What To Do If You Default on a Loan

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Defaulting on a loan is overwhelming.

The bad news? If you can’t pay an installment on your home or auto loan there isn’t much you can do.

But if it’s debt you didn’t bet collateral on, like credit card payments, student loans or medical bills, there are steps you can take to help soften the blemish on your credit score.

Read these tips to insure missing that payment has minimal impacts on your daily life.

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1. Don’t wait to contact the lender. Defaulting can start affecting your credit score as early as 30 days after missing a payment but a company doesn’t move your account to a collection agency for as much as 150 days and collection is what you want to avoid. Call your lender to explain your financial situation and work out a plan that fits your needs. Keep in mind that credit card companies will keep control of your account from between 90 to 120 days, typically, but can wait until at least about 60 days to entertain mediation.

2. Collections isn’t game over. Once the lender moves your account to a collections agency, it means the agency owns it. The lender makes it out fine because the collections agency paid the lender for the rights to collect the debt. But avoid stress if your debt goes into collections. There is still much you can do.

3. Check the Statute of Limitations. In every state, there is a different timeframe that debt can no longer be collected after. Check the period, usually several years, for your state to make sure a collection agency isn’t trying to collect debt you’re not legally bound to pay anymore. The statute of limitations starts once you miss that payment, or when a creditor formally asks you to pay, depending on your contract with the creditor.

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4. Consider Debt Validation. Before entertaining any debt collectors, make sure the collection agency has the rights to your account. Request proof the debt collector now owns your debt, instead of the lender. A collections agency needs to purchase your debt from the creditor for you to be legally responsible for paying them, unless the contract you signed with the creditor has a stipulation that spells out that the debtor is responsible for paying the debt to the creditor or “its assigns,” meaning a collection agency. If the agency cannot validate the debt, under the Fair Debt Collection Practices Act, they cannot collect it, contact you about collecting it, or report it.

5. Settle. Debt validation can be lengthy. If your nerves can’t take it, moving to settle right away may be the best bet. When negotiating with a collection agency, always put everything in writing and correspond via mail with receipt requested. Make copies of all letters you send them. Also, avoid agreeing to payments to settle your debt because handling fees will make it hard for the balance move.

6. Keep it around 25 percent. Remember that debt collectors will purchase the rights to the debt from a creditor for a big discount. A typical rate an agency will pay a collector is about 7 cents to every dollar of debt. Use this to your advantage when negotiating. By starting low, below 25 percent of the original debt, you have leeway. If an agency makes 25 percent, it likely would still be a profit for them.

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7. Don’t forget to negotiate the rating. Sometimes consumers may be too focused on settling the unpaid debt, but it is very important to negotiate your credit rating. The best option is a rating that says it was “Paid” or “Paid as Agreed” without earning negative variations like “Paid Charged-Off” or “Paid Repossessed,” which are common and the least desirable options. At the least, vie to get a phrase like “Settled” on your account.

8. Be honest with future employers.  The bottom line is that if you don’t fix the situation in time, your credit score will take a hit.  And the more time it takes, the bigger the hit. In a job market where many employers background check applicants not only for criminal records but also for credit scores, it’s going to show up. Come clean in interviews and they’ll respect you for it. Don’t let them find it on their own.

9. Remember, after seven years, most financial scars will be stricken from your credit report.

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