What Happens If I Don’t Pay My Collections?

When a debt remains unpaid for an extended period, it often transitions into “collections.” This means the original creditor may assign the debt to an internal department or sell it to a third-party collection agency. The primary goal of these entities is to recover the outstanding amount.

Creditor and Collection Agency Actions

Creditors and collection agencies typically initiate contact through phone calls and letters once a debt is significantly past due, often after 90 to 180 days. The Fair Debt Collection Practices Act (FDCPA) regulates how debt collectors can interact with consumers.

The FDCPA prohibits collectors from calling before 8:00 a.m. or after 9:00 p.m. in the consumer’s local time zone. Within five days of initial contact, a debt collector must send a written “validation notice” detailing the debt amount, the original creditor’s name, and the consumer’s right to dispute the debt. If the consumer disputes the debt in writing within 30 days, the collector must cease collection efforts until the debt is verified.

Impact on Credit Standing

Unpaid collection accounts significantly affect an individual’s credit report and score. These accounts are typically reported to the three major nationwide credit bureaus: Experian, TransUnion, and Equifax. A collection account indicates a defaulted debt, usually one unpaid for at least 120 days.

Payment history is a primary factor in credit scoring models. Collection accounts can lead to a substantial drop in credit scores, making it more challenging to obtain new loans, credit cards, or rental agreements. Collection accounts generally remain on a credit report for seven years from the date of the original delinquency.

The impact on credit scores varies depending on the scoring model and whether the collection account is paid. Newer credit scoring models may ignore paid collection accounts or reduce their negative impact, while older models may still penalize them. Medical collection debt has specific rules; paid medical collections and unpaid medical collections under $500 are generally no longer included on credit reports by the major bureaus.

Legal Consequences

When a debt remains unpaid, creditors or collection agencies may pursue legal action to recover the money owed. This often begins with filing a lawsuit in court. If a consumer is sued for a debt, they receive a summons and a complaint, which details the amount owed and the reasons for the claim. The debtor typically has a limited time, often between 20 to 35 days, to respond to the lawsuit.

Failure to respond within the specified timeframe can result in a “default judgment” being entered against the debtor. A default judgment is a court ruling in favor of the creditor, confirming that the debtor legally owes the debt. Once a judgment is obtained, the creditor gains powerful tools for debt enforcement.

One common post-judgment enforcement action is wage garnishment. This involves a court order directing an employer to withhold a portion of the debtor’s earnings and send it directly to the creditor. Federal law limits wage garnishments for most debts to the lesser of 25% of an individual’s disposable earnings or the amount by which their disposable earnings exceed 30 times the federal minimum wage. For specific debts like child support or federal student loans, different garnishment rules may apply.

Another enforcement method is a bank levy, where a court order allows the creditor to freeze and seize funds directly from the debtor’s bank accounts. This can significantly impact a debtor’s financial liquidity.

A judgment can also lead to a property lien, particularly on real estate. A judgment lien attaches to property, such as a home, meaning that the property cannot be sold or refinanced without first satisfying the lien. The statute of limitations, which is the time limit within which a creditor can sue to collect a debt, typically ranges from three to six years, varying by jurisdiction. However, actions such as making a payment or acknowledging the debt can sometimes restart this clock.

Secured Debt Implications

Secured debt is backed by specific collateral that the borrower pledges, unlike unsecured debt. Common examples include auto loans, where the vehicle serves as collateral, and mortgages, where the home secures the loan. If a borrower defaults on a secured debt, the creditor has a legal right to take possession of the collateral.

For auto loans, this process is known as repossession, allowing the lender to seize the vehicle. For mortgages, the process is foreclosure, a legal action where the lender takes ownership of the property and sells it to recover the outstanding debt. The proceeds from the sale are used to pay down the debt.

If the sale of the collateral does not cover the entire outstanding debt, the creditor may pursue a “deficiency judgment” for the remaining balance. This judgment represents the difference between the amount owed and the amount recovered. Once obtained, it becomes an unsecured debt, allowing the creditor to use other collection methods, such as wage garnishment or bank levies. Some jurisdictions have laws that limit or prohibit deficiency judgments, particularly after home foreclosures.