What Happens If You Can’t Pay Your Credit Card Debt?

Financial difficulties can arise unexpectedly, leading to challenges in meeting credit card obligations. Understanding the sequence of events and potential repercussions is an initial step toward addressing the situation.

Immediate Financial and Credit Impacts

Missing a credit card payment has immediate financial and credit consequences. Creditors apply a late fee once a payment is overdue. For larger credit card issuers, this fee can be up to $30 for a first late payment and up to $41 for subsequent late payments within six billing cycles, though a new rule effective May 2024 caps this at $8 for large issuers. These fees add to the outstanding balance.

Beyond late fees, a missed payment can trigger a penalty Annual Percentage Rate (APR). If a payment is 60 days or more overdue, the credit card issuer may significantly increase the interest rate on the outstanding balance, sometimes to 29.99% or higher. This higher APR causes the debt to grow more rapidly, making it even harder to pay down the principal. Such an increase applies to new purchases and potentially the existing balance, depending on the cardholder agreement.

A missed payment also negatively impacts an individual’s credit score. Credit card issuers report payments that are 30 days or more past due to the major credit bureaus: Experian, Equifax, and TransUnion. The longer the payment remains outstanding, the more severe the damage to the credit score. These negative marks can remain on credit reports for up to seven years.

The original creditor will attempt to contact the cardholder regarding the overdue payment. These communications often come in the form of calls, emails, or letters. They aim to encourage immediate payment and prevent further delinquency.

Creditor and Debt Collector Engagement

As the delinquency progresses, the original creditor’s internal collection efforts will intensify. The credit card company’s collection department increases the frequency of communication. These efforts aim to negotiate a payment arrangement or establish a payment plan to bring the account current.

If internal collection efforts are unsuccessful and the debt remains unpaid, usually after about 180 days, the credit card company may consider the debt charged off and sell or assign it to a third-party debt collection agency. A debt buyer purchases the debt from the original creditor, while a debt collector works on commission on behalf of the original creditor or a debt buyer.

Third-party debt collectors will then begin their own communication attempts, using methods like phone calls, letters, emails, and text messages. These communications are subject to regulations under the Fair Debt Collection Practices Act (FDCPA), a federal law protecting consumers from abusive collection practices. The FDCPA restricts collectors from contacting consumers before 8:00 a.m. or after 9:00 p.m. local time and prohibits harassment or false representations. Consumers also have the right to request validation of the debt and to cease communication.

Both the original creditor’s collection department and subsequent debt collectors aim to recover the outstanding balance. While they may offer settlement options, such as paying a reduced lump sum, their focus remains on obtaining payment. Understanding these interactions and consumer rights can help individuals navigate the collection process more effectively.

Potential Legal Actions

When credit card debt remains unpaid despite collection efforts, creditors or debt collectors may pursue legal action to recover the money owed. One common step is filing a debt lawsuit against the individual after several months of non-payment.

If an individual fails to respond to the summons, a default judgment may be entered against them. A court judgment legally confirms the debt and empowers the creditor to use more aggressive collection methods.

One potential outcome of a court judgment is wage garnishment. A court order can allow a portion of the debtor’s wages to be directly withheld by their employer and sent to the creditor. Federal law, the Consumer Credit Protection Act, limits the amount that can be garnished to no more than 25% of disposable earnings or the amount by which weekly disposable earnings exceed 30 times the federal minimum wage ($7.25 per hour), whichever is less. These limits ensure that a portion of the debtor’s income remains available for living expenses.

Another legal action creditors can take with a judgment is a bank account levy. This allows the creditor to seize funds directly from the debtor’s bank accounts. While certain funds, such as Social Security or disability benefits, may be exempt from seizure, other funds in the account can be frozen and taken to satisfy the judgment.

In some situations, a judgment can also lead to a property lien being placed on real estate owned by the debtor. A property lien makes the property collateral for the debt, meaning the debtor may be prevented from selling or refinancing the property until the debt is satisfied. While less common for unsecured debts like credit card debt, this measure provides the creditor with a claim against the property’s value.

Paths to Debt Resolution

Individuals facing overwhelming credit card debt have several resolution strategies. One approach involves direct negotiation with the original creditor. Before the debt is sold to a third party, individuals may be able to negotiate a payment plan or enroll in a hardship program.

Another structured path is a Debt Management Plan (DMP), facilitated by a non-profit credit counseling agency. In a DMP, the agency works with creditors to consolidate monthly payments and often negotiate reduced interest rates. The individual then makes one monthly payment to the agency, which distributes the funds to creditors, aiming to pay off the full debt over a period of three to five years. This approach can simplify repayment and make it more manageable.

Debt settlement involves negotiating with creditors or debt collectors to pay a lump sum that is less than the total amount owed. While this can significantly reduce the amount paid, it carries risks. Debt settlement has a negative impact on credit scores, and this mark can remain on credit reports for up to seven years. Additionally, any amount of debt forgiven above $600 is considered taxable income by the IRS, requiring the individual to report it on their tax return via Form 1099-C.

Bankruptcy is a last resort for individuals unable to resolve their debt. The two most common types are Chapter 7 and Chapter 13. Chapter 7 bankruptcy, known as liquidation, can discharge most unsecured debts, including credit card debt, usually within a few months. However, it may involve selling non-exempt assets to repay creditors. This type of bankruptcy remains on a credit report for up to 10 years.

Chapter 13 bankruptcy is a reorganization plan that allows individuals with a regular income to create a repayment plan over three to five years. Under this plan, individuals can keep their assets while repaying a portion of their debts, with any remaining unsecured debt discharged upon completion of the plan. Chapter 13 bankruptcy stays on a credit report for seven years. Both Chapter 7 and Chapter 13 filings trigger an automatic stay, temporarily halting collection calls, lawsuits, and wage garnishments.