Although failure to pay a debt is not a criminal offense, it has many consequences depending on on the debtor's situation. A mortgage default will lead to foreclosure, and an unpaid car loan can result in repossession of the car. Wages may be garnished, tax liens imposed on property, and credit ruined, hindering future borrowing ability. In the event of failure to pay a debt, the debtor must understand the nature of the debt, prepare for likely consequences and seek out possible solutions.
Nature of Debt
A debt can be either secured or unsecured. A secured borrowing can be as large as a mortgage or a car loan or as small as pawning off a piece of jewelry for short-term cash needs. By failing to pay a secured debt, the borrower simply loses the security deposit -- the house, the car or the jewelry. An unsecured debt is granted against only the borrower's credit, an intangible. If a borrower breaks the promise to pay, the recourse for an unsecured debt may be problematic for both the lender and the borrower as it can involve collection, lawsuit or the seizing of personal property.
In addition to losing security, failure to pay a secured debt affects the borrower's creditability for future borrowing. Lenders may charge higher interest rates if they ever approve a borrower with tainted credit record. Failure to pay an unsecured debt presents many uncertainties for the debtor, as lenders and collection agencies may pursue different courses of action. In general, the last collection resort for lenders is filing a lawsuit and, if a court judgment is granted, the lender can garnish a portion of the debtor's wages, which may force an eventual bankruptcy filing.
When facing with a debt-collection lawsuit, a borrower's options become very limited. It is helpful for the borrower to seek out solutions with the creditor after failing to pay a debt. Many times, lenders of unsecured debt such as credit card debt are willing to negotiate with the borrower for a reduced payment to resolve the debt. By doing such a debt settlement, the borrower tries to limit any negative remarks on his credit report.
Statute of Limitations
Laws governing debt collections, such as the federal Fair Debt Collection Practices Act, afford consumers certain rights with regard to how debt can be collected. For example, debt collection agencies cannot make collection calls during certain hours of the day. Statutes of limitations allow lenders to sue only within a specified period, which can be as short as three years in some states for some debts. The failure to pay a debt would normally stay on a credit report for seven years and then be erased on the assumption that a credit report, negative or positive, should be aged off as it becomes irrelevant over time.
Failure to pay a debt not only has direct financial impact on the borrower but can also bring other unintended consequences. For example, it can affect employment, both for the existing job and future career. When repeated court judgments are placed against the borrower for wage garnishment, the employer could potentially fire the employee because of concern that the lack of credit could translate into an issue of character. Certain professions, such as financial services, may require a credit check at the point of hiring, and an unsatisfactory credit history might hurt the job seeker.