Any bill that is reported to a credit bureau as past due is a delinquent debt. In the early stages of delinquency it’s easier to repair your credit and move on. But the longer debts go unpaid, the more aggressive creditors get about collecting and the harder it is to dig your way out.
Delinquent debt will send your credit score into a nosedive. As your credit score falls, your access to credit shrinks and the best interest rates and terms will not be available to you. You may even get passed over for a job or rejected for a rental apartment if your credit history takes a negative turn.The worst thing you can do if you fall behind on your bills is to ignore the problem. Avoiding lenders’ efforts to contact you by not responding to letters or calls, moving without notifying them of your new address, or making no effort to reduce or pay your debts will only compound your woes.
“In the end, lenders don’t want to take your house or repossess your car,” says Rod Griffin, director of public education at Experian, one of the three major credit-reporting bureaus. “They want you to fulfill those terms and have a good relationship with you. (Delinquency) is costly and time-consuming for them, too.”
Here is what you can expect creditors to do at various stages of delinquency — and what you should do to get out of the mess.
Stage 1: 30 days past due
What to expect
At 30 days past due, 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 cut you some slack and choose not to report it to the credit bureaus. You’ll probably incur a late fee, though.
“Late payments can start harming your credit score as soon as they are reported, but you get a 29 days’ grace period,” says John Ulzheimer, a credit expert, author and educator who worked for Equifax and credit-scoring service FICO. “Most lenders report as soon as you’re 30 days late, but that’s not a requirement.”
If you know you’re going to miss a payment, get in touch with 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). “You should be bringing the account up to date or reaching out to the creditor to identify alternatives for resolving the issue.”
If you know you aren’t going to be able to pay, be honest with your lender. The creditor may work with you. If you’ve lost your job or have some other circumstance that’s causing hardship, seek financial advice early.
Stage 2: 60 days past due
What to expect
The lender will communicate with a greater sense of urgency and be clear about the negative consequences of failing to bring the account up to date. You’ll be charged more penalties and late fees and your credit score will drop further.
If you’re missing mortgage payments, you’re still at a point where the lender is likely to work with you to help get your account current.
The stakes are higher now. But it’s not too late to get caught up without trashing your credit. If you pay what you owe, your credit card lender may continue to let you use the card, says McClary.
If you haven’t 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 costlier it becomes to work around these challenges,” says McClary. “At this stage, you’re faced with tougher choices. Your window of opportunity is closing.”
Stage 3: 90 days past due
What to expect
At this stage, the lender is close to declaring your account uncollectible, which is known as a “charge-off.” Credit card lenders may send your account to a third-party debt collector.
“A 90-day delinquency is considered to be a major derogatory in both the FICO and VantageScore credit-scoring systems,” says Ulzheimer. “Once you pass 60 days past due the impact is more significant and long-lasting.”
There is a chance you can reactivate your account by setting up a payment plan with the creditor, McClary says. If you have a hardship, your creditor may agree to reduced payments or a lower interest rate.
Another option is to work with a nonprofit credit counseling agency such as the NFCC, or one of its member agencies to help manage and pay off your debt. A credit counselor helps you devise a payoff plan, which requires you to close out your accounts and make a monthly payment to the counseling agency, which pays the creditors.
“The debt management plan gives you access to lower interest rates, reduced payments,” McClary says. “It halts the fees and you pay off your debts in a fraction of the time it would take otherwise.”
The typical debt management plan takes three to five years to complete, McClary says. Another plus: counseling agencies may work for little to no cost, depending on your circumstances.
Stage 4: 120-180 days past due
What to expect
A creditor will declare your account as a charge-off once you are four months or more past due. “Your credit score will tank when it’s listed as a charge-off,” says McClary. “A creditor may have a path toward filing a judgment against you. Some states have the option to garnish your paycheck.”
The creditor may sell the account or let a third-party debt collector take over recovery efforts. “Now you are dealing with a person who wants the full balance,” says McClary.
Debt collectors will call you and send you letters and emails. They are bound by the federal Fair Debt Collection Practices Act, which prohibits them from using unfair, deceptive and abusive collection tactics.
Third-party debt collectors sometimes sell off debt to another debt collector if they haven’t been successful in getting you to pay. Make sure the debt shows up as the same account on your credit report. Sometimes it may look like another delinquent account, and you’ll want to dispute any duplicates. Know that any payment you make to a third-party debt collector can restart the statute of limitations on your debt.
If you’re still missing mortgage payments, the foreclosure process could get underway. Foreclosure laws vary by state, but generally, after the fourth missed payment, you receive a default notice and are given a window of time to pay up before the lender starts taking steps to claim your house.
McClary urges consumers not to ignore the debt collectors. “You have the right to tell them to stop calling you at work, for example, but don’t shut down the lines of communication,” he says. “You want to know where they are in the process. Leave them the option to contact you by mail or email.”
Get verification of the debt from the third-party collector and confirm the collector’s identity with the original creditor. Set up a payment plan or offer a settlement.
Try to negotiate a settlement with the original creditor, which may offer more flexibility. The creditor or debt collector probably won’t settle for less than half the balance. “But shoot for the moon on your first offer because you never know,” advises McClary.
Get the settlement offer in writing with a clause that states the collector or creditor won’t sue you if you make the payments. When a settlement is paid in full, make sure your credit report reflects that.
States have their own laws pertaining to the statute of limitations on debt collection, wage garnishment and seizure of assets.
What to expect
If a third-party debt collector has been unable to contact you, it can take you to court. If the debt collector or creditor receives a judgment against you, it may be able to garnish your wages or seize assets to satisfy the debt.
If you receive a summons, show up for your court hearing, credit experts say. There, you can dispute the debt. Otherwise, it’s an automatic win for the collector.
If you live in a state with a judicial foreclosure system, your mortgage default will end up in court. If the court forecloses, your home will be sold at auction to the highest qualifying bidder and that money will go to the lender.
All information on your delinquent account will remain on your credit report for seven years. That can sound like forever, but Griffin of Experian tells consumers with delinquent debt and bad credit to stay positive.
“Start small and work your way up. Get your credit report and know what’s in it,” says Griffin, noting that tools like Experian Boost can help consumers improve their credit score by giving them a bump for on-time mobile phone and utility payments.
“It is a credit history, but it is a history you can change,” Griffin says. “You can absolutely restore your credit history.”