you to pay a settlement -- a lump sum of some portion of the total debt due.
With no payment or agreement to pay, at some point before the statute of limitations for collecting this type of debt expires in your state, it is very likely the owner of the debt will sue you in court to collect. Because the debt is legitimate and owed by you, the creditor/collector would likely be granted a judgment for the total amount due. With a judgment, the creditor can execute a bank levy or wage garnishment (depending on the laws in your state), or file a lien on your property in order to collect.
During the period that you do not make any payments on the accounts, your credit is negatively affected -- first by late payment notations, then by charged-off accounts, followed by collection accounts. You can expect your credit score to drop by 100 points or more depending on the other information included in your credit report. Many employers, landlords and insurance providers and all mortgage holders will review your credit report as part of the decision-making process. Less-than-stellar credit can hurt your chances of obtaining a job, lease or mortgage.
Rather than ignore the problem and possibly suffer the consequences outlined above, I recommend that you seek professional help. You could start with a consultation with a nonprofit credit counseling organization, but if you truly cannot afford to pay anything on your credit card debt, you may need to consult with a bankruptcy attorney. Whatever you decide, do take action rather than leaving your fate to your creditors.
Let's keep talking!
See related: Life cycle of a delinquent credit card debt, Yes, card issuers can sue you for nonpayment, How wage garnishment works -- and how to avoid it, 11 tips for dealing with debt collection, collectors
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