Debt has a way of following you into the future.
The best strategy for dealing with debt is to avoid getting into it in the first place. But life happens—student loans pile up, medical emergencies take us by surprise, and before we know it, we’re drowning in debt. It can be challenging to maintain a payment schedule in the midst of a mountain of debt, but it could be one of the most important financial moves you make.
If you think debt is bad, delinquent debt is much, much worse. Missing payments can have drastic consequences that follow you for many years to come. In fact, trying to outrun your debt is sort of like trying to outrun the mafia—it will find you no matter what. The anatomy of delinquent debt takes shape in the form of a timeline that reaches a breaking point after only 90 days. Here’s what happens:
When you miss your payment due date, even by one day, your debt is considered 30 days past due because you are 30 days behind the start of the billing cycle. This isn’t the end of the world—in fact, it happens to the best of us. One mistimed vacation and it’s easy to miss a payment.
At 30 days past due, you will not be harassed by bill collectors. You may receive a letter from the creditor, but it will likely have a friendly tone asking for payment. Your creditor may or may not report a 30-day past due payment to the credit reporting agencies and as a result, this information could show up on your credit report.
What to do: The best defense really is a good offense. If you know you are going to be late with a payment, contact the creditor ahead of time to see if you can arrange a payment plan. If you know you’ve missed a payment, but haven’t received a letter from your creditor yet, get in touch with them. They are more likely to work with you if you reach out to them first.
One month after the due date for a missed payment, the debt is considered 60 days past due because you are now two months behind the billing cycle. Things get a little more serious when debt is 60 days past due. Your account will likely be turned over to the department that specializes in collecting delinquent debt.
If you are 60 days past due, expect more aggressive contact from creditors—via phone, email, and letters. The creditor will likely call you frequently until the matter is resolved. Furthermore, they will report the delinquent debt to the credit reporting agencies, resulting in negative information on your credit report that will remain there for seven years.
At this point, interest and penalty fees are accruing and the clock is ticking.
What to do: Answer the phone. It’s tempting to avoid these uncomfortable phone calls, but that will only exacerbate the problem. Ask your creditor for a payment plan or hardship plan.
When you have missed two payments—meaning you are two months past your due date for the last time you paid your bill—your account is considered 90 days past due since you are now three months behind the billing cycle.
At 90 days, things can get serious—and a little ugly. Your creditor will most likely shut down your account, but you won’t know this until you try to use your credit card in a store. Interest fees and late fees are piling up and your credit report is taking a serious hit.
What to do: Speak with your creditor. This debt is not going anywhere—in fact, it’s only getting worse. If you are facing financial hardship, your creditor may be willing to establish a payment plan with reduced payments. At the end of that payment term, they might reactivate the account.
If your creditor is unable to collect the debt from you, they will write it off as uncollectible and notify the credit reporting agencies that your account is a charge-off. The creditor might sell the account to a third-party debt collector, who will contact you via phone, email, and mail—constantly. (The Fair Debt Collections Practices Act regulates how often collectors can call you.)
What to do: First, it’s important to verify the identity of the third-party collector with the original creditor. At this point, you may wish to try to negotiate a settlement with the debt collector—most will not settle for less than half of the balance. If you come to an agreement, be sure to get the offer in writing and include a clause stating that the collector will not sue you as long as you make the payments. Follow up with the credit reporting agencies to verify that the debt has been settled.
If you have been ignoring your debt through the entire 30-day, 60-day, 90-day, charge-off process, you can’t ignore it now. If the third-party debt collector is unable to collect the debt from you, they will resort to legal action. You will receive a summons to appear in court.
What to do: You must show up for your court hearing. If you don’t show up, it results in an automatic award to the collector. In court, the judge will serve as a mediator and will help establish a payment plan. The final resort would be wage garnishment or seizure of assets.
Just Say No to Delinquency
Debt is not a time to stick your head in the sand and play ostrich. Delinquent debt has a way of snowballing. This is one instance where ignoring a situation will make it much, much worse. It may be painful, but your best course of action is to face your debt head on and find a solution early—before you end up in court.