What to Do When You’re Delinquent on Debt
You’re past due on several credit cards, and you have a hefty medical bill looming in the back of your mind. Perhaps one credit card payment is only a few weeks late, while another is nearly a year late. The questions start piling up:
- How do you prioritize which debt to pay off first?
- How do you stop the phone calls from coming?
- How does this all affect your credit score?
If you’re delinquent (or past due) on your debt, the first thing you should do is remember that you’re not alone.
“When it comes to delinquency, there is always going to be an ingredient of shame and guilt,” said Kelly Figueroa, a financial wellness expert at GreenPath Financial Wellness. “This is why many clients don’t reach out for help.”
Communicating with your creditors — and reaching out for help from a credit counselor, if necessary — is one of the most important things you can do in the early stages of debt delinquency.
What to do when you’re delinquent on debt
If you’re delinquent on a debt, the most important thing you can do is stop ignoring it and take action.
“The first thing somebody should do is be as proactive as possible in their communication with the creditors they owe,” said Bruce McClary, vice president of communications at the National Foundation for Credit Counseling. “If you feel like you’re about to fall behind on a debt, it’s important that you reach out and contact that creditor and let them know about the circumstances that you’re facing.”
Oftentimes, reaching out to a creditor before you know a payment will be missed or immediately after a payment is missed will lead to more flexibility from the creditor.
“There are so many different options that could be on the table, depending on the creditor you’re working with,” McClary said. “It’s always better if you’re the one who calls first. Because if you wait until the point where they’re calling you, it can be a little more challenging to work out an arrangement with the creditor.”
1 to 30 days late
You may be hit with a late fee, and some calls may start coming in from your creditor. Typically speaking, this is the most important time frame of debt delinquency. Because the payment is still within one month of its due date, you’ll likely be able to work something out with your creditors.
In addition, it also helps if your previous relationship with your creditor has been good. “If this is your first time falling behind, and you’ve had an account with them for years, that also might improve your chances of getting a little bit more flexibility in the arrangements you work out,” McClary said.
What should you do?
“The first thing you should do if you’re delinquent on your debt is call your creditors,” said Maria Scenna, a marketing specialist with American Consumer Credit Counseling. “You should never ignore your debt, even if you’re having trouble making your payments. And yes, avoiding calls from debt collectors can make the problem worse.”
Scenna said that although they won’t be able to waive your payment, the creditor might give you an extension, allow you to make a partial payment until you have money to pay the remaining amount or waive your late fee.
Explain to your creditor if this is a specific hardship, such as the loss of a job or a death in the family. “A lot of clients don’t know that different services and credit card companies, even utility companies, will have some options for clients who are just going through a temporary hardship,” Figueroa said.
30 to 90 days late
During this time frame, calls from your creditor asking for the past due amount will likely start coming in.
“Once you get to about 60 days past due, then it’s likely that you’re going to be getting the phone calls,” McClary said. “And the letters.”
In addition, the delinquency will likely start affecting your credit report and credit score around this time. Creditors report missed payments to credit reporting agencies, so by the first delinquency, your credit report will be affected, Scenna said. “The longer you miss your payments, the lower your score will drop.”
McClary said the real impact on the credit report happens at around 60 days. “If you’re only 30 days past due, it’s not really going to have an impact on your credit report,” he said. “But if you’re 60 days plus — if you’re two payments out, in other words — you can be pretty sure that there’s going to be an impact on your credit report.”
What should you do?
At this point, you should call your creditor and attempt to create a repayment plan, if possible. Although you might not be able to pay your balance in full, you might be able to pay a small amount each month that will appease the creditor.
“If you wait until the point where you’re more than 60 days past the last payment that you made, you’re dealing with two problems instead of one,” he said. “You’re not just dealing with the problem of working out an arrangement with the creditor, you’re now dealing with the likely problem that the creditor has reported this negative activity to your credit bureau. And that would then have an impact on your credit score. It has a cascading effect.”
90 to 120 days late
Once you hit 90 days past due, it’s likely the creditor will start calling asking not just for the past due amount, but for the full balance owed. In addition, this is the time period in which your debt will either be given to the company’s internal collections agency or to a third-party collections agency.
“If it’s a credit card and there was still available credit on that account, at that point beyond 90 days, it’s almost a certainty that the account will be shut down and you’ll no longer have use of that card,” McClary said. “And then at 120 days, it’s very likely that it’s out to a third-party debt collector.”
What should you do?
Take another look at your budget to see if there’s any wiggle room. If there is, contact your creditor and propose a repayment plan that will work with your budget. If you agree to a repayment plan with your creditor, you will likely be pulled from the third-party collection agency.
