Here’s What Happens If You Just Stop Paying Your Debts
Student loans, credit cards, medical bills—we’ve all thought about just saying, “Screw it.” I mean, seriously: what’s the worst that could happen if you just never pay off your debts? Of course, there are obvious consequences, such as a serious hit to your credit rating. But if you feel tempted to abandon your debt repayment plan altogether, you should know that the long-term consequences are often severe.
What happens if you just don’t pay your debts?
According to debt attorney Leslie Thain, Esq., ignoring debts not only causes your credit score to drop and your balance to increase. of Tayne Law Group, located on Long Island. She explains how your creditors will begin debt collection efforts, “which means you’ll start receiving regular calls and letters, even social media messages, from debt collectors.” These calls can seem to border on stalking as they come at any time of the day or night.
“Although debt collectors are legally prohibited from discussing your debt with your family, friends and co-workers, they may contact these people to verify your contact information and essentially try to track you down,” says Thain. Consider how such an invasion of your privacy will add stress and irritation not only to your life, but also to the lives of those around you.
If you continue to ignore these debts or fail to pay them, creditors may sue, which could result in a lawsuit. If you lose, a judgment will be entered against you, which will give the creditor the legal power to garnish your wages, seize certain assets, or place a lien on your property. Thain explains how these effects work:
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Seizure of wages. Imagine having a portion of your paycheck automatically deducted and sent to your lender every payday. This can significantly impact your take-home pay, making budgeting difficult and making day-to-day living expenses even more difficult.
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Asset confiscation. Depending on the debt and state laws, creditors may be able to seize non-essential assets, such as a second car or expensive jewelry, to get their money back. This can be a traumatic, stressful and humiliating experience.
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Real Estate Liens: A lien placed on your property essentially restricts you from selling it freely or refinancing it. You will either have to pay off the debt first or convince the lender to remove the lien before selling or refinancing. So, when you refinance, if and when interest rates drop, you may not be able to take advantage of the new lower interest rate while keeping your mortgage interest rates high. And in the event of a sale, this can significantly complicate the process, which can seriously delay the time it takes for you to complete the entire transaction. Depending on your home selling situation, this could put your entire life on hold until the lien is lifted.
Consequences of late payment of credit card bills
The most immediate consequences of missing a credit card bill are increased costs due to late fees and penalty APR.
“The APR is a higher interest rate that kicks in if you miss a payment, making it even more difficult to pay off your debt,” Thain says. “Your credit score will also suffer, making it harder for you to borrow money in the future or get approved for things like renting an apartment, opening utility accounts or purchasing a cell phone.”
However, if you continue to miss payments, your account will go into collections. This is even worse for your credit score and debt collectors will start calling you. Ultimately, an unpaid debt can lead to a lawsuit.
Some people believe that just because a debt isn’t on their credit report, it’s gone. But this is simply not true. If a debt does exist, then a simple search will lead to the discovery of the debtor and can have the long-term consequences described above.
Bankruptcy should be a last resort
While it may be tempting, Thain insists that bankruptcy should really be a last resort as the consequences could affect you far into the future. While you may be overburdened with high debt and having trouble paying bills, bankruptcy “can be—and often is—a long and expensive process.”
Depending on the type of bankruptcy, you may have to sell some of your assets (real estate, vehicles, etc.) to obtain funds to pay off debts to creditors, or you may have a payment plan lasting three to four years . five years, which obliges you to repay 100% of the amount you owe. It’s also not automatic: you need to be means tested.
The impact on your credit score is significant and lasts between seven and 10 years. This can make it incredibly difficult to get a loan, buy a home, or even get a job in some cases. Essentially, bankruptcy can derail your financial life for a decade, making it much more difficult to recover. That’s why it should only be considered if the benefits of getting out of debt outweigh these negative and long-term consequences. For more information, see our guide to what actually happens when you file bankruptcy .
Don’t Make These Mistakes When You’re in Debt
One of the biggest mistakes Thain sees in his clients is paying the minimum on all debts and “thinking that’s enough.” With credit card interest rates at an all-time high , paying only the minimum amount won’t impact your balance and your debt will continue to grow. Instead, it’s critical to identify your highest interest rate debts and create a plan to aggressively tackle them before they get out of control.
Another mistake is simply not knowing how much you owe and to whom. Thain says many clients have difficulty answering this question, “which is a huge problem because we need to know and understand the underlying level of debt to really address the root of the problem.” Often those who are in debt ignore the problem, but this only leads to worse consequences in the future. Without a clear understanding of your debts, it is impossible to create a plan to solve them.
It’s easy to overspend if you’re not focused on the end goal. Thayne sees clients with out-of-control spending, and she usually recommends creating a budget before spending so you know what’s available and don’t be tempted to buy on impulse.
Not checking your credit report annually is another common mistake. Thain recommends getting free copies of your credit reports from Annualcreditreport.com and making a list of all your debts, the current balance for each and the interest rates. She explains that “it gives you a clear picture of your debt journey and helps you set appropriate goals.”
Bottom line
The consequences described above are a serious headache in themselves. When it comes to your debt, each consequence significantly reduces the amount of income you have access to, making this headache even worse. In other words, ignoring the debt won’t make it go away, and your creditors will get that money one way or another. Therefore, it is better to take a proactive approach to dealing with debt problems and look for possible solutions rather than allowing the situation to gradually worsen.
If you’re struggling with debt, consider talking to a credit counselor or financial advisor about your options. There are better solutions than just leaving.