Some years back, a popular financial blogger and podcaster offered a novel solution to credit card debt: just don’t pay it. That proposal was based on two claims: your credit score doesn’t really matter anyway, and since collection agencies buy your debt for pennies on the dollar, it’s easy to settle with them for a lot less than you owe. But are these claims true? Is walking away from debt really a viable option?
Let’s take a closer look.
Walking Away From Debt: The Timeline
You’ve had it with a debt, and you’ve decided to just walk away. You stop making payments. What’s going to happen?
That depends to some extent on the type of debt, the creditor, and the specific agreement you have with that creditor. In general, though, here’s what you can expect.
- 30 days. You can expect a letter, call, or email from your creditor reminding you that you’ve missed a payment. In addition, your late payment may be reported to one or more credit bureaus.
- 60 days. If you haven’t paid the debt or responded to the 30-day message, you can expect to receive more aggressive requests for payment. You may be assessed late fees, and a penalty interest rate may be applied. In addition, your late payment will almost certainly be reported to the credit bureaus, and your credit score will drop.
- 90 days. The creditor is likely to declare you in default. Your credit score will drop further. The account may be sold to a collection agency. If the debt is secured, the creditor may begin the process of seizing the collateral.
Those are general guidelines, and the details of what happens will depend largely on what type of debt you have. So let’s take a closer look at some more specific cases.
Walking Away From Secured Debts
A secured debt is backed by collateral: you essentially tell the lender that they can take the collateral if you don’t pay. The most common types of secured debts are mortgages and car loans.
Secured loans present less risk to the lender, so they may offer lower interest rates than loans that are not protected by collateral. But what happens if you don’t pay?
What Happens if You Walk Away From a Mortgage
If you stop paying your mortgage, the initial response will be similar to what’s described above. You’ll usually have a grace period of around 15 days before your payment is considered late. You’ll get a reminder and then a request for payment. A late payment fee may be imposed. If you still don’t pay, your lender will initiate foreclosure proceedings. Usually, 90 days or more after the due date of your first missed payment.
The procedure for foreclosure is complex and may vary from state to state. You’ll have opportunities to negotiate a payment plan or restructuring: your lender doesn’t want to foreclose. They want to be paid.
☝️ If you insist on walking away from a mortgage the story only ends one way: the lender will foreclose, the property will be sold at auction, and you’ll be evicted.
What Happens if You Walk Away From a Car Loan
If you fall behind on car loan payments, you can expect a similar process: a reminder, a request, and then a demand. Your late payment and eventual default will be reported to the credit bureaus, and your credit score will plunge.
As with a mortgage, your lender doesn’t want to repossess your car: that just means more hassle and expense for them. If you keep walking away, though, sooner or later, your car will be repossessed and sold at auction. If the auction proceeds don’t cover your debt and the repossession costs, the lender can still come after you for the balance. That debt will probably go to a collection agency if you don’t pay.
Walking Away From Unsecured Debts
Any debt that is not secured by collateral is an unsecured debt. There is nothing that the creditor can seize from you if you fail to pay. So what happens if you walk away?
What Happens if You Walk Away From Credit Card Debt
Credit card debt is one of the most common and pervasive forms of debt in the US. Total credit card debt in the US reached an all-time high of $975.59 billion in early 2023. The average American owes $5,733 in credit card debt. But what happens if you just walk away?
As with most debts, you’ll get a reminder first, and then more aggressive requests for payment. Once you miss a payment you will probably face a late fee and a penalty interest rate, which can escalate your balance very quickly. Your missed payments will be reported to the credit bureaus. After 90 days of non-payment, your account will be closed and you will no longer be able to make charges on the card. If you still fail to pay your account will be sold to a collection agency.
What Happens if You Walk Away From Student Debt
If you stop making payments on a private student loan, the consequences will be similar to those of not paying credit card debt. You’ll face penalties, your credit score will tumble, and eventually, your account will be sold to a collection agency.
If you walk away from government-guaranteed student debt, a few other things may happen as well. It may take some time for the government to come after you, but they eventually will, and they can seize your tax refunds or garnish your wages without going to court first.
What Happens if You Walk Away From Medical Debt
Medical debt is a bit different from most debts in that you don’t incur it voluntarily. It also typically involves three parties: the provider, the patient, and an insurance company. For that reason, walking away from medical debt will not catch up with you as fast as walking away from some other debts. Credit bureaus will wait 180 days before displaying late payments on medical bills on your credit report, and some newer scoring models give less weight to medical debt.
