What Happens to Your Unpaid Debt

If you default on a credit card, loan or even your monthly internet or utility payments, your account could be sent to a debt collection agency. Unpaid debts sent to collections hurt your credit score and may lead to lawsuits, wage garnishment, bank account levies and harassing calls from debt collectors. An outstanding collection account can also cause you to receive unfavorable interest rates or insurance premiums and lose out on coveted jobs and housing.

Working directly with your original creditor can help you turn your finances around, but when you run out of time, you may have to deal with paying debt collectors. Here’s what you need to know about what happens when you don’t pay collections.

Unpaid Debt Collection Practices

Timing is a critical factor when you’re burdened with debt. If you’ve fallen behind on your debts, your first and best opportunity to get a grip on the situation is working directly with your original creditor. How long you have to work with your original creditor varies. With most debts, you are generally given between day one of delinquency up to the time your lender “charges off” your account before your account goes to collections.

Charging off your debt means the lender no longer expects to get paid the balance you owe. It writes it off by moving your balance from the asset column in its accounting ledger to the loss column. Lenders, especially those issuing consumer credit cards, are traditionally required to account for losses no later than 180 days of consecutive nonpayment.

There are three options on how your lender may choose to treat your account after its charges off the debt. Keep in mind that the Fair Debt Collection Practices Act requires that collectors notify you of your debt validation rights within five days of initial communication with you.

1. Unpaid Debt Gets Assigned to Third-Party Debt Collection Agencies

Creditors and lenders may send accounts to third-party debt collectors who contact you through the mail and over the phone in an attempt to get you to pay. These assignments are generally 60-day to 90-day contracts. If the collector gets you to pay some or all of the debt during the time it has your account, it typically gets paid a contingency fee between 15% and 20% of the amount you paid on your debt.

Setting up a payment arrangement with a debt collector is one way to stop the phone from ringing, but always calculate whether payments are something you can afford first. Debt collectors can be persistent in their collection efforts. Agreeing to a payment plan just to stop the aggravation of the phone ringing isn’t a real solution to problem debt.

Here are some reasonable options for resolving an unpaid debt placed with a debt collector.

Pay off the debt in full if you are financially able.
Make a monthly payment arrangement.
Negotiate a payoff for less than the balance owed on the account and pay this reduced balance in a lump sum or over a set time period.

Some creditors assign accounts to collection agencies even though they haven’t officially charged off the account on their books. This means you may be contacted by a debt collector working for an agency after just a few months of missing payments.

2. Banks and Debt Buyers Assign Unpaid Debt to Attorney Firms

Banks and debt buyers use different criteria for identifying accounts to be assigned to a collection attorney or law firm. Some banks have a reputation for working with attorneys to collect unpaid debts more than others.

Some large attorney debt collection firms operate the same way a collection agency will to collect debts. They contact you by phone and mail to apply pressure to get you to pay the debt in full, make a payment plan or negotiate a reduced payoff. Other collection law firms may start with phone calls and letters but are also authorized to sue you in court as part of their fair debt collection efforts. A lawsuit may not come about, but you should always take communication with a collection attorney seriously, especially an in-state attorney.

3. Unpaid Debts Are Sold to Investors

Billions of dollars of unpaid debts are sold to investors. The savings and loan crisis from the 1980s began today’s modern-day collection industry. Investors were willing to step up to buy bad bank assets on the cheap with an expectation of turning a profit by collecting more than what they paid for portfolios of bad debt. It turned out to be profitable.

Today, debt buyers make up a huge portion of the collection industry. They’re able to purchase recently charged off accounts in large portfolios for a steep discount. Sometimes debt buyers resell accounts they purchased to another investor later.

Some debt buyers specialize in buying up unpaid debts and bundling accounts for resell to investors who want to collect debts owed in certain states or accounts over a certain dollar amount. There are also specialty bad debt investors who focus on credit card debt, while others focus on utility bills, student loan debt, medical bills or old debts that haven’t been paid in many years.

Debt buyers may collect unpaid debt internally using their own resources. They also work with debt collection agencies using assignment contracts similar to how banks assign debt to a debt collection company. Debt purchasers also place accounts they buy with debt collection law firms.

How Do You Know Where Your Charged Off Debt Will Land?

Knowing where your charged off debt will land is difficult to determine because the criteria creditors use to determine which of the three collection options they’ll use differs from one creditor to the next. It could depend on your balance, your account behavior or whether your credit report shows you’re paying other debts. Even your zip code can be a factor that determines which option your account lands in. However, once you know where your account ended up, each collection scenario can be managed with some predictability.

How Long Can You Legally Be Chased for an Unpaid Debt?

How long you can legally be chased for a debt depends on what state you live in and what type of debt is involved. A statute of limitations is the time period a creditor or debt collector has to file a lawsuit to recover a debt. Statutes of limitations vary by state but range between 3 and 15 years. If you’re sued for a debt that’s time-barred due to an expired statute of limitations, you have grounds for defense.

Just because the statute of limitations has expired doesn’t mean you can no longer be chased for a debt. A collection agency can still legally call you and send you letters to collect on the unpaid debt, but it can no longer pursue a lawsuit to garnish your wages or levy your bank account. However, if you acknowledge the debt is yours either verbally or in writing or you submit a partial payment, you could inadvertently restart the statute of limitations clock. If you have debts that have been charged off and/or are in collections, it’s critical you get your credit reports to find out what’s being reported.

Does Unpaid Debt Ever Go Away?

An account in collection can have a significant negative impact on your credit, but it won’t stay on your credit reports forever. Collection accounts generally remain on your credit reports for seven years plus 180 days from whenever the account first became delinquent. However, the Consumer Financial Protection Bureau indicates that in some states making a partial payment can restart the time period for how long the negative information stays on your credit report. Just because it no longer shows up on your credit report does not mean that the debt is erased. Lenders and collection agencies can still pursue unpaid debts.

One guaranteed way to make unpaid debt go away is to pay if off. However, first verify the debt is yours, the collection agency is legitimate and you can afford to pay off the debt before making any payment. Also, get everything in writing to ensure the debt stays gone.

What Happens After 7 Years of Not Paying Debt?

Typically, after seven years of not paying a debt, it reaches the time limit it can appear on your credit report and falls off. Charge-offs can actually be reported for seven years, plus an additional 180 days from the initial date of delinquency. However, a common misconception is once the statute of limitation expires and the debt falls off your credit report according to the credit bureaus, you no longer owe the debt. It’s still a legitimate debt and a collector can still pursue collection, except through the court system.

Debt Intervention Options

Your options for managing your unpaid bills are limited. If you want to get out of debt, try some mainstream approaches to resolving your past due debts.

Request a more affordable monthly repayment amount from your creditors
Enroll with a consumer credit counseling agency
Negotiate a reduced payoff amount
File Chapter 7 bankruptcy to discharge unsecured debts
File Chapter 13 bankruptcy to allow the courts to set a payback amount your unsecured creditors will receive each month for a 3-year or 5-year term

These options offer a good process of elimination to help you narrow your options based on your financial capabilities. These options won’t necessarily improve your credit score.

If you’re unsure of what’s on your report, sign up for Credit.com’s free Credit Report Card to track your credit score. Membership offers the latest tips and advice from credit and money experts, an easy-to-understand breakdown of your credit report information and a free credit score and action plan.