The consequences of defaulting on a personal loan
What happens when you go into default
- Defaulting means you’re unable to meet the legal obligation to pay your debt.
- Debt collection services contact you to seek repayment.
- Debt collectors may file a lawsuit against you if you don’t repay the debt.
- Going into default impacts your credit score for years.
People default on loans for a variety of reasons, from a job loss to unexpected medical debt. In November 2015, Credit Karma and Qualtrics conducted a survey that found that, of 1,050 Americans surveyed between the ages of 31 and 44, 25 percent defaulted on a loan before they turned 30.
Defaulting on a loan is simply defined as being unable to meet the legal obligation of debt repayment. Although it is not an uncommon circumstance, it’s important to understand that the consequences of defaulting on a loan can have a major impact on your credit and your finances.
Going into default on a personal loan puts your credit at risk. Once you’ve gone into default for a certain amount of time, the default becomes part of your credit history, and that information becomes available to help shape your credit score.
Once a default is recorded on your credit history, it can remain there for as long as seven years.
Note that there is a difference between a delinquent account and one that has gone into default. An account becomes delinquent when the debtor fails to make a payment. A loan is not usually officially put into default until a certain period of time has passed.
One of the most immediate effects of defaulting on a loan is that you’ll likely hear a lot more from debt collectors.
The Fair Debt Collection Practices Act (FDCPA) is a federal law that governs debt collection practices, and it prohibits debt-collection companies from using “abusive, unfair or deceptive practices to collect past due debts from you,” according to the Consumer Financial Protection Bureau (CFPB).
Debt collectors generally are not allowed to contact you at an unusual time or place, or at a time or place they know is inconvenient to you.
If you tell a debt collector in writing to stop contacting you, the debt collector cannot contact you again except to say there will be no further contact, or to notify you that the debt collector or creditor may take certain specific actions, such as filing a lawsuit against you.
Debt collectors are required by law to provide you with the name of the creditor; the amount owed; and how you can dispute the debt or seek verification of the debt. If the debt collector doesn’t provide the information when they first contact you, they are required to send you a written notice including the information within five days of contacting you.
Complaints about debt collectors can be submitted to the CFPB online or by calling (855) 411-2372. Complaints can also be addressed to the attorney general of your state, and you may be able to sue a debt collector in state or federal court.
Garnished wages and liens
If your loan goes into default, and collection agencies aren’t successful in getting you to pay your debt, your creditors may sue for the right to garnish your wages.
In order to garnish your wages, creditors may need to receive a court order that authorizes them to take money out of your paycheck, or to take money directly out of your bank account. Some types of debt don’t require a court order.
How much of your wages can creditors garnish? It depends on the type of debt, and it varies by state. For personal loans, the amount creditors can garnish is generally either 25 percent, or the amount of your weekly income that is more than 30 times the federal minimum wage, whichever is less.
Keep in mind that some states prohibit wage garnishments for certain kinds of debt. It is also a violation of FDCPA for debt collectors to threaten to garnish your wages if they cannot legally be garnished.