Debt Management Fail: Study Says 35 Percent of Americans in Default
According to a recent study by the Urban Institute, about 35 percent of Americans have at least one defaulted account on their credit histories. Defaults can be tough on your credit scores, and resolving them is important for effective debt management. Missed and misapplied payments and inaccurate information reported by third party collectors and credit bureaus can cause defaults to appear on your credit reports. Negative entries on credit reports lower your credit scores, and may remain on your credit history for three years or more. Bringing a defaulted account current does not automatically remove the default from your credit reports, but the account should be updated to show that the default was paid. You may, however, be able to negotiate the removal of the default as part of your repayment plan with the creditor.
Defaulted accounts and other negative entries on your credit reports can create problems aside from your finances. Credit reports and scores are frequently reviewed for decisions connected to employment and rental applications.
Debt Crisis? Find Your Escape Route
“Debt rescue” is possible, depending on the types of debt you have.
- Order your credit reports and credit scores: You can order a free copy of each of your credit reports annually at the government’s annual credit report site, but you’re already in a better position with My LendingTree. We update your credit file every month and provide in depth analysis to identify where you can save on monthly payments and what steps you can take to improve your credit.
- List your debts: Organize your debts into categories including mortgages, vehicle loans, education loans, credit card debt and consumer loans. Include the creditor’s contact info and your balance, the minimum monthly payment, next due date and interest rate for each account. For revolving debt on credit cards, try to consolidate into a personal loan or 0% interest balance transfer card and focus your effort on paying that debt down first.
- Compare your list to information on your credit reports. Although there may be some differences in information on each credit report, make note of possible errors. Credit scores can vary according to which accounts are reported to each bureau. If one score is much different from the other two, check that credit report carefully for errors and indications of identity theft or fraud.
Debt Management Puzzle: Finding Solutions to Debt Problems
Debt management options vary according to your credit scores and types of debt owed. If you have bad credit, you’ll have fewer options, but help may be available.
Home loans: If you cannot make your mortgage or home equity loan payments on time, contact your mortgage company immediately. Programs are available to help you bring your account current if you want to keep your home, or if you wish to sell, your mortgage company may cooperate by providing a period of forbearance or accepting a short sale to prevent foreclosure. Government sponsored foreclosure prevention programs are also available. The sooner you ask your mortgage company for help, the better your chances of receiving assistance.
Vehicle loans: If you have missed any vehicle payments, contact your auto loan company immediately. If you don’t communicate with your auto finance company, your car could be repossessed. Vehicle loan companies may modify the terms of your loan by adding past due interest to the balance of the loan and adjusting the due date to the current month. They may also offer repayment arrangements. Auto repossessions are expensive and embarrassing; it’s best to work with your vehicle loan company right away.
The Federal Trade Commission cautions that home loans, home equity loans and vehicle loans are secured by your home or property. If you don’t work out repayment arrangements, your mortgage lender or vehicle finance company can foreclose or repossess your home or vehicle.
Unsecured Debt: Multiple Debt Management Options Available
Credit card debt, education loans and personal loans are unsecured debts, which means that there is no collateral associated with these types of debt. Unsecured debts are risky for lenders, so they closely monitor payment due dates. Options to bring your accounts current may include:
- Forbearance: This allows you time to gather funds needed to pay your accounts current. It won’t work if you don’t know when you’ll be able to pay up, but if you can commit to pay by a specific date, a forbearance agreement can help.
- Repayment agreement: A lengthy financial hardship can make it impossible to repay all amounts you owe at one time. Creditors may agree to establish repayment program for past due accounts.
- Debt management and credit counseling services: These agencies can help design a budget based on your current income while also negotiating repayment terms with unsecured creditors. The U.S. Department of Housing and Urban Development (HUD) maintains a list of approved housing counseling agencies that can also help with credit problems.
- Bankruptcy: In general, most consumers file either a Chapter 7 bankruptcy, which discharges all eligible debts, or a Chapter 13 bankruptcy, which establishes and administers an affordable repayment plan. At the end of the term (three-to-five years), remaining balances are forgiven. The National Foundation for Credit Counseling advises that a bankruptcy can remain on credit reports for seven to ten years (although its effect on your credit scores diminishes over time).
About Medical Bills and Collection Agencies
Creditors and health care providers often transfer unpaid accounts to collection agencies. Debt collection agencies are subject to federal regulation, and are not allowed to use abusive or threatening techniques. Always attempt to work with creditors before collection agencies are involved. Keep track of all payments made to health care providers, and pay all co-payments and deductibles promptly.