What Can I Do If I Miss a Payment or Cannot Pay a Debt?
If you miss a payment or cannot pay a debt, a creditor has a number of options at its disposal to encourage payment, including the use of collection agencies. While debtor's prison is a relic of the past, inability to pay a debt still can have negative consequences, including damaged credit scores and lawsuits. Bankruptcy, which allows consumers who are unable to pay back their debts to put a hold on collection efforts while working out a repayment plan, should be considered a final option (see What is Bankruptcy?).
This article explores the various options for debtors who are unable to pay back their debts, as well as the actions typically taken by creditors when debts are not paid. See FindLaw's Debt Relief section for more information.
Negotiating with Your Lender
Ideally, you want to avoid having your account placed in collections; being reported to a credit agency; or getting hit with a lawsuit when you miss a payment or several payments. Lenders would rather not spend time and money pursuing unpaid debts, which means it is in the best interests of borrowers to communicate with their lenders to negotiate a repayment plan. Even if creditors initially insist that you must pay a certain amount each month, they usually will compromise on terms and amounts if it increases their chances of getting repaid.
A mutually negotiated modification of your debt, often referred to as a "workout," is one common solution for consumers who fall behind. The two main types of workouts are compositions (a contract in which creditors agree to take partial payment) and extensions (a contract in which creditors agree to additional time to pay off a debt), which typically involve more than one creditor. Entering into a voluntary agreement with the lender often allows you to discharge a portion of your debt, which is similar to bankruptcy but without the associated drawbacks of bankruptcy protection.
See Dealing with Creditors Informally for more details.
Debt Counseling and Other Third Party Services
There are a number of debt-consolidation, credit counseling, and other services offered by third parties to help struggling debtors, but make sure you do your research before you decide to use one. Reputable debt-relief companies always explain your legal rights and do not charge a fee before services are rendered. See Avoiding Credit Repair and Credit Counseling Scams to learn more.
Creditors' Actions When Debtors Fall Behind
Understanding how your creditor might pursue an unpaid debt will help you to be proactive and find a workable solution with your lender. Generally, creditors are willing to negotiate payment terms that are amicable for both parties. Creditors (or their collection agency) may use any of the following methods to pursue repayment of your debts:
- Contacting You: The creditor may contact you directly or through a collector working on its behalf. Lenders must adhere to rules established by the Fair Debt Collection Practices Act (FDCPA), which prohibits the use of harassment or threats when communicating with debtors (see The Fair Debt Collection Practices Act for an overview).
- Reporting You to a Credit Agency: Lenders may report your debt delinquency to one or more of the three major credit reporting agencies (Experian, TransUnion, and Equifax), which typically has the effect of lowering your credit score (visit AnnualCreditReport.com to get your federally mandated free report).
- Filing a Lawsuit: Since legal action is costly and time-consuming, lenders typically will sue their borrowers for nonpayment of debts only as a last resort. For instance, you may be sued if you stop making payments and ignore phone calls and letters from your lender. If the creditor prevails in a lawsuit, your wages may be garnished.
- Repossessing Your Property: If the debt is secured, meaning a specific item is used to guarantee debt repayment (such as a car or home), lenders may repossess that item if you default on the terms of your loan.
In any case, it's often best to contact lenders directly or speak with a bankruptcy attorney if you miss a payment or do not think you will be able to pay off a debt.