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What happens when you can’t pay your debts?

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(© Alexander Borisenko –

According to Forbes, while the richest 400 Americans have become 14% richer during the coronavirus, 50% of Americans now have negative net worth. Debt is a pervasive problem in households across the globe and its impacts on mental health, physical health and lifestyle cannot be overstated. It is statistically likely that you will have debt at some point in your life, so it is important to understand what happens when you can’t pay off debt.

Stage 1: Reminders

If you are in debt to a business or have outstanding payments, you will get reminder letters in the post. If you don’t act on these letters, it is likely that you will get several more. Often these will cite consequences of not paying debts, including a bad credit score. They will get progressively more worrying, until you get a letter saying that your debt has been transferred to another entity.

Stage 2: Agency Transferral

Your debt will be either sold to an agency that collects debt as a business model, or the business to which you are in debt will hire a collection agency. Typically, this happens after about 60 days of non-payment. If, at this stage, you pay the debt collector, your money will be split between the debt collector and the hiring business if they didn’t sell it.

Stage 3: Collection

Debt collectors will contact you if you don’t pay them. It takes around half a year for them to decide that you are unlikely to pay your debt. Throughout this period, they will likely call and mail you frequently. They may even visit your home and try to settle the debts in person.

These events are likely to be highly stressful and frightening. If the debt is small, however, the creditor may just halt collection efforts and not spend any more money trying to resolve the debts (common with parking tickets). Though this is your best-case scenario, if your debts are large, it isn’t likely for this to happen.

Stage 4: Further Action

If your debts are very large (e.g. mortgage payments), your creditors may have a legal right to attempt to foreclose on your home — to take possession of it and sell it to recoup their investment. This can be a traumatic experience for an individual, but some stress can be alleviated. It is always worth speaking to a lawyer about the attempt to foreclose your home, to see if you have any legal defences available.

Stage 5: After Effects

The after effects of unpaid debt can vary, but almost all include damage to credit. If you have a home foreclosure, your credit score will drop by almost 300 points. A debt that gets reported to a consumer reporting agency can remain on a credit report for 7 years.

Depending on your State, there is a statute of limitations for debt, which means that if you don’t pay it for long enough you will no longer be legally liable for it. However, there is a chance it will still be on your credit report, which can impact your ability to borrow money in the future and will influence how you buy a house or a car if you need debt to do so.