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Defaulting on Debt: What It Means and How to Bounce Back
by
JG Wentworth
•
July 9, 2024
•
8 min
The dreaded word “default” puts many consumers into a cold sweat. Defaulting on debts like credit cards, loans, or even mortgages can feel like a catastrophic financial failure with lasting impacts.
But what does it actually mean to default? And is it truly the dead end that people fear? Let’s take a look at defaults from the perspective of regular folks dealing with debt troubles.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
What exactly is defaulting?
In simple terms, defaulting means not paying back money you owe to creditors according to the agreed-upon repayment terms. For credit cards and loans, it typically happens after missing a certain number of consecutive minimum payments (often 3-6 months).
For home mortgages, default usually kicks in once you fall 90-180 days behind on payments depending on the lender’s policies. Some auto loans go into default after just 30 days of missed payments.
The point of default is when the creditor essentially says “enough is enough” with the missed payments and can take more serious actions against you to recover the debt.
The fallout of defaulting on debt
The repercussions of default can escalate quickly and be quite severe if the situation isn’t resolved:
- Credit score damage: This is one of the most impactful and longest-lasting consequences of default. Once a creditor reports the defaulted debt to the major credit bureaus, it damages your credit score, staying on your record for 7 years.
- Debt collection overhead: At this stage, creditors typically sell the defaulted debt to third-party debt collection agencies who then relentlessly pursue you to pay up through letters, calls, and potentially legal actions.
- Asset repossession: For secured debts tied to assets like homes and autos, lenders can legally seize and repossess the underlying property once you default on the loan.
- Litigation nightmares: Debt collectors frequently take defaulters to court to pursue legal judgments against them to garnish wages, put liens on assets, or even have you arrested in some states.
Is there any potential upside of defaulting?
Believe it or not, there is actually one potential upside to strategically defaulting on certain dischargeable debts like credit cards or personal loans:
Debt relief or settlement
Creditors would usually prefer getting at least a portion of what you owe back rather than nothing at all. This opens opportunities to negotiate settling defaulted debts for a lump sum that’s a fraction of the original balance.
Of course, taking this route still damages your credit rating and brings aggressive collection efforts. But it can provide a path out of the debt trap by eliminating some liabilities, even if it’s a heavy financial scar.
How to recover from defaults
For consumers overwhelmed and defaulting on multiple debts, there are a few potential lifelines:
- Debt consolidation loans: Taking out a new affordable loan lets you consolidate defaulted obligations into one manageable payment, immediately preventing further defaults.
- Credit counseling: Nonprofit credit counseling agencies can work with creditors on your behalf to reduce interest rates and set up debt management payment plans to cure defaults and rebuild credit over time.
- Bankruptcy: As an absolute last resort, filing for bankruptcy can discharge many defaulted debts entirely and allow you to start rebuilding from square one, albeit with severe credit damage upfront.
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Need help?
Whether you think you might default soon, or have already defaulted, why not give JG Wentworth a try? If you have $10,000 or more in unsecured debt, you may be eligible for our Debt Relief Program. *
- One monthly payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- 24/7 support
- We only get paid if we settle your debt
Want to learn more about how we can help you avoid, or resolve, defaulting? Contact our team of dedicated debt resolution specialists today to answer any questions you may have.
The bottom line on defaults
Let’s be crystal clear – defaulting on debts should always be an absolute last resort. It’s a multiheaded financial mess with credit damage, aggressive collections, potential asset seizures, and even court judgments.
However, the reality is sometimes circumstances like job loss, medical issues, or divorce force otherwise financially responsible people into inescapable debt traps where defaulting may be the only path forward. In those scenarios, understanding your options and taking proactive steps to recover can make all the difference.
Because while defaulting feels like a nightmare in the moment, it certainly doesn’t have to be a permanent life sentence. With diligence and responsible actions, defaulting can become a steppingstone to restoring your financial footing and creating a fresh start.
About the author
* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy.
