- Debt collection efforts by creditors differ based on the loan type.
- Secured loans give a lender the legal right to confiscate property that guarantees the loan.
- Unsecured loans give lenders fewer ways to collect on a delinquent account.
- Ignoring debt collectors could have severe consequences and lead to garnished wages and property levies.
Loans create a legally binding contract between you and the lender. When you miss payments, you are in breach of that contract. The contract details the actions a creditor may take and gives the lender specific rights and means to recover the amount owed.
When you do not pay a debt, the lender will take collection actions. Here are common consequences that may occur when you fall behind on loan payments:
Lenders Demand Payment
As soon as you miss a payment, the lender will begin the debt collection process. The actions taken depend on the loan type.
A loan secured by collateral gives the lender the right to take the asset guaranteeing the loan. For example, the lender will repossess your vehicle if you miss car payments, and skipping mortgage payments could lead to foreclosure.
Debts without collateral give the lender fewer ways to collect. Lenders typically begin with a period of phone calls and letters demanding payment before legal action begins. The longer you ignore debt collection efforts, the more likely you will face a lawsuit compelling you to pay the delinquent account.
The Amount Owed Becomes Larger
The loan contract describes what happens when the account becomes delinquent. In most cases, the lender charges late fees for each missed payment. The late fee can be assessed one to 15 days after the due date. Secured accounts like a car or home loan generally offer more generous grace periods before late charges begin.
In addition to late fees, default interest can increase the cost of delinquency. Most credit card contracts include a provision allowing the company to charge a higher interest rate when you miss two or more payments. The default rate applies to the total balance and can be 30% or higher.
The bill can grow by 20% or more within six months between the late payments and default interest. If the lender sells the account to a debt buyer, the new owner can charge interest on the outstanding balance until you pay off the debt or reach a new payment agreement.
Debt Collectors May Call Friends and Family
The FDCPA (Fair Debt Collection and Practices Act) prevents debt collectors from discussing a delinquent account with third parties, including family members, friends, or your boss. However, debt collectors may contact relatives, friends, and employers seeking information such as your address, phone number, or email address. So, while they may not discuss the debt directly,many debt collectors reach out to third parties seeking information about you.
Your Credit Score Declines
Missed payments cause your credit score to fall. Delinquencies on multiple accounts or more than one month could lower your score by as much as 100 points. The derogatory marks remain on your credit report for seven years but have less impact as time passes.
You Could Receive a Visit from The Local Sheriff
Debt collectors who sue to compel payment must notify you of the court filing through a summons. Your local sheriff’s office is often the one who delivers the court summons to your home or workplace. The legal papers notify you of the lawsuit and give you 20 to 30 days to respond. Failing to respond will lead to a default judgment, giving the creditor more ways to force payment on the debt.
Final Thoughts
Ignoring debt collection calls can have significant consequences. It could lead to a judgment that provides the creditor with additional ways to collect, such as wage garnishments or account levies. Discussing the account with the creditor could result in a lower payoff allowing you to pay off the bill without court intervention.
