Around one-third of all Americans have debt in collections, according to the Urban Institute. Medical debt accounts for a substantial portion of this unpaid debt, with around one in five households past due on bills for healthcare services.
While not all Americans are past due, most owe at least some money, whether that's for mortgages, auto loans, credit cards, student loans, or other debts.
If you're one of the millions of Americans who owe money, you may have some questions about your debts that you're not comfortable asking. Here are some of the most common with the answers you need.
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1. What happens if you don't pay your debt?
If you don't pay back what you owe, creditors likely will take action. Typically, once your debt is 30 days or more past due, creditors post notice of a late payment on your credit report, reducing your credit score and making future borrowing difficult.
You can also expect to start getting collections calls and will often get hit with late fees. If you owe on a credit card, your late payment could also trigger a penalty APR that's significantly higher.
You do have legal rights under the Fair Debt Collection Practices Act. Upon your request, creditors have to prove you owe, and can't continue collections activities until they do. They also cannot call you early in the morning or late at night, or make threats of legal action they don't intend to pursue.
The type of debt you have will determine what happens next if you don't repay. If you have secured debt, like a car loan or mortgage, the lender may initiate proceedings to repossess your vehicle or foreclose on your home. If the debt is unsecured, which means there's no collateral, creditors often write off the unpaid balance and sell your debt to collections agencies.
You could find yourself facing a lawsuit that might lead to a judgement against you, which a collector could enforce by asking a court to put a lien on your home or garnish wages. But often collectors don't bother with legal action for small debt; instead they just ruin your credit and make frequent collection calls.
2. Do you always have to pay back what you owe?
Creditors can take various types of legal action to try to make you repay your debts. However, for most types of loans, there's a statute of limitations, which varies by state but usually runs out after around three to six years.
Once the statute of limitations has run out, creditors no longer have any recourse -- so while you technically still owe, creditors have no way to try to make you pay. If you hope to wait out the statute of limitations, take care to avoid inadvertently restarting the clock, which can happen if you make a payment.
It's also important to note that there's no statute of limitations for collecting federal student loan debt.
3. Can you get in legal trouble if you don't pay back your debt?
Typically, if you don't pay back your debts and legal action is taken, it happens within the civil justice system. This means you get sued, and the court could enter a judgement against you.
If your unpaid debt is for a home, foreclosure proceedings are likely. Some states require judicial foreclosure, which means going to court, while in other states lenders have the right to foreclose without court orders when loan agreements include power-of-sale clauses.
There are some circumstances, however, where legal troubles could be more serious. For unpaid tax debt or unpaid child-support debt, it's possible you could be jailed. In some states, failure to comply with court orders to pay a judgement could also result in arrest for defying the court.
4. Can you discharge your debt in bankruptcy?
If you're overwhelmed by debt you cannot pay, bankruptcy unfortunately may not be the panacea you were hoping for.
Thanks to bankruptcy reforms in 2005, many Americans who file bankruptcy don't qualify for Chapter 7, which facilitates debt being discharged quickly after certain nonexempt assets are taken to repay creditors. Many debtors are now relegated to Chapter 13 bankruptcy, which requires a three- to five-year repayment plan that is often a financial hardship.
There are also certain types of debt you cannot discharge in bankruptcy, including federal student loan debt and debt from past due child support. Except in very limited cases -- such as undue hardship caused by total and permanent disability -- you will have to pay back what you owe on federal loans.
Secured debt can also present complications in bankruptcy proceedings. If you hope to keep your house, car, or other assets that are acting as collateral, you'll have to find a way to get current and pay back what you owe. You can't simply wipe away these debts in bankruptcy while keeping the assets.
5. What happens if you die with debt?
If you die with debt, any cosigners are obligated to repay it. Creditors can also make a claim against your estate and try to get paid from the assets you left behind.
If you don't leave enough assets to repay what you owed, creditors typically have no recourse. Unless your loved ones cosigned, creditors have no legal authority to make your heirs pay back out of their own pockets the debt that you died with.
However, if you have a car or home to pass on and there's an outstanding auto or mortgage loan, your loved ones will need to take responsibility to continue paying what is owed if they want to keep the car or home.
Make a debt repayment plan
Owing a lot of money is undoubtedly stressful, but there are ways to tackle your debt problems.
While you typically don't need to rush to pay off low-interest debts with long repayment terms, such as mortgages or student loans, getting rid of high-interest consumer debts like credit card balances and unpaid medical bills should be a top priority.
Make a plan to prioritize which debts you want to pay off first, and set up a budget that allows you to allocate extra cash to paying off what you owe. This way you can free yourself sooner from costly consumer debt, and keep more of your money instead of spending it on interest.
