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Co-authored with personal finance expert Brian Loman of ElcLoans
What happens if you never pay your bills?We've all struggled to get ahead. Even the best of us have had points where we were behind on our bills and our bills exceeded our income. Trust me. I have had more than a few times when I said I can't pay my bills! When I can't pay my bills I not only have the financial burden. I also have emotional turmoil. It makes me feel like a failure. I feel like I'm letting my family down. But I'm also stressed. Bill collectors start calling. Envelopes start showing up in the mail. I start to panic. Technically and legally though, when you're at that place where you say I can't pay my bills, a few things can happen. Those include:
- Damaging information can be put on your credit report - late payments and unpaid debt stay on your report for 7 years
- If you have a "secured" loan, that means you legally promised something as collateral against the debt. The creditor can take possession of whatever that is (car, house, etc).
- If you got someone to co-sign a loan you are putting their credit report at risk too. So make sure to let them know
What happens if I can't pay my medical bills?I've been in this situation before. Once upon a time, our health insurance situation was pretty decent. Not perfect, but certainly far better than it is today. While today many have some form of coverage where they didn't before, it's often what they call catastrophic coverage; meaning it only really covers a portion of really major expenses. Our health insurance rates are also quadruple what they were a few years ago too. So we're paying a whole lot more for a whole lot less. BUT I digress. I point all that out simply because it's not uncommon for many of us to get huge medical bills after we or one of our kids has a medical procedure. My oldest daughter had a heart condition known as SVT. Summer before last she had a procedure done. Even after insurance, our portion of the bill was about 20 grand! I'm still paying that bill. I send them a small amount of money every month that fits into our budget. They cash the check and send me a new statement. We've been doing that over a year at this point. I'll have that paid off eventually (and I will pay it as a matter of principle). But it will take a while. However, we had another medical bill for my wife's gall bladder emergency surgery (scary term considering it was done as an outpatient procedure) and I was paying that bill off and had paid it down by more than half. For some odd reason, they refunded everything I had paid and sold it to a collection agency. Guess what bill suddenly got really low on the priority list? But really, compared to most other kinds of debts, medical bills can go to the bottom of your priority list. They tend to harass the least, take legal action the least, and are more willing to negotiate. They are also much more willing to just take small monthly payments as I make.
What happens if I can't pay my student loans back?This is much more serious than medical bills, and as health insurance, our college tuition system in this country is a mess! Never before have our kids paid so much for an education only to come out of college to get paid so little. I sure hope the future generations are a whole lot smarter about when and if to go to college, WHERE to go to college (people care IF you have a degree, not where you got it). But if you don't pay your student loans, here's the timeline:
- You are considered in default if you haven't paid your loan(s) in 270 days
- The payment is considered delinquent even if you paid something, so partial payments don't really count
- The loan will be considered delinquent until all past due balances are paid
- You will get reported to the credit bureaus after 90 days of being delinquent
- After 270 days it will get sold to a collection agency
- The entire loan balance is considered due in full
- You lose access to any student loan forgiveness programs or payment plans
- If you are still in school, you'll lose financial aid
- The collector can garnish your wages to collect the debt
- They may place a lien against your house if you own it
- They can take your tax refunds if you are eligible
What happens if I can't pay my car payments?Well, if it's a really nice car, I'd consider selling it and getting a $1,000 beater while you get out of debt and clean up the mess. Sometimes though, we're what they call upside down on the car. That simply means you owe more than you could sell it for. If you are just a little upside down, I'd consider taking out a small loan just to be done with it (make sure and get enough to also get that $1,000 car). But if you're really behind, that personal loan might not be an option. Assuming this car is your means to get to work, it's important from an income standpoint too. Unlike collection agencies, the bank or the company that you owe the money to can be a little more understanding. So don't hide your head in the sand. Call them and let them know of your situation and how it's affecting your ability to pay. Many times, they will give you a grace period, what they call forbearance, where you can skip your payment for a few months. It won't change what you owe and could add a little additional interest owed, but it gives you breathing room. But if you stop paying and don't talk to them, you can expect your car to get repossessed after about 90 days. You can still get it back after that happens, but that typically requires paying what's owed, plus fees, within 2 weeks.
What happens if I can't pay my taxes?Like student loans, this is another type of debt you don't want to hide your head in the sand over! As they say, the only thing certain is death and taxes. Actually, that was Benjamin Franklin, but it still applies today. First and foremost, continue to file tax returns! The penalties for not doing anything are a whole lot worse than filing and not paying what you owe. When you file, if you can't pay the full amount, still pay something. The IRS has the ability to an extension on paying what you owe or allow you to make installment payments. Here are my detailed guides on how to do both of those. Just click the links to my website to read the crucial steps you need to take. How to File a Tax Extension How to Set Up an IRS Payment Plan But if you just don't pay or file?? Well, it's possible you could end up in jail. The IRS will have you jailed, not for making an honest mistake, or being broke, but for the following reasons:
- Tax evasion
- Not filing a tax return - 1 year jail time for each year you didn't file
- Assisting someone else evade taxes
What happens if I can't pay my credit card debt?This is also one you can put fairly low on the priority list. In most cases, yes, they will call you repeatedly, they'll just sell your bad debt to a collection agency, and those folks will call and harass you and try and get you to pay. The worst things that happen in most cases are:
- Incurred late fees and penalties
- Lowered credit score
- Increased interest rates on all your credit cards
- Possible legal action
What happens if I can't pay my child support?This is another serious one. Not only because of the legal consequences, but also because this is your child we are talking about, and nothing should come before your child. Sadly, though, there are a LOT of people behind on paying child support. According to Congress, there are 11 million cases and $116 billion owed in back child support. So what happens if you stop paying child support?
