During times of financial stress, it may be tempting to stop sending payments to your creditors. The consequences of nonpayment vary slightly depending on the type of debt you default on, but can last for many years and cause you considerable problems in the future. Negotiating new payment plans or loan terms with your creditors is always preferable to ignoring your financial obligations.
Additional Charges
Creditors add late fees to consumer accounts that remain unpaid past the due date. Although company policies differ, expect to incur numerous late fees the longer your debt remains unpaid.
If you owe a credit card debt, additional charges will apply. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 restricts card issuers from raising interest rates during the first year an account is open -- provided the card holder pays all bills on time. As soon as your payment is 60 days late, the credit card company will raise your interest rate -- causing the balance you owe to grow rapidly.
Asset Seizure
Secured debts, such as an automotive or mortgage loan, are directly tied to property that you own. Because your lender holds a security interest in your assets, it can and will repossesses those assets if you stop making regular payments.
Credit Damage
Your lender reports your payment history to the credit bureaus. Missed payments affect your credit report negatively and cause your credit score to drop. The Fair Credit Reporting Act (FCRA) permits negative account information to remain on your credit record for up to seven years.
Should you ever seek new credit or loans in the future, your new lender will see that your past credit history does not reflect responsible debt management skills and either turn down your application or charge you a higher interest rate -- costing you more money.
Collection Activity
Unpaid debts that are not secured by property, such as credit card debts, are eventually referred to debt recovery agencies for collection. Debt recovery agencies will aggressively pursue you for payment using telephone calls, letters and emails to demand that you pay off your outstanding debt.
If a debt recovery agency cannot collect the debt you owe, it sells your account to another agency. No legal limitations exist regarding how many times creditors can sell a debt. Thus, debt collectors can continue contacting you and attempting to collect on your account indefinitely.
Legal Action
Either an original creditor or a collection agency can sue you for debts you leave unpaid. State laws regarding collection activity after a lawsuit vary, but typically grant the creditor additional options such as wage garnishment and attaching property liens. The court judgment that results from a debt collection lawsuit also appears on your credit report for seven years -- damaging your credit score even further.
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