Debt arrears timeline: what to expect
Any invoice that is reported to a credit bureau as overdue is an overdue receivable. In the early stages of default, it’s easier to repair your credit and move on. But the longer debts go unpaid, the more aggressive creditors become in collecting them and the harder it is to work their way out.
Past due debt will send your credit rating into a nosedive. When your credit score declines, your access to credit shrinks and the best interest rates and terms are not available to you. You can even be passed over for a job or turned down for a rental if your credit history takes a negative turn. The worst thing you can do when you fall behind on your bills is ignore the problem. Avoiding lenders’ efforts to contact you by not responding to letters or calls, moving without telling them your new address, or not making efforts to reduce or pay off your debt will only compound your problems.
“In the end, lenders don’t want to take your home or repossess your car,” says Rod Griffin, director of public education at Experian, one of the Big Three credit bureaus. “They want you to meet these conditions and have a good relationship with you. (delinquency) is costly and time-consuming for them too.”
Here’s what to expect from creditors at different stages of default — and what you should do to get out of the mess.
Level 1: 30 days overdue
What to expect
After 30 days, the lender will send you a written reminder that you have not made your payment. If you have an excellent payment history, the lender may let you go and choose not to report it to the credit bureaus. However, you will likely be charged a late fee.
“Late payments can hurt your credit once they’re reported, but you get a 29-day grace period,” said John Ulzheimer, a credit expert, author, and educator who worked for Equifax and credit rating service FICO. “Most lenders will call you as soon as you’re 30 days past due, but that’s not a requirement.”
If you know you’re going to miss a payment, contact your lender beforehand. Lenders are more likely to work with you if you reach out first.
“Communication is key,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling (NFCC). “They should update the account or contact the creditor for alternatives to resolve the issue.”
If you know you can’t pay, be honest with your lender. The creditor can work with you. If you’ve lost your job or have other circumstances that are troubling you, seek financial advice early.
Stage 2: 60 days overdue
What to expect
The lender will communicate with a greater sense of urgency and be aware of the negative consequences of not updating the account. You will be charged more penalties and late fees and your credit score will continue to decline.
If you miss mortgage payments, you’re still at a point where the lender will likely work with you to fix your account.
The stakes are higher now. But it’s not too late to get caught up without destroying your bankroll. If you pay what you owe, your credit card provider can still allow you to use the card, McClary says.
If you haven’t already contacted your lender, it’s time to pick up the phone, explain your situation, and try to work out a payment arrangement.
“The longer you wait, the more expensive it becomes to circumvent these challenges,” says McClary. “At this stage you are faced with more difficult decisions. Your time window is closing.”
Stage 3: 90 days overdue
What to expect
At this stage, the lender is about to declare your account uncollectible, known as a “write-off.” Credit card lenders may refer your account to an outside collection agency.
“A 90-day delinquency is considered a serious disadvantage in both the FICO and VantageScore credit rating systems,” says Ulzheimer. “Once you’re 60 days past due, the impact is more significant and longer-lasting.”
There’s a chance you can reactivate your account by creating a payment plan with the creditor, McClary says. In cases of hardship, your creditor can agree to a reduction in payment or a lower interest rate.
Another option is to work with a non-profit credit counseling center like the NFCC, or one of its member agencies, to help you manage and pay off your debt. A credit counselor will help you devise a payout plan that requires you to close your accounts and make a monthly payment to the counseling agency that pays the creditors.
“The debt management plan gives you access to lower interest rates and reduced payments,” says McClary. “It stops the fees and you pay off your debt in a fraction of the time it would otherwise take.”
The typical debt management plan takes three to five years to complete, McClary says. Another plus: Counseling centers can work for little or nothing, depending on your circumstances.
Stage 4: 120-180 days overdue
What to expect
A creditor will declare your account as a derecognition once you are four months or more past due. “Your credit rating will go down if it’s listed as a charge,” says McClary. “A creditor may have a way of filing a judgment against you. Some states have the ability to garnish your paycheck.”
The creditor can sell the account or have an outside collection agency take care of the collection efforts. “Now you’re dealing with a person who wants full balance,” says McClary.
Collection agencies will call you and send you letters and emails. They are bound by the covenant Fair Debt Collection Practices Actprohibiting them from using unfair, deceptive and abusive collection tactics.
Third-party collection agencies sometimes sell debt to other collection agencies when they couldn’t get you to pay. Make sure the debt appears as the same account on your credit report. Sometimes it can appear like another delinquent account and you should dispute any duplicates. Note that any payment you make to an outside collection agency may restart the statute of limitations on your debt.
If you’re still missing mortgage payments, foreclosure proceedings could begin. Foreclosure laws vary by state, but generally, after the fourth missed payment, you’ll receive a reminder and a window to pay before the lender begins taking steps to claim your home.
McClary tells consumers not to ignore debt collectors. “You have a right to tell them, for example, to stop calling you at work, but don’t cut lines of communication,” he says. “They want to know where they are in the process. Give them the opportunity to contact you by post or email.”
Obtain confirmation of the claim from the third-party collector and confirm the identity of the collector to the original creditor. Set up a payment plan or offer a severance package.
Try to negotiate a settlement with the original creditor, which may offer more flexibility. The creditor or debt collector is unlikely to settle for less than half of the balance. “But shoot the moon on the first offer because you never know,” advises McClary.
Get the settlement offer in writing with a clause stating that the collector or creditor will not sue you if you make the payments. If severance pay is paid in full, make sure your credit report reflects this.
States have their own laws regarding the statute of limitations on debt collection, wage garnishment, and asset confiscation.
What to expect
If a third-party debtor could not reach you, he can take you to court. If the collector or creditor receives a judgment against you, they may be able to garnish your wages or seize assets to pay off the debt.
If you get a subpoena, show up for your court hearing, credit experts say. You can contest the claim there. Otherwise it is an automatic win for the collector.
If you live in a state with a foreclosure system, your mortgage default will end up in court. If the court rules out foreclosure, your home will be auctioned off to the highest qualified bidder and the money will go to the lender.
All information about your delinquent account will remain on your credit report for seven years. That may sound like an eternity, but Experian’s Griffin advises consumers with delinquent debt and poor credit to stay positive.
“Start small and work your way up. Get your credit report and know what it says,” says Griffin, noting that tools like Experian Boost can help consumers improve their credit scores by giving them a boost for on-time cell phone and utility payments.
“It’s a credit story, but it’s a story you can change,” Griffin says. “You absolutely can restore your credit history.”