What to Expect if You Have Delinquent Debts
Debt becomes delinquent when a borrower is unable to make timely payments. When a payment is past due, lenders send letters and emails and call borrowers. Some banks also inform the reporting bureaus. Within a 6-month period, your financial institution will attempt to collect debt in different ways – through law firms, controllers, accountants, and collection agencies. If you default, delinquent debt will affect your credit score, making it more difficult to get approved in the future. Most lenders hold debts for a period of 180 days and then sell them to collection agencies.
Types of Delinquent Debt
Examples of delinquent debt include deficiency balances such as installment contracts and real estate and auto loans. Other examples are bad checks, medical receivables, student loans, and credit card charge offs. The category of legal-related debt includes dismissed bankruptcies and judgments. Borrowers owe money to attorneys, private investigators, as well as banks and other financial institutions. There are different sources of bad checks such as retail chains, food stores, and financial establishments. Closed accounts and insufficient funds are other examples. Finally, delinquent debt also includes home equity and automobile loans, and retail purchases. Money is owed to retail stores, finance companies, banks, and car lots.
Scope and Magnitude
Studies reveal that between 8.8 and 10 percent of borrowers hold credit cards that are classified as delinquent. Some of them choose to file for bankruptcy protection. Customers with a low income level are more likely to use delinquency. Households that are in financial distress are likely to face financial problems in the future.
What to Expect
If you are 2 months late, your financial institution may report your account to the credit bureaus. Another option is to develop a repayment plan, depending on your circumstances. If you are unable to keep up with your payments because of a loss of job, serious illness, or divorce, you may want to talk to your loan officer and explain your situation. If you are 3 months late, your issuer will assess penalty interest and late fees. Expect letters, emails, and calls from your bank. There is still a chance that your creditor agrees on a hardship or repayment plan that makes monthly payments more affordable. Before you discuss this option, make a list of other sources of income, including alimony, child support, second or part-time job, rental income, etc. List your income and expenses to determine the largest payment you will be able to afford. Finally, if you default, your bank will contract or sell your debt. The only option you have is to negotiate with your creditor and offer settlement. This is a debt reduction method whereby financial institutions agree to accept a reduced balance. The borrower makes a lump sum payment equal to 35 – 50 percent of the outstanding balance. While there are benefits for borrowers, including a more favorable interest rate, you should consider the downsides as well. Your credit score will be affected, and some loans cannot be included in the settlement agreement. Examples are judgments and tax liens. If settlement doesn’t work and the collection agency is unable to contact the borrower, they will file a lawsuit. They have the right to seize your assets and garnish your wages.
Alternatives
There are alternatives to settlement, including consumer proposal, negotiating with banks, credit counseling, individual voluntary arrangement, restructuring, and filing for bankruptcy. The method you choose to deal with delinquent debts depends on your financial situation, age, marital status and number of children, income level, types of credit used, etc. Financial institutions take different factors into account, including your credit score, debt to income ratio, length of credit history, employment history, and others. The worst thing you can do is to take no action. Whether your bank or credit union will file a lawsuit depends on your financial situation. For example, if you have no assets and are unemployed, your creditor is unlikely to initiate legal action. The reason is that there are not assets to seize and sell. Some people choose to file for bankruptcy, but whether this is a good idea depends on the types of secured and unsecured loans you have.
Self money management is another option that works well if you are disciplined and have good money management skills. You may want to analyze your income and expenses, create a monthly budget, and stick to it. There are different ways to reduce your monthly expenses – make a shopping list before going to the grocery store, take public transportation, etc. In any case, make sure you file your tax returns and pay your taxes on time.
Zombie Debt
Zombie debt, which has been classified as uncollectible, is a serious problem. Some borrowers receive a payment notice for loans they have paid off. This occurs when the creditor sells debt to a third-party collector while the outstanding balance has been paid off. You may want to keep track of your monthly payments and review your statements to be able to prove your case.
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