What Happens If Debt Is Not Forgiven?

When a person takes on a large amount of debt, creditors will sometimes choose to forgive the debt. When a debt is forgiven, the debtor is no longer obligated to pay the money he owed and the creditor forgoes any legal right to collect it. While debt settlement may harm a person's credit score, it can be financially advantageous for the debtor. However, when a debt is not forgiven, the debtor may face a number of consequences.

Penalties

One of the chief consequences of not paying off a debt is that the borrower will often find himself owing more and more money the longer the debt is open. This is because, according to the terms of the loan contract, the creditor may be entitled to charge punitive fees or collect additional interest on outstanding debts. This can send the debtor even deeper into debt, complicating his ability to dig himself out of his hole.

Legal Judgment

In many cases, a creditor owed a significant amount of money by a debtor will sue the debtor in court in an attempt to collect the money. If the judge hearing the case rules that the debtor does indeed owe the creditor the money plus any additional fees, then the judge will award the creditor a legal judgment. Once awarded a legal judgment, the creditor can take a number of steps to collect the money.

Collection

Creditors have a number of options for collecting money awarded in a legal judgment. If the debtor continues to refuse to pay, the creditor may seek to have the debtor's wages garnished. In a garnishment, wages are diverted from a person's paycheck and given the creditor. Also, the creditor may seek to have the individual's bank account frozen and have funds extracted in an amount equivalent to the money owed to him.

Credit Score

When a debt is forgiven, a person's credit score is harmed, as the creditor will report the debt to credit reporting bureaus as written off. However, when a debt is forgiven, a person can begin to repair the damage done to his score. By contrast, having an outstanding debt in which he is behind on payments will continue to harm an individual's score for a much longer period of time.