Dealing with the aftermath of a financial rough patch can be stressful and confusing. It’s likely that you’re up to your eyeballs in paperwork and have a lot of difficult questions running through your mind.
For instance, if you were unable to pay a credit card bill and ended up defaulting, what should you do now? If you’re not sure of the answer, take a look at the details below – the Nerds will help you sort things out!
What it means to default on a credit card
In case you’re unclear on what defaulting on a credit card means, here’s the gist: After you’ve failed to make a payment on your credit card for 180 days, your issuer assumes you’re probably never going to. At this point, the issuer can (and usually does) close your card, write off what you owe as bad debt and sell your account to a collections agency.
Now your credit card issuer is out of the picture. Your debt belongs to a collector, and you’ll start getting flooded with phone calls asking you to pay the bill. Although you can send written notice asking them to stop calling you and there are laws limiting what debt collectors can say and do when they contact you, you’ll still owe the debt. And if you don’t deal with it one way or another, you could get sued (see below).
Also, the default will be reported to the three major credit bureaus. Your credit score will take a nosedive, and the blemish will stay on your credit report for up to seven years.
In short, defaulting on a credit card bill has serious consequences. You should make it a priority to handle this matter as soon as you can.
Nerd note: As of August 2014, the FICO model treats paid and unpaid collections the same when calculating your credit score. However, a new version of the model debuts in fall 2014; significantly, it ignores paid collections accounts. Although it’s unlikely that most lenders will start using the revamped FICO model right away, this is a good reason to consider repaying your old debts.
If you’ve already defaulted, these are your options
Once you’ve defaulted on a credit card bill, you can proceed in a couple of ways:
Do nothing – You can choose to do nothing about your debt, but this is a terrible idea. Eventually, the debt collector could sue you for what you owe. If they win the suit, a judgment will be issued against you, and your wages could be garnished.
It’s important to know that debt collectors have a limited amount of time to sue you before a statute of limitations bars them from doing so. This deadline varies by state, but even if it passes, collectors can still try to get you to pay – they just can’t take you to court.
Pay off the debt – If you can afford to do so, paying off the debt might be your best option. It will get the collector off your back and you won’t have to worry about getting sued. If you choose to pay, be sure to get proof from the collector that you actually owe the debt – they are required to provide it. Then, pay in full. Making a partial payment could cause your debt to be re-aged. Also, after the payment clears, get a written confirmation from the collector that you’re no longer carrying a balance with them.
Settle the debt – If you can’t afford to pay in full, your collector might be open to settling it for less than you owe. If you can reach an agreement, get it in writing before you make the payment, and get a written confirmation that you’ve upheld your end of the bargain after you pony up the cash. Just in case the collector goes back on his word, you’ll want proof of the arrangement and that your obligation was fulfilled.
Declare bankruptcy – This is a drastic move, but it is a way to keep your debt collector at bay. If you’re totally in over your head on multiple bills and there’s no hope you’ll be able to repay it, contact an attorney and start moving forward with bankruptcy.
Once you’ve taken this step, the collector cannot keep trying to get a payment from you until your bankruptcy is settled in court (assuming the debt you have with the collector is included in the bankruptcy documents). If your debt is discharged by the judge, you’re no longer obligated to pay it.
Dealing with the fallout and moving forward in a positive direction
It’s important to remember that once you’ve defaulted on a credit card bill, the damage to your credit is already done. You’ll be stuck with the default on your credit report for seven years, but there are steps you can take in that time to start recovering. These include:
- Paying your bills on time – this should be one of your top financial priorities
- Paying your credit card bills in full every month
- Keeping the balances on your credit cards low – make frequent payments to accomplish this
- Applying for credit very sparingly
- Checking your credit report at least once per year to track your progress
The takeaway: Defaulting on a credit card bill isn’t ideal, but you do have options. Just be sure to learn from this experience and start rebuilding your credit today – it’s never too late!
Defaulted on credit card image via Shutterstock