A default occurs when you fail to make the required payment on a debt. Defaults can occur on secured debt, such as a mortgage, or it can occur on unsecured debt, such as a student loan or credit card. Defaulting on debt is not an uncommon scenario. Each year, more than one million people default on their student loans. Many more default on their mortgages, credit cards and personal loans.
While defaulting on one payment probably isn’t a big deal, continuing to ignore payments can result in legal claims and fewer credit opportunities. So what do you do when you can no longer afford to meet your contractual obligations? Bankruptcy is a possible solution that can help discharge or reorganize your debt. This is a legal process that includes an automatic stay, which prevents creditors from contacting you.
Let’s learn more about default and how bankruptcy can help your situation.
Defaulting on Secured vs Unsecured Debt
Secured debt is debt that is backed by collateral, such as a mortgage (backed by a home) or auto loan (backed by a vehicle). If you fail to make your payments, the lender can take the collateral away from you. This is the case with foreclosure and repossession – the banks may foreclose on your home or repossess your car.
Unsecured debt isn’t backed by an asset, but lenders can still make a legal claim if you fail to make your payments. Examples of unsecured debt include medical bills and credit card balances. Oftentimes in these cases, the lender will close the account after a certain number of months and write it off as a loss. They may then sell the debt to a debt collection agency that will then try to collect from you.
Student loans are another type of unsecured debt, and failing to make your payments will result in the same consequences as not paying your credit cards. Ignoring student loan payments can negatively affect your credit score, credit rating and future loan opportunities. If you are unable to pay your debt, it’s time to discuss bankruptcy. Bankruptcy is a legal process designed to help individuals rebuild their lives after financial hardship.
When Does Delinquency Occur?
So when does a delinquency occur? Typically, you are considered ‘delinquent’ once your payment is three months or 90 days overdue. But it’s not just the creditors that know about this. They report you to the three credit bureaus and your credit score will go down. If you try to open a new credit card, it will either be denied or include a high interest rate. There are other drawbacks to having a lower credit score. Potential employers and landlords may also check your rating, and this can impact your ability to get a job or rent an apartment.
Things get worse after this, unless you are able to catch up on your payments. After 270 days, loans move to default. It’s estimated that one-third of student loan borrowers end up in default at some point in time. This is risky territory as you could suffer tax withholdings and wage garnishments. Bottom line: Don’t ignore problems with debt. If your situation is temporary, contact your lenders and creditors and let them know about your situation. If it’s longer term, meet with an experienced bankruptcy attorney to explore your options for debt relief.
How Long Do Defaults Stay on Your Credit Report?
Believe it or not, defaults stay on your credit report for seven years. If the default was a mistake, you can have it removed and your score will increase. But if the default is legit, you’ll have to deal with it for seven long years. This is why it’s worth getting ahead of your debt – ignoring it will only cause more problems. There are options for people who are facing financial hardship. Even though bankruptcy goes on your credit report, you can start rebuilding your credit right away. Continuing to default only leads to more problems.
Schedule a free consultation with The Law Office of William Waldner to discuss your situation and determine what options you have available. Chapter 7 bankruptcy liquidates your assets and allows you to discharge most debt. You may even be able to keep your home and car with New York State exemptions. Chapter 13 bankruptcy reorganizes your debt so that you can pay it off in more manageable payments. Find out which type of bankruptcy can help your situation and prevent you from future defaults.