The Basics of Dealing with a Loan Default

Over the past few weeks, several readers have written in with questions related to defaulting on their loans. Some individuals were in a precarious situation and were wondering about the consequences of defaulting, while others had already defaulted on their loan and were wondering what the consequences were.

What’s default? First of all, a loan default simply means that you’ve not met your obligations when it comes to your agreement to repay a loan. This can be something as simple as just missing a payment or being late on a payment, or it can be an avoidance of all payments.

Usually, when you’re in default, the organization that you’re indebted to will begin to contact you to get their money. Initial contacts are usually quite painless – merely reminders to pay. As the default continues, however, companies tend to get more aggressive, contacting you repeatedly with stronger language.

Eventually, this will begin to affect your credit (usually when you’ve been in default for thirty days or more), which makes it harder for you to get other loans, can increase your insurance payments, and can even affect your ability to get a job (as many jobs now run a credit check before they hire people).

Eventually, a loan default results in repossession or foreclosure (if your debt has collateral) or having that debt turned over to a collection agency (if your debt doesn’t have collateral). The impact on your credit card worsens over time, but as you approach the seven year mark since your default, the impact of the default lessens on your credit history.

Obviously, if you’re recently in default, you’re better off acting now rather than later.

What should I do? As soon as you recognize you’re in default on a loan or about to be in default, contact your lender. Go over the situation in detail with them and see what your options are.

Most of the time, lenders would far rather work out a payment solution directly with the borrower than entering into a foreclosure situation. Quite often, foreclosures and repossessions and collection situations are the result of a lack of communication between the borrower and the lender. Your best bet is to be proactive.

What if I don’t have the money to pay? This is the reason that most people are afraid to be proactive about their debt situation. They simply don’t have the money to pay the debt, and they figure that contacting the lender won’t help, so instead they choose to stay put and hope things get better.

Here’s the problem with that approach: lenders will assume that you never have any intent to pay. They have no reason to believe otherwise, so they will lump you in with the rest of their debts and treat you in a standard fashion.

If you are making a genuine effort to repay your debts, sitting on your hands is not the best option. You are far more likely to get an easier payment schedule, a forbearance, or some other solution if you contact your lender and deal with the situation.

What if my debt is already in collections? If your debt has already been turned over to a collection agency, your best bet is to negotiate with the collection agency. Do this entirely in written form via registered mail with receipt requested, not over the phone, and keep thorough records of this process. Even if they call you, ignore the call and follow up with mail.

If your debt is already in collections, the bad news is that your credit has likely already been significantly damaged. The good news is, though, that you should be able to negotiate a conclusion that can somewhat reduce the damage for an amount much smaller than the face value of the debt. Here’s some excellent advice on how to negotiate in this situation.

In a nutshell: if your debt isn’t in default yet or is freshly in default, call your lender and see if you can come up with a better payment solution. If your debt has been turned over to collections, communicate only in written form, keep your records carefully, and negotiate using these tactics.

Good luck!