120 to 180 days late
During this time frame, the debt might still be with the credit card’s internal collections agency, or it might have been already sold to a third-party collections agency. The calls and letters will continue coming — somewhat aggressively, depending on the creditor or collections agency. At this time, you’ll likely be offered a settlement.
What should you do?
Take the settlement offer if it works with your budget. If you are unable to pay the proposed settlement amount, you should get in touch with a nonprofit credit counseling agency for help. They can help you set up a debt consolidation repayment plan that works for you, and can communicate with your creditors, if necessary.
180-plus days late
If your debt hasn’t already been given to a third-party collection agency yet, it almost certainly will be once the debt is 180 days past due. Debt collectors will pursue you aggressively for the next three months or so, at which point they will either sell the debt to another third-party collection agency or sue you (depending on the type of debt you have).
Around this time, a debt settlement will likely still be on the table, according to Figueroa. “The truth is that anytime you are over six months behind, for the most part, the creditor will send a letter for settlement to your house,” she said, adding that debts can often be settled by consumers without the assistance of a debt-settlement company.
What should you do?
If you still cannot afford the debt settlement amount, try to negotiate an amount that works for you. For example, if your debt is $5,000, you can propose paying back $2,500. Employ the help of a nonprofit credit counseling agency or debt-settlement company, if necessary.
“An absolutely last resource could always be bankruptcy,” Figueroa said. “Of course, this is a very high-level option for people, depending on their stage, depending on their goals, and of course their budget and their resources.”
Paying off old debts vs. new debts
Perhaps you’re delinquent on several debts, each of which is from a different time period. Maybe one debt is only 15 days old, while another is over two years old and has already been given to a third-party collection agency. You might be struggling to prioritize which debts to pay off first.
If you are facing several debts, one thing worth looking at is the statute of limitations on these debts. Depending on the state you live in, there are certain limitations in place for how long a debt can be pursued. For example, the statute of limitations on credit card debt in Illinois is five years, while the statute of limitations on medical debt in the same state is 10 years. In New York, the statute of limitations on credit card debt is six years, while in California it is just four years.
“It’s important to understand where you are in terms of the statute of limitations on collectible debt,” McClary said. “And also the debt collection laws. Debt collection laws vary from state to state. There are certain states that have their own rules that apply to third-party debt collectors and when they can collect the debt and when they can’t.”
In addition, there is a set of rules in place nationwide regarding the fair collection of debt: The Fair Debt Collection Practice Act. “It’s a very good idea for people to understand how they’re protected by the Fair Debt Collection Practices Act,” McClary said, “and also to do a little bit of extra background work and look at what additional consumer protections are in place in the state where they live.”
5 ways to dig yourself out of debt
If your debt is significant and you are struggling to manage it, consider using one of the following strategies to get out of debt more quickly.
1. Consolidate your debt
Debt consolidation consists of putting all of your debt together and taking out a personal loan — also known as a debt consolidation loan — to pay off that debt using one monthly payment.
Many consumers use this method, as it involves turning many debt payments into one monthly payment. This method is only worthwhile if the interest rate on the debt consolidation loan is lower than the interest rate on the debt.
2. Do a balance transfer
A balance transfer involves taking an existing credit card balance and transferring it to a new card, called a balance transfer credit card, which will likely have a low introductory rate grace period.
Sometimes, these introductory rate grace periods can be as low as 0 percent APR. This method is only worthwhile if you will be able to pay back your debt before the introductory rate expires, as the interest rate will go back up after that grace period ends.
3. Contact a nonprofit credit counselor
If you’re struggling to pay back your existing debt on your own, get in touch with a nonprofit credit counseling agency. Counselors at these agencies can help you come up with a plan for paying off your debt and can communicate with your creditors, typically at a very low cost.
“Sometimes, it’s most helpful to get a financial professional who can put another set of eyes on your situation and maybe identify some approaches you can take that you might not have been able to see for yourself,” McClary said. “Or maybe you’re at the point where your communications with creditors are causing more frustration than results, and you feel like your efforts have come to a halt.”
4. Use the debt snowball method
The debt snowball method, popularized by financial expert Dave Ramsey, involves paying off debts from smallest to largest. This method is often met with success because consumers like the “wins” that accompany paying off debts one by one.
5. Use the avalanche method
The avalanche method for paying off debt involves paying off debts with the highest interest rates first. Although this method doesn’t come with as many small “wins” as the debt snowball method, it’s typically the more financially savvy method, as paying off higher interest debts first will save you money in the long run.
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