What Happens If You Default On Payday Loans Or Debt Consolidation/Debt Settlement Agreements?
If you default on any loan or debt payment agreement, you are breaching a contract. When legal contracts are breached, the side that was not responsible for the breach is entitled to legal redress. This legal redress for an unpaid debt usually proceeds as follows.
- Contact From The Creditor. First, the creditor will contact you directly. It will usually call you or send you a letter telling you that you were supposed to make certain payments, which you haven’t made.
- Debt Is Passed To Collections. If you don’t respond to a creditor’s communications, the debt will be passed into collections. The original creditor is in the business of lending money, not in the business of debt collection. Therefore, when a debt remains outstanding, it typically sells the debt to an external debt collection agency. These debts are sold for far less than the original amount owed. For instance, on a debt of $10,000, a debt collection agency may pay $500, since the creditor has already tried and failed to collect the debt.
When your debt is sold, the space where the debt used to be on your credit report simply says, “charge off.” This leads many people to believe that the debt is gone. However, the debt is not gone. All “charge off” means is that the original creditor transferred the debt to someone else. However, the debt is still very much alive, and now owed to the debt collection agency.
It is also important to know that the debt collection agency can collect the full $10,000 you originally owed. Despite having only paid $500 to purchase your debt, the “product” they bought is still worth $10,000 if they can collect it.
- Collection Actions Begin. Next, the debt collection agency will try to collect from you. Though different collections agencies have different strategies, most of them follow a common pattern.
The initial contact usually has an upbeat, helpful, and friendly tone: “You owe my client (your original creditor) $10,000, but I’ve have been authorized to reduce the balance to $7,500, which saves you $2,500, but only if you pay it in full within 30 days.” The representative may also threaten to take “appropriate action” if you don’t pay by that time.
If you don’t comply, the next communication will often have a much more dejected tone: “I offered to reduce your balance to my client by $2,500. I don’t understand why you didn’t take me up on it. However, I have been authorized to extend that offer one more time. This is an amazing opportunity for you, but I must receive payment in full within 30 days.” This might end with a threat that if you do not pay by that time, you will face legal action.
Some collections agencies do accept monthly payments, and are open to working with debtors to make as much of the payment as possible over a longer period of time. However, the current trend in the field is to demand payment in one lump sum. This is usually much harder for the average debtor to do, especially after having trouble making payments in the first place.
- Legal Action Begins. In many cases — often because a debtor simply has no way to make a lump sum payment — the debtor doesn’t pay the demanded money, so the debt collection agency sues the debtor.
You will know you’re being sued because you will receive a summons stating that you are being sued. The attached complaint will say that you owe the company the amount demanded. You have 30 days to file an answer.
- Request For Default Judgment. If you do not pay and do not timely file an answer, the collection agency will file a request for default judgment. If you don’t file a challenge to the request within 21 days, the Court will enter the default judgment.
If you are a homeowner, the collection agency will then record a judgment lien with the County Recorder. The collector will also enlist the services of the Sheriff to initiate a wage garnishment with your employer, and levy funds out of your bank accounts.
You will usually get around a two-week warning about the wage garnishment, since your payroll department is obligated to inform you before the first garnishment. However, you will get no warning before the Sheriff levies funds out of your bank accounts.
The best way out of this trap is bankruptcy. When you go through a bankruptcy, if your debt is dischargeable, then it will be wiped out. If the collection agency recorded a judgment lien against your property, under certain circumstances we can remove the lien in a bankruptcy case. The legal term we use is “avoiding the lien,” which means rendering the lien null and void. In sum, by filing bankruptcy, you can avoid the lien and get rid of the underlying debt (if it is dischargeable). Thus, bankruptcy can be a very attractive way to deal with creditors and collection agencies.
That is a rough outline of what happens if you default on a debt, or if you’re in a debt consolidation program that isn’t working.
For more information on Bankruptcy In California, an initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.
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