(ThyBlackMan.com) You had every intention of making good when you applied for those credit accounts, but things have taken a bad turn and it’s looking like you’re going to be unable to pay. While you’re not sure what’s going to happen next, you do know it isn’t likely to be positive.
We’re not here to sugarcoat things for you. Yes it’s going to be a bit rough. However, the decisions you’re about to have to make can be easier to contemplate if you know what to expect when you default on your debts.
What Constitutes Default?
Simply put, a loan can be considered to be in default when a payment isn’t made when due. This is just as true for mortgages and car loans as it is for credit card accounts, student loans, personal loans and medical bills.
It can happen with a single missed payment in some cases, while it can be as much as 270 days after a missed payment in others. With this in mind, it’s important to know what constitutes default according to the terms of your loan agreement.
You might think you are in default when you’re merely delinquent — and yes, there is a huge difference.
Delinquent v. Default
When a loan is delinquent it simply means a payment is late. The consequences are much less severe than default — if payment is forthcoming in a short period of time.
You’ll see a blemish on your credit report, but all will be forgiven in short order if it doesn’t happen again. Default, on the other hand, creates a significant scar on your report — one that can take as long as seven years to heal in some cases.
What Happens Next?
You can expect to get calls and other forms of communication from the lender’s accounts receivable department for a while. They’ll do everything possible to try to help you get the account back in good standing. All they really want to do is collect the money, try to keep you as a customer and move forward.
If this proves unworkable and the debt is secured by an interest in real or personal property (like a house or a car) they will move to repossess it in order to cut their losses.
If the loan is unsecured, they’ll continue to communicate with you for a while to see if they can help you figure out how to get out of debt. The obligation will then be sold to a collection agency if they have no luck in this regard. That organization will be a bit more vigorous in its efforts. It won’t care about trying to keep you as a customer or saving the account. It will just want the money — period.
Yes, You Can Be Sued
In some instances, creditors will take you to court to try to get a judge to rule against you. If this is accomplished, they can then garnish your wages, tax refunds (in some cases) and other sources of income to satisfy the debt.
Before Any of This Happens
Knowing what to expect if you default on a loan can help you reduce the severity of the situation a great deal. There are always options for your protection, and the sooner you act, the broader the range of those options is. For example, if you take a responsible attitude to your owings, you can compile a consumer proposal which means you don’t need to declare bankruptcy, and don’t need to go to court. It can also mean that the damage to your credit rating is minimized and your recovery accelerated. Your best play is to contact people you owe the instant you realize things are going to be too tight to let you meet your obligations.
Try to work out some sort of a deal in which they’ll accept reduced payments for a while— or even defer requiring repayment for a bit — to help you set things back in order. Just be sure to get whatever terms you reach recorded in writing for future reference.
Staff Writer; Greg Jackson