- You may lose your driver's license
- The court may garnish your wages (up to 65%)
- Any tax refunds will get confiscated
- The court may place liens on any property you own (house, car, etc)
- They will report you to the credit bureaus just like a creditor, so your credit score takes a nosedive. You'll also have the stigma of not paying child support for anyone who looks at your credit report in the future
- You could be jailed if a judge finds you in contempt of court
- You could be charged with a felony if you owe $10k or more and have not made an attempt to pay
What happens if I can't pay my utility bills?Well, sitting in your house with the power shut off or no running water is no fun. My wife grew up that way and it's not a good way to live. First off, when times are tight, you have to prioritize your bills. If you need to let a utility lapse, not getting trash or recycling pick up isn't nearly as crucial as electricity or water. Cable and internet also aren't crucial for our existence (no matter what your kids say). You can also turn off the AC or at least adjust the thermostat. You can also turn the hot water heater down too. There is also a government program to help you with paying utility bills. The Low Income Home Energy Assistance Program (LIHEAP), is part of the Department of Health and Human Services. They can provide financial assistance both with bills, but also repairing broken equipment such as your HVAC system. In addition, many utility companies themselves have financial assistance or payment programs, so when in doubt, call and ask what your options are. But if you don't pay, they will shut you off, often charging fees and penalties when you later request it to be turned back on.
Can you go to jail for not paying your bills?The short answer is in most cases, no. In the 1800s the so-called "Debtor's prisons" were commonplace. Back then, if you said to yourself I can't pay my bills, there was a very real chance of ending up in jail. Fast forward to today and there are really only 2 kinds of debt that can land you in jail in the US. Those are a failure to pay taxes and failure to pay child support. That being said, if a creditor does take you to court for bad debt and a judge issues an order to appear, you could be jailed if you fail to show up or otherwise don't follow the judge's orders.
How do I talk to a creditor if I can't pay?Creditors just want one thing; your money. They don't care about you, your situation, or how much you can actually afford to give them. No offense to creditors, but they tend to be bottom feeders; at least the collection agencies. So right out of the gate, plan to communicate in writing only; that way there's a paper trail. Ideally email, but old-fashioned snail-mail works too. If you just talk to them on the phone any promises they make to convince you to give them your bank account info could easily be forgotten. NEVER GIVE A CREDITOR ELECTRONIC ACCESS TO YOUR BANK ACCOUNT If you're dealing with a collection agency, also realize they likely bought your debt for pennies on the dollar of what you actually owed. As a matter of integrity, I think it's important to pay back what you borrow. But, say you owed $1,000 and didn't pay. Whoever you borrowed that from probably sold it to this collection agency for $250. If they can get you to pay anywhere near that $1,000 they make out like bandits. Then, on top of that, they are probably telling you there are interest, penalties, and other fees. Maybe they even have the gall to ask for $2,000. In truth, they'll probably take $500. But you'll have to be diligent, persistent, and unwavering. I have a detailed guide to doing credit report repair yourself for free, and in that article, I walk through this process in much greater detail. So click the link to see that now on my site, if it applies to your situation.
How long can a debt collector legally pursue old debt?Every state in the US is a little different. But states have statutes of limitations on debt collection just like other offenses. Generally speaking, an old debt is considered uncollectable after a period of only 4-6 years. That is different, however, from how long it stays on your credit report (typically 7 years). Also know that if you occasionally make payments on it, you're starting that 4-6 year cycle over again, so only do that IF you have the intention of paying it off in full. Now, just because an old debt is past the statute of limitations in your state doesn't mean that they will stop harassing you. After all, after a few years, chances are your old debt has been sold to a few different companies and every time that happens, you might start getting contacted again. But you also have rights under the Fair Debt Collection Practices Act (FDCPA). Those rights include:
- They can't call you before 8 am or after 9 pm
- Debt collectors have to stop calling you at work if you ask them to
- They can't harass you by any means of communication
- If you obtain an attorney and make them aware of it, they have to stop contacting you and can only speak with your attorney
- You can send them, in writing, a request to stop contacting you (and they are obligated to only acknowledge that once and possibly indicate future actions they may take)
- They are required to tell you the amount owed, who that was owed to, and that it can be disputed
How do I get out of debt with no money?It's like the chicken and the egg. Which came first. How can you pay your bills and get out of debt when you don't have much money to begin with? That's a question many of us who have said "I can't pay my bills" have wrestled with. The key is two things:
- You need to get on a written monthly budget
- You need to examine both your income and your expenses
- Is there room for advancement where I work now?
- If yes, what do I need to do to take advantage of that?
- No room for advancement? Are there other companies where you live that might pay better?
- If no, are there training programs or skills you could learn that would change that?
- Again, if the answer is no, I would look at possibly moving to a city with more opportunity
If your income is OK, then you likely have an expense problem.Getting on a written monthly budget will make that abundantly clear. But some of the most likely scenarios I see when people and families are living beyond their means include:
- They bought too much house - Your total monthly house payment (rent or mortgage, including any taxes and insurance) should not be much more than 25% of your monthly take-home pay.
- They drive expensive cars - A $50,000/year salary and that new Lexus just don't add up. Drive what you can afford, ideally never buying a brand new car, and never leasing a car.
- You go on vacation while deep in debt - If you owe a bunch of money, I'm sorry to report, that any lavish vacations should be on hold while you clean the mess up (especially if you charge that vacation on a credit card).