Bad Debt Problems

Banks, loan companies and other lenders consider accounts to be bad debt after you stop paying for about 180 days, according to MSN Money writer Liz Pulliam Weston. Creditors consider your likelihood of repaying the bill to be low after six months, so they usually take steps to get it off their books and get some money by selling off the account. You may even face a lawsuit for the bad debt.

Process

Creditors follow a process for handling bad debts that usually includes charging the accounts off their books as not collectible, which gives them a tax benefit. This action does nothing to legally absolve you from paying the debt, and the lender may make some money off the account by selling it to an independent collection agency at a steep discount. Charge-offs show up on your Experian, TransUnion and Equifax credit reports, along with the original delinquent account information, and the debt collector usually adds an entry, too.

Effects

Bad debt problems affect your credit rating, making other lenders leery of working with you once they review your credit reports. The unpaid bills mark you as someone who is at high risk of defaulting on other obligations. Charge-offs and collection accounts also devastate your credit score because they are part of your payment history. Thirty-five percent of your total score is based on that category, according to credit scoring giant FICO. Debt collector sometimes file suit to collect on bad debts. You are especially at risk if you have a steady job, because the collector can garnish your wages if it gets a judgment against you.

Time Frame

Bad debt never completely disappears, but your problems lessen over time because it drops off your credit reports and collectors lose their right to sue after a certain number of years. The allowable bad debt reporting period for Experian, TransUnion and Equifax is seven years, according to the Federal Trade Commission, after which the entry is completely erased. The period during which you can be sued varies by state, running from two to 15 years, the BCS Alliance explains. Collectors can still pursue you in other ways after your state's statute of limitations expires, but they cannot take you to court.

Prevention

You can often prevent bad debt problems by settling with your creditor before, or even after, it charges off the bill. Lenders often accept a discounted amount to settle a bill rather than writing it off and getting pennies on the dollar from a collection agency. Negotiate your settlement in writing, and ask the lender to remove the bad credit report entry entirely or make its status "paid as agreed." Settled delinquent accounts still cause credit problems, even though you paid the negotiated amount, unless you get the status changed to something favorable.