For one reason or another, you find yourself in debt. This could be down to a misuse of a credit card when you were younger, a loan you took out, or anything else. The point is that you owe money to someone – or multiple someones. You’re trying your best to pay everything back, but you just can’t hack it.
So, what happens next?
What happens when you can’t repay what you owe? The exact circumstances vary depending on the type of debt and the lenders involved. However, here are a few things that tend to happen in this situation:
The interest rates go up
Weirdly, when you can’t make repayments, lenders decide that the best option is to start raising your interest rates. Why do they do this? It might be to try and scare you into finding a solution and paying them as quickly as possible, so you don’t start owing even more money. Unfortunately, all it does is increase what you owe to a point where you really can’t afford to pay it off. It’s counterproductive from them, but they’re just thinking about getting as much money from you as possible.
The important thing is that you don’t panic when this happens. Realize this is a standard procedure, but don’t let it scare you into making rash decisions. Stay calm, talk to a financial advisor or debt expert, and they will help you deal with the situation.
Collection agents can come calling
When you start defaulting on your payments, a lot of lenders work with collection agents to try to get you to pay up. From here, you will start getting calls from the agents, possibly even home visits, and they increase in frequency. It’s all designed to put the pressure on, and it can get very nasty, very quickly. There are certain things that collection agents can and can’t do. They can send you letters, but they can’t harass you or make threats of force.
If you have been contacted by one, it’s a good idea to look up a list of debt collection agencies to see what people say about them. If a lot of reviews go on about how they harass you, you can start thinking about legal action against the agency. Or, you can report them to the authorities, getting them to stop bugging you unlawfully.
Money can be taken from your bank account
This process is called the right of offset and it happens when you are in debt to a bank or building society. Let’s say you have a credit card with the same bank that you have a current account. If you are missing credit card payments, they might start taking money from your current account to cover these. They are legally allowed to do so, and it’s a way for them to recover some of the money they’re owed.
However, this only tends to happen in extreme cases. Most of the time, they won’t take money from your account. Still, be aware that this is something that can happen when you can’t repay your debts.
Legal action is taken
As soon as you are unable to make payments and start defaulting, your creditors are likely to begin taking legal action. They want to recover their losses, and going to the courts is the only way. Well, it’s the only way they believe they can get their money from you. They have to go through a process to get the courts to take action against you. It’s not a nice experience, and a couple of key actions tend to occur:
- Wage garnishment
- Asset seizure
Wage garnishment is a court order that stipulates your creditor can deduct money from your wages until your debt is paid. Basically, whenever you are paid each month, your creditor gets a cut of that. Agreements are made on how much they take every month and for how long, until the debt is repaid. It is far from ideal and can be very embarrassing as you have to let your employer know that this is happening.
Asset seizure is perhaps the most common action that gets taken following court procedures. As you can probably guess, it involves the seizing of your assets by the creditor. In essence, they have the right to take some of your assets and sell them to make up for what you owe. It’s not uncommon for cars and other vehicles to be seized in this scenario – if you haven’t already sold them to try to pay your debts!
In very extreme scenarios, the creditor can also issue an arrest warrant if you don’t turn up to court or haven’t complied. Obviously, this is unlikely to be an issue for all of you as you’re not going to do anything silly like that!!
You can seek out other methods to clear your debts
When you can’t keep up with your normal repayments, you need to start seeking out different ways of clearing your debts – or clearing as much of it as possible. Debt relief charities and organizations exist to help you with this, but we can walk through some of the common methods of getting free from debt when you start defaulting:
- Debt consolidation – This is the process of consolidating multiple debts into one big loan. You get the benefit of only worrying about one payment to make every month, and debt consolidation companies usually make it easy for you to pay. After all, the whole purpose of these loans is to help people get out of debt.
- Debt Management Plan – Here, a debt management company helps you by talking to your creditors and getting them to restructure your debts. This could involve reducing your payments and interest rates, or getting rid of any outstanding penalty fees. Overall, an agreement is reached to put you on a payment plan that helps you pay what you owe.
- Debt settlement – A pretty simple concept; the lender agrees to a settlement that’s less than what you owe. They don’t like doing this, but it can be the only option they have to regain as much money from you as possible. Effectively, you can pay whatever you are capable of paying, and the debt gets written off.
- Bankruptcy – Finally, you can file for bankruptcy if no other solutions will help. This is the final straw, you should definitely try the other methods first. If you are in such a bad financial position that you can’t see any way of making debt repayments, bankruptcy can be a safe option. Effectively, your debts are legally cleared and you no longer have to pay them. You may be asked to make small payments to the lenders, but that’s it. It’s a way of wiping the slate clean and letting you start again with no debts to worry about. This makes bankruptcy seem really great, but there are plenty of downsides to it that make it an option you should only consider if nothing else is working.
Through these methods, you should reach a solution to repay your debts when you can’t keep up with the normal repayments. Then, you will be debt-free and can start rebuilding your life.
In summary, a lot happens when you can’t repay your debts! For this reason, it’s good to avoid getting in debt as much as possible. Be more financially savvy and learn to save money and avoid borrowing just for the sake of it. But, if you are in debt and start falling behind on payments, be aware that there are ways to get out of it before lenders can enforce legal action.