You may not feel the impact of walking away from medical debt as quickly as you might for some other debts, but you will eventually feel it. Your credit score will plunge, and the debt is likely to end up with a collection agency.
👉 If you’re struggling with medical bills, you might want to explore some ways in which you can get help paying medical bills.
What Happens if You Walk Away From Tax Debt
Three words: don’t do it.
The IRS might not seem like the most aggressive collector out there. They won’t call you every day for days on end. They won’t call your workplace or your family. You may think they’ve forgotten about you, but that would be a mistake. When they come for you – and they will – they will bring an array of enforcement options that no other creditor can match. If there’s one debt you should not walk away from, this is it.
👉 Read about what happens when you don’t pay your taxes to see exactly why this is the case.
Walking Away From Other Unsecured Debts
There are other forms of unsecured debt, with personal loans and payday loans among them. In each case, the pattern if you walk away will be similar to what we’ve already described: a reminder, a demand, a report to a credit bureau, and a hit to your credit score.
Eventually, your account will probably end up with a collection agency.
What Happens When Debt Goes to a Collection Agency?
If you walk away from an unsecured debt the account will usually end up with a collection agency. What does that mean, in practice?
📰 New Federal debt collection regulations will take effect on Nov. 29, 2021. The new rules will have a far-reaching impact on the debt collection industry. If you have delinquent debts or accounts in collection these rules will affect you.
Learn more about Regulation F and what will it mean for consumers with debts.
- The agency will report a collection account to the credit bureaus. Your credit will suffer.
- The collection agency will pursue you aggressively. The Fair Debt Collection Practices Act limits collection agency practices, but collectors will take every legal step they can, and some will push to (and cross) the edge of what’s legally permitted.
- You may be sued. Collection agencies file millions of lawsuits every year, many of which end in default judgments against the debtor.
- If the creditor gets a judgment against you, they may be able to garnish a portion of your wages, place liens on your assets, or place a levy on your bank account.
- You can’t be jailed for failure to pay the debt. Despite this, some people are still finding themselves facing – and even serving – jail time for unpaid debt.
According to the FTC, collection agencies buy debt for an average of 4 cents for every dollar of debt. Some agencies may work directly for the creditor and receive a percentage of what they recover.
It’s important to remember that even if a collection agency bought your debt for 4 cents on the dollar, they might not be willing to settle for a small fraction of what you owe. Collection agencies have access to your credit report. They know your financial situation, and they generally know where you work. If they believe they can get more, they will push for more. That process can make your life quite difficult.
☝️ Never assume that it will be easy to settle with a collection agency or that a collection agency won’t sue you.
Let’s Sum That Up
What happens when you walk away from debt? Basically, this:
- You’ll get a reminder from your creditor, followed by increasingly aggressive demands.
- Your credit score will take a beating. You may not be able to qualify for loans or credit cards, and if you do you will pay high interest rates.
- If your debt is secured, the creditor will foreclose or repossess your collateral.
- If your debt is unsecured, your account will end up with a collection agency.
- The collection agency will pursue you and will often sue you if you do not pay.
- If a court issues a judgment against you, expect wage garnishment, liens on your assets, and levies on your bank accounts.
☝️ If this doesn’t sound like something you want to face, you might want to think twice about walking away from debt.
Know Your Options
Many people end up walking away from debt without ever making a decision to walk away. They put off dealing with debt, ignore the calls and letters and emails, and walk away without taking a step. Nobody likes dealing with debts, especially when we can’t afford to pay them, but if you take no action you are effectively walking away.
In most cases the more effective route is the opposite one. As soon as you know you’ll miss a payment, contact the creditor, let them know. Get in touch, explain the situation, and try to work out a way to pay the debt. If you take the initiative creditors will see that as a sign of good faith. They will be more likely to work with you.
Knowledge is your friend. Read up on debt relief, debt settlement, negotiating medical debt, tackling tax debt, and what to do if a creditor sues you. The more you know, the more likely you are to make a good decision.
Remember that no creditor wants to foreclose, repossess, or send your debt to collections. If you make an effort to work with them, they will usually work with you. That’s not a perfect solution, but it’s often better than walking away from debt.