Falling behind on your loan, credit card debt, or bills can be a scary situation. With everything getting more expensive thanks to inflation, this is a real concern for many families. It’s challenging to balance rising costs with your debt payoff strategy, and sometimes unpaid debts happen.
The best thing you can do if you’re worried about unpaid debt is to understand the process. When you know what lies ahead, you can stay prepared and make a plan. In this guide, we’ll discuss the realities of what happens to an unpaid debt.
What Is an Unpaid Debt?
To begin, we need to define an unpaid debt. It’s not as cut and dry as any debt that’s past due. Missing a single payment usually won’t result in any action being taken for unpaid debt (other than a late fee). Instead, an unpaid debt is any debt that’s in default.
For a debt to be in default, the borrower needs to have failed to repay the funds according to your original agreement. In most cases, this means falling behind by 30 to 90 days. At this point, you’ve officially violated the terms of your loan and the creditor can take action against you.
Unpaid debts come in many forms, including:
- Credit card debts
- Personal loans
- Utility bills
- Car loans
- Mortgage
Secured debt (ie. debt that’s tied to something like your home or car) has more significant consequences if left unpaid. In these cases, your property or home can be at risk. On the other hand, unsecured debt like credit card debt, isn’t likely to result in your belongings being at risk.
Expert tip: If you suspect you might default on a debt, take action quickly. Contact each individual lender and let them know you’re unable to pay. Most will have programs in place to help, and they can delay any serious action while you get back on track.
What Happens to Your Unpaid Debts?
In this hypothetical situation, let’s say you’ve avoided paying for debts for over 30 days. You’ve now violated your loan contract, and your debtors can take action to reclaim what they’re owed. There are several things that might happen depending on the type of debt, how much you owe, and so on.
- Your lender will contact you: The first thing more lenders do if you miss a payment is contact you. They can contact you by phone, letter, or email. You’ll also accrue additional interest and fees during this time.
- Your debt will be sold to collections: The most common action taken by lenders is to pass your debt to a collections agency. This is when your lender sells your debt to a collections agency that will seek the debt on the company’s behalf. Because they earn a percentage of the debt as commission, they’re highly motivated to reclaim this debt.
- Your assets might be repossessed: If you’ve defaulted on a secured debt, like your car, you could face threats of repossession. These assets will be sold to pay your debt.
- Your credit score is impacted negatively: It shouldn’t be a surprise that your debt will also hurt your credit rating. Late payments and having debt sent to collections are bad news, and these actions can plunge your score.
While dealing with these actions above can be intimidating, it’s important to understand your rights. Debt collectors can ask for payment, offer payment plans, and repossess secured goods. However, they can’t trespass on your property, use abusive language, or take unfair advantage of you. If you suspect you’re being harassed by a debt collector, report this behaviour to the Australian Financial Complaints Authority.
How to Deal with Unpaid Debts
Last but not least, how do you deal with unpaid debts? If you’re no longer able to pay your bills on time, the best thing to do is to contact your lender directly before you default. Your lenders want to work with you to get paid. They understand things happen, and they don’t want to pass your debts on to a collector if they can help it.
If your debt has already been sold to a collections agency, remain honest and cooperative. Work out how much you can afford to pay and consider adjusting your budget. Many collectors will agree to payment plans or even settle your debt.
Finally, recognize that it’s highly unlikely any legal action will be brought against you. Judgements are rare, and as long as you take proactive steps to solve your debt, you’re going to get through this.
When in doubt, ask for help. The expert team at Debt Busters can help guide you through the debt repayment process no matter where you’re starting from. You don’t have to face these next steps alone. Contact a member of our team today to get the help you need without the anxiety.