I defaulted on my loans: What to know before you start dissolving your debt pile

Dubai: Even if you have been regularly paying down your debt, a default on any loan is going to damage your credit score and leave you vulnerable to one or more debt collection procedures.

The consequences of a default depend on whether your loan is secured (mortgage or car loan) or unsecured (credit card, student loans or personal loans).

In either case, financial experts suggest consumers look at a debt consolidation plan as a way to satisfy creditors and avoid the consequences for default. But first, let’s delve into how you may have defaulted.

• Defaulted on secured loans? Here’s what happens next

If you default on a home loan, the lender can foreclose on your house. While the process varies with lenders, you will mostly be in default on this type of loan after non-payment for a fixed number of days.

In most cases, although foreclosure normally takes several months after you default, some foreclosures can take two years or more.

Similarly, if you default on your automobile loan, your car can be repossessed — which means the bank takes ownership of it. Most banks allow a designated time period in which you can make your payment.

If you cannot meet the deadline or renegotiate your loan terms, your lender can repossess your vehicle. If your car is taken, it will likely be put up for resale at a public auction.

You can keep your car from being auctioned off by redeeming your debt — or paying the total amount due, plus any fees associated with the repossession. If the car sells for less than the amount you owed, you may be liable to make up the difference.

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The consequences of a default depend on whether your loan is secured (mortgage or car loan) or unsecured (credit card, student loans or personal loans).

• Defaulted on unsecured loans? Here’s what happens next

In case of unsecured loans, there is no collateral (property) that can be taken. Generally you have a grace period to pay on a credit card or other personal loan, but in some cases missing a payment by even one day can cost you.

After exceeding the grace period limit and if non-payment on a typical credit card account persist, you will be facing late fees and perhaps an interest rate increase.

Beyond that, you will likely come to the attention of the lender’s collection department, which will move your account to default status.

It is only after this when your debt will probably be charged off or written off— which means your bank will count it as a loss and delete the account from its books.

You will still owe the money, and the bank will either sell the account to a collection agency or hire a debt collector who will receive a percentage of the collected amount.

When will my debt be reported as default to my credit bureaus?

The original creditor will report the default to the credit bureaus, and your debt will be labelled as an unpaid charge-off (or write-off) on your credit report.

This will remain on your credit report as evidence that you once had difficulties in meeting your financial obligations.

However, a delinquent debt that is paid before it reaches charge-off status should not negatively impact your credit report.

• Defaulted on other debts? Here’s what happens next

Some debts stay with you for life, even if you file for bankruptcy. Among these types of debts, some debts are probably the easiest to re-negotiate.

In a lot of case studies, student loans are evidently observed to be comparatively difficult to discharge through bankruptcy. In some cases, a student loan debt may be discharged in part, but not all.

If student loan debt is a major reason for you to consider bankruptcy, contact your loan servicer first and see if it’s possible to negotiate a repayment plan that would work for you.

It’s worth noting that your creditors have some ability to stop certain debts from being discharged. They may also seek for relief from the automatic stay that prevents them from pursuing collection activity. So the discharge process doesn’t always go as quickly or smoothly as debtors might hope.

If a debt collector or creditor is calling about a loan or credit balance you can’t pay in full, contrary to common belief, you may find that a creditor or collector may still be willing to negotiate.

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Why would debt collectors be willing to negotiate down your debt?

Why would debt collectors be willing to negotiate down your debt?

It’s because debt collectors don’t need to recoup the full amount you owe to reap a profit. As such, there’s a chance one may agree to a settlement. Creditors may be willing to reach an agreement, since the alternative is to write the debt off as a loss. But what happens if you can’t reach a new agreement?

Bankruptcy offers people who are overwhelmed by debt an opportunity for a fresh start through either liquidation or debt reorganisation. In both cases, the bankruptcy court can discharge certain debts.

Once a debt has been discharged, the creditor can no longer take action against the debtor, such as attempting to collect the debt or seize any collateral. However, not all debts can be discharged and some are very difficult to get discharged.

What are your next steps when seeking to dissolve your debts?

Debt management plans (DMP) and bankruptcy are two tools designed to help financially stressed people get out of debt, but they work very differently.

Debt management plan is an agreement between a debtor and a creditor that addresses the terms of an outstanding debt. This commonly refers to a personal finance process of individuals addressing high consumer debt.

However, if you’re trying to decide between starting a DMP or filing for bankruptcy, bear in mind that while the ability to build and attain credit gives consumers purchasing power, it can also be a slippery slope.

If you’re like those whose debt has crept up higher than it’s possible for you to pay off, you may be considering bankruptcy. But before making a decision, knowing your options will help you make a better, more informed choice.

The first question you should ask yourself: Is debt management better than bankruptcy? While the best answer to this is better done case by case, for many, debt management programs are a more effective and safer option.

Bankruptcy can have a long-lasting impact

Filing for bankruptcy may clear your credit, but there are plenty of negative repercussions to think about before going this route. Although declaring bankruptcy keeps creditors from trying to collect, there are some variations on what you can expect depending on what type of bankruptcy you file for.

However, keep in mind that a bankruptcy can live on your credit report for up to a decade or even more. Because the information contained in bankruptcy case documents is a matter of public record.

Another caveat is that potential employers and landlords may be able to see that you’ve filed, potentially impacting your ability to find a job and housing.

In most cases, you cannot file for bankruptcy until you’ve undergone credit counselling. However, credit counselling can offer an alternative path for climbing out of debt and taking back control of your financial well-being without the negative impact of declaring.

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You can only enter into a debt management plan (DMP) if you have some money left over every month once all your essential expenses have been paid.

Can you afford a debt management plan?

You can only enter into a debt management plan (DMP) if you have some money left over every month once all your essential expenses have been paid.

It’s a good idea to draw up a budget, including your monthly income and all your essential monthly household expenses, for example, your mortgage, rent and utility bill payments.

If you have a very small amount left over after all these have been paid – or nothing at all – you should consider other ways to manage your debts.

Before starting a plan, the DMP operator should make clear to you the terms and conditions, including how much money you’ll be expected to pay each month and for how long the reasons the provider might stop operating the plan for you, for example, if you don’t make the required monthly payments.

Final thoughts..

If you have defaulted on a loan, what happens next is that it is sent to a debt collection agency whose job is to contact the borrower and receive the unpaid funds. Keep in mind defaulting reduces your credit score, impact your ability to receive future credit, and can lead to the seizure of personal property.

While taking on any debt repayment plan too will have an impact on your credit, bankruptcy in particular has a fairly catastrophic impact on the future of your credit score. As time goes by, those negative marks will hurt you less, but it will take time to rebuild your credit.

With a debt management plan (DMP), you can typically expect your score to drop slightly at the beginning of the plan. This is because the included creditor accounts are closed, which can drop your score. As you maintain your DMP, however, your score will usually go up.

However, if your credit score is already low and using credit again isn’t something you see yourself worrying about in the coming years, it may not make that big of a difference.

So although filing for bankruptcy is a challenging way forward, if you’re deeply underwater and trying to protect your home and other essential assets, it may be the right way out. A debt management plan, on the other hand, is cheaper and simpler to start. It’s also easier to quit if you want to try something else.

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