Defaulting on Unsecured Lines of Credit

Defaulting on unsecured lines of credit can have damaging effects on your existing assets and your long-term credit health. Unsecured lines of credit are credit cards and other debts without collateral at stake like a home loan or car loan. A debtor may pursue you in a number of ways to collect the debt from simple phone calls to a civil lawsuit.

Damage to Your Credit Score

Defaulting on an unsecured line of credit can severely damage your credit score. Once a bank or other lending institution reports your delinquency to a credit bureau, it can remain on your credit report for up to seven years unless the debt is settled. This can make it difficult to secure new unsecured credit such as a credit card and may increase the down payments necessary to make certain purchases such as open utility accounts or purchase a new cell phone plan.

Collection Agencies

Your original lender may sell your debt to a collection agency as a means of recouping some of the financial loss of your default. Collection agencies are notoriously aggressive in collecting outstanding bad debts and may keep your phone ringing on a regular basis. The Fair Debt Collection Act does provide you some protection from aggressive debt collection practices. Debt collectors may only contact you at times that are convenient for you to answer the phone and may never contact you between the hours of 9 p.m. and 9 a.m.

Civil Suit

An unsecured line of credit has no collateral that your lender may seize in the event you don't pay your debt. As a result, the debtor has no leverage to force your payment and may file a civil suit against you in attempt to receive some payment for the debt. A judge may order you to liquidate assets to pay off the debt or garnish part of your wages if you live in a state where it is legal.

Bankruptcy

If you are in a deep financial trouble with multiple defaulted credit accounts, bankruptcy may be your only answer. Unsecured lines of credit may be included in Chapter 7 bankruptcy. Once you file for bankruptcy, all collection practices against you are required to stop. You are required to meet certain income standards to be granted bankruptcy protection. Under the terms of Chapter 7 bankruptcy, you may be required to liquidate some of your assets to pay some of your debts before being granted a clean financial slate.