Defaulting on Your Loans

Defaulting on a loan means that you have not met your obligations when it comes to the terms of repayment. It can mean missing a payment, being late on a payment or avoiding a payment altogether. A default on any loan is going to severely damage your credit score and leave you vulnerable to one or more collection procedures.

The consequences of default depend on whether your loan is secured (mortgage or car loan) or unsecured (credit card, student loans or personal loans). In either case, financial experts suggest consumers look at a debt consolidation plan as a way to satisfy creditors and avoid the consequences for default.

Defaulting on Secured Loans

If you default on a home equity loan or a home equity line of credit, the lender can foreclose on your house. While the process varies from state to state, you will usually be in default on this type of loan after 150 days of nonpayment. Although foreclosure normally takes 2 to 18 months after you default, some foreclosures can take two years or more.

Similarly, if you default on your automobile loan, your car can be repossessed — which means the bank takes ownership of it. Most banks will first issue a notice to a client in default, allowing for a designated time period — usually around seven days — in which you can make good on your payment. If you cannot meet the deadline or renegotiate your loan terms, your lender can petition a court for a permit to repossess your vehicle.

If your car is taken, it will likely be put up for resale at a public auction. You can keep your car from being auctioned off by redeeming your debt — or paying the total amount due, plus any fees associated with the repossession. If the car sells for less than the amount you owed, you may be liable to make up the difference.

Defaulting on Unsecured Loans

In the case of unsecured loans, there is no collateral (property) that can be taken. Generally you have a grace period of up to 30 days to pay on a credit card or other personal loan, but in some cases missing a payment by even one day can cost you.

After 60 days of nonpayment on a typical credit card account, you will be facing late fees and perhaps an interest rate increase. By 90 days, you will likely come to the attention of the lender’s collection department, which will move your account to default status.

Between 120 and 180 days, your debt will probably be charged off — which means your bank will count it as a loss and delete the account from its books. You will still owe the money, and the bank will either sell the account to a collection agency or hire a debt collector who will receive a percentage of the collected amount.

Once your debt has been charged off, you have opened yourself up to the pursuit of a collector who has a financial stake in getting you to pay and a great deal of experience in pressuring defaulters to meet their obligations. While the federal Fair Debt Collection Practices Act (FDCPA) prevents a collector from employing certain abusive and deceptive practices in attempting to reclaim a loan, you cannot escape the annoyance and aggravation that a professional debt collector can generate.

Sooner or later, a charge-off will reach a lawyer’s desk, and a collection attorney may take you to court after issuing a final letter calling upon you to pay your debt. If the debt is deemed valid, the court can issue a judgment against you, ordering you to pay it — and legal fees. Once you go to court, your default becomes a matter of public record.

A court judgment allows a creditor to put a lien on your house, which means that if you ever sell it you’ll be forced to cover over some or all of that debt. A lender or collector can also ask a judge for an execution order, which allows it to garnish up to 25 percent of your wages.

In addition, your original creditor will undoubtedly report the default to the credit bureaus, and your debt will be labeled as an unpaid charge-off on your credit report. This will remain on your credit report as evidence that you once had difficulties in meeting your financial obligations. (A delinquent debt that is paid before it reaches charge-off status should not negatively impact your credit report.)

Defaulting on Other Debts

Some debts stay with you for life, even if you file for bankruptcy. These include child support, alimony, student loans, and debts due on federal or state taxes.

Among these types of debts, IRS debts are probably the easiest to re-negotiate, as the government isn’t as likely to intimidate you to get your attention. It can simply redirect any tax refunds owed you straight into the Treasury.

Defaulting on child support, on the other hand, can result in criminal charges and jail time.

Student loan default generally occurs after 270 days of nonpayment. Since there is no statute of limitations on federal student loans, your obligation to repay them never goes away.

The consequences of defaulting on a student loan can include:

• Ineligibility for additional federal aid or grants.
• Severe damage to your credit report.
• Garnishment of wages.
• Seizure of savings and checking accounts.
• Cancellation, revocation or non-renewal of a professional license.
• Withholding of state and federal tax refunds.