Walking Away From Debt: What Are the Risks?
When debt becomes overwhelming, it can be tempting to simply stop making payments and “walk away.” But stopping payment does not make a debt disappear, and the consequences can continue for years.
Depending on the type of debt and your circumstances, missed payments may lead to late fees, additional interest, negative credit reporting, charge-offs, collection activity, or even a lawsuit. If a creditor obtains a court judgment, additional collection remedies may be available under applicable state law.
Before deciding not to pay a debt, it is important to understand what you owe, who owns the debt, whether the information is accurate, and what options may be available to you. Different types of debt can have very different consequences, so there is no single strategy that is right for everyone.
What Happens When You Stop Paying a Debt?
When you stop making required payments, an account may move through several stages of delinquency. The exact process depends on the type of account, the creditor, and the terms of your agreement.
• Late payments may be reported to the credit bureaus. Once an account becomes sufficiently past due, the delinquency may appear on your credit reports and can negatively affect your credit scores.
• Interest and fees may continue to accumulate. Depending on the account agreement and applicable law, the amount you owe may continue to increase.
• The account may be charged off. A charge-off is an accounting action by the creditor. It does not mean the debt has been forgiven or that you no longer owe it.
• The debt may be sent or sold to a collection company. You may begin receiving collection letters or calls, and a collection account may also appear on your credit reports when permitted.
• You could be sued. Depending on the debt and applicable statute of limitations, a creditor or debt collector may pursue legal action to collect what it claims you owe.
What Does a Charge-Off Really Mean?
A charge-off does not mean that a debt has been canceled or forgiven. It generally means the original creditor has classified the account as a loss for accounting purposes after it became seriously delinquent.
Even after an account is charged off, the creditor may continue collection efforts, assign the account to a collection agency, or sell the debt to a debt buyer. Depending on the circumstances and applicable law, the owner of the debt may also have the right to pursue legal action.
A charged-off account can remain on your credit reports for a limited reporting period established by federal law. Paying or settling a charge-off generally does not automatically remove the accurate account from your credit reports. Instead, its balance and status should be updated appropriately.
If you believe information about a charged-off account is inaccurate or incomplete, you have the right to dispute that information with the credit reporting companies.
Can a Creditor or Debt Collector Sue You?
Yes. Depending on the type of debt, applicable law, and how much time has passed, a creditor or debt collector may file a lawsuit to collect an unpaid debt.
If you are sued, do not ignore the lawsuit or court papers. Failing to respond by the required deadline could result in a judgment against you. A judgment may give the creditor additional collection options permitted by state law.
There are also legal time limits, called statutes of limitations, for filing lawsuits to collect many types of debts. These time limits vary by state and by the type of debt.
Be careful with very old debts. In some circumstances, making a payment or acknowledging an old debt may affect your legal rights or the time period for bringing a lawsuit, depending on state law. Before making a payment on an old debt, consider getting legal advice if you are unsure of its status.
How Long Can Negative Debt Stay on Your Credit Report?
Most negative account information, including late payments, collections, and charge-offs, can generally remain on your credit reports for up to seven years. The exact reporting period depends on the type of information and the dates associated with the delinquency.
For collection accounts and charge-offs, the reporting period is generally tied to the original delinquency that led to the account being charged off or placed for collection. Selling or transferring a debt to another collection company does not restart the federal credit-reporting period.
Paying or settling a debt also generally does not cause accurate negative information to disappear immediately. The account should instead be updated to accurately reflect its current balance and status.
It is important to distinguish the credit-reporting time limit from a state’s statute of limitations for filing a debt-collection lawsuit. They are two different things, and one can expire before the other.
Should You Ever Just Walk Away From Debt?
There is no one-size-fits-all answer. When someone cannot afford to pay all of their debts, the best course of action depends on the type of debt, the amount owed, income and assets, whether the debt is legally enforceable, and the person’s overall financial situation.
Before simply stopping payments, consider whether other options may be available. These could include contacting the creditor about a hardship program, negotiating a repayment arrangement, settling a debt when appropriate, working with a reputable nonprofit credit counselor, or consulting a bankruptcy attorney when the debt burden has become unmanageable.
Be especially careful about prioritizing unsecured debts over essential obligations. Housing, utilities, insurance, taxes, court-ordered obligations, and secured debts such as a mortgage or auto loan can carry consequences very different from ordinary credit-card debt.
The goal should not simply be to make a collection account disappear. It should be to make an informed decision that protects your finances, your credit, and your legal rights as much as possible.
Owing a Debt and Credit Reporting Are Two Different Things
Whether you legally owe a debt and whether that debt can still appear on your credit reports are two separate issues.
A debt may eventually become too old for a creditor or debt collector to successfully sue you under the applicable statute of limitations, but that does not necessarily mean the debt must immediately disappear from your credit reports. Likewise, an account may reach the end of its federal credit-reporting period even though questions about the underlying debt may still exist.
This is why it is important to consider both the age of the debt and the credit-reporting dates before deciding how to handle an old account.
If an account on your credit report contains inaccurate dates, balances, ownership, payment history, or account status, you have the right to dispute inaccurate or incomplete information. However, accurate negative information generally cannot be removed simply because it is damaging to your credit.
Make an Informed Plan Before You Act
Debt problems can feel overwhelming, but making decisions without understanding the consequences can sometimes make the situation worse. Before paying, settling, disputing, or deciding not to pay an account, take the time to understand how the debt is being reported and what options may be available.
At Credit Help USA, we help clients review their credit reports, identify information that may be inaccurate or incomplete, understand how negative accounts are affecting their credit profile, and develop a personalized strategy for moving forward.
Credit Help USA does not provide legal advice or tell clients whether they should default on a debt. When legal questions involving lawsuits, statutes of limitations, judgments, or bankruptcy arise, we may recommend consulting a qualified attorney.
Sources & Consumer Resources
Consumer Financial Protection Bureau (CFPB)
• What Is a Statute of Limitations on a Debt?
• What Should I Do If a Creditor or Debt Collector Sues Me?
• Debt Collection
Federal Trade Commission (FTC)
• Debt Collection FAQs
AnnualCreditReport.com
• Free Credit Reports Authorized by Federal Law
