If you're juggling mortgage debt, student loans, a car loan or other debts, it's easy to feel like you'll never get ahead. In some situations, you may be tempted to walk away from unsecured debts altogether. While you're not in danger of losing any collateral, not paying your unsecured debts has some potentially negative implications. Before you bail on your credit card debt or medical bills, it's important to look at the big financial picture.
Impact on Credit
If you're not making regular payments to your unsecured debt, your creditor will most likely report it to the major credit bureaus. Having multiple late or missed payments on your credit report can cause your score to drop, which can make it difficult for you to get approved for new credit. If your account remains delinquent, your creditor may decide to just charge it off, which can do even more damage to your credit. Late payments, charge-offs and collection accounts can remain on your credit report for seven years from the date of the original delinquency. Depending on the laws in your state, an outstanding judgment can stay on your credit for up to 10 years.
If you're not paying your unsecured debts, you'll likely be contacted by a debt collector at some point. The federal Fair Debt Collection Practices Act spells out what debt collectors can and cannot do with regard to contacting you about a debt. Debt collectors legally can't harass you, threaten you, make false statements to you or to your other creditors, or engage in any unfair practices to collect a debt. They can, however, contact you by telephone or mail unless you expressly ask them not to. The frequency of phone calls and letters may increase the longer the debt goes unpaid.
If other collection actions are ineffective, your creditor may decide to sue you if you owe an unsecured debt. If the creditor files a lawsuit, you should receive a copy of the summons and complaint, which tells you when to appear in court and how much you're being sued for. You'll have the opportunity to appear at the court date and provide a defense as to why you don't believe you owe the money. If the creditor wins a judgment, they can collect on the debt by garnishing your wages, placing a lien on any property you own or levying your bank account.
Each state puts a different time limit on how long creditors can take you to court for a debt. This means that after the time limit has expired, you still owe the debt but you can no longer be sued. Filing Chapter 7 bankruptcy can eliminate your unsecured debts and put a halt to creditor lawsuits. You can also file Chapter 13 bankruptcy, which gives you time to reorganize and pay down your debts while also protecting you from creditor lawsuits. If you're considering bankruptcy, you should be aware that it can cause significant and long-lasting damage to your credit.
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