What is the default difficulty?
A payment default can arise when you are having financial difficulties that make it difficult to keep track of your payments on credit card, loans and other debts. For example, being laid off or losing your job altogether could be a financial hardship if you don’t have savings or other means to replace lost income. Being in default on a debt means that you have not made a payment for a specified period of time, as determined by the lender and / or the type of debt involved.
Key points to remember
- Your lender and the type of debt involved can determine how many payments must be missed before a debt is considered in default.
- Defaulting on credit cards or other debt can cause significant damage to your credit score, making it harder to borrow money or qualify for lower interest rates.
- Credit card and loan difficulty programs can help you avoid default and potentially make your payments more manageable.
- Bankruptcy could be seen as a last resort option for managing debt if you have defaulted or are in danger of default.
Understand the default difficulties
Financial difficulties can make paying debts and daily expenses more difficult if you don’t have enough income or savings to cover your bills. Financial hardship can be triggered by a variety of circumstances, including:
- Injury or disability
- Job loss or prolonged layoffs
- Unexpected expenses
- Death of the main breadwinner in your household
When a difficulty arises that reduces your ability to pay debts and other bills, it can increase your risk of default. Fault can happen when you miss or stop making payments on a debt altogether. You can default on secured debts, which require collateral, as well as unsecured debts.
The time at which the default occurs may be different, depending on the type of debt. With credit cards, for example, you can be in default after missing six months of payment. For federal student loans, the default occurs when you are 270 days or more overdue on payments
Default and delinquency seem similar, but they are not the same. You can default on a debt by missing a single payment, while default is associated with a series of consecutive missed payments over time.
Consequences of lack of rigor
There are several side effects of default that you can experience if you don’t pay off your credit cards or loans. The first is that your creditors can take debt collection actions against you. This may include:
- Send you letters asking you to pay
- Call you with payment requests
- Sue you in small claims court for the amount owed
- Garnishment your salary or bank accounts if legal action is successful
There are certain rules that debt collectors must follow under federal law. For example, they can’t call you before 8:00 a.m. or after 9:00 p.m. without your permission. Knowing your rights can help protect you against unfair debt collection practices. If you believe you have been treated unfairly or that your rights have been violated by a debt collector, you can file a complaint with the Consumer Financial Protection Bureau.
Failure to repay federal student loans could also result in the federal government setting off your tax refund. If you are entitled to a refund, that money could go to the Treasury Department to pay off your unpaid debt.
Another consequence concerns your credit score. Overdue debts can be reported to each of the three major credit bureaus. FICO Credit scores, which are the most widely used credit scores, use payment history as the primary determinant of your score. Missed or late payments, defaults and collection accounts can all lower your score.
When your credit history is damaged by default, it can be difficult to get approval for new loans or new lines of credit. If you are able to get approved, you could be paying higher interest rates for the money you borrow, making your debt more expensive.
Avoid default difficulties
Defaulting on a debt should not be inevitable. If you’re struggling to keep up with your payments, there may be options that can help you manage your debt and avoid default. These options include:
Credit Card Difficulty Programs
Credit card hardship programs are designed to help borrowers avoid default by reducing or suspending credit card payments, lowering your APR, and waiving certain fees, such as late fees. Many credit card issuers offer these programs, although qualification can be determined on a case-by-case basis.
A credit card hardship program might be an option to consider if you can’t make the minimum payments on your cards. You may need to provide proof of your financial hardship to be eligible for credit card debt relief.
If you do not qualify immediately, you may consider working with a debt relief company. It can help you negotiate a lower rate and reduce your debt load with the credit card company.
Withholding and deferral of student loans
Student loan forbearance and deferral programs can help if you have federal student loans and can’t make the payments. Federal student loans are currently on temporary forbearance for eligible borrowers until September 30, 2021, under the CARES Act. Both allow you to temporarily suspend payments; the difference is in the way the interest is capitalized on the loans.
With a deferral, the interest accrued on your loans is paid by the federal government for the subsidized loans. You would still pay the interest that accrues on unsubsidized loans. During a forbearance period, you would be responsible for paying all of the interest that capitalizes on your loans.
If you are already in default on federal student loans, you may be able to discount them by rehabilitating or consolidating them. You could then make the payments more manageable by switching to an income-based repayment plan.
Deferral and forbearance apply to federal student loans, but private lenders are not required to offer them. If you have private student loans, you will need to contact your lender or lender to find out what type of relief, if any, might be available.
Modification and forbearance of mortgage
If you can’t make your mortgage repayments, you also have options to avoid default and possible foreclosure. A loan modification, for example, would allow you to rework the terms of your mortgage loan so that your payments are more in line with your budget.
Mortgage forbearance is similar to student loan forbearance in that you can temporarily suspend mortgage payments. Whether interest and fees accrue on the loan during this time and how you make up for missed payments depends on the terms of your lender’s forbearance program.
If forbearance or a loan modification is not an option, you can also try refinancing your mortgage at a lower rate. This could help lower your monthly payments and minimize your risk of default due to overpayment.
When taking advantage of deferral or hardship forbearance programs, ask your lender or creditor how it will be reported to the credit bureaus. If missed payments are not reported correctly, it could end up hurting your credit score.
The bottom line: take steps to avoid difficulties
The worst thing you can do if you are having financial difficulty is completely neglect your debt. While you may not be able to pay what you owe, it’s important to stay in touch with your creditors. They can help you consider solutions to keep your debts up to date in order to avoid damage to your credit rating, debt collection lawsuits, and other negative impacts associated with default.