“Defaulting on a Loan Explained”

 

When it comes to loans, the topic of “default” is always discussed in a negative light. It is brought up in regards to consequences that come from failing to pay off a debt. That is the shorter explanation of what it is, but rarely are the outcomes and even the ways in which one can get out of a default brought up.

 

What does it mean?

 

“Default” refers to the failure of repaying a loan or security debt, including interest or principal. A default often occurs in situations where a borrower misses payments, avoids making payments or stops altogether, or is not in a position to make payments on time. Individuals and businesses, as well as countries, can default if they are unable to maintain their debt obligations.

 

A default can happen on secured debt, like a house-secured mortgage loan or a business loan secured by the assets of a company. Failing to make timely mortgage payments results in the loan potentially going into default. Likewise, if a business issues bonds – basically borrowing from investors – and it cannot make coupon payments to its bondholders, the business will find itself in default on its bonds.

 

What will happen?

 

If you default on a personal loan or credit card debt, there is a good chance that you will face consequences. Some of these repercussions include late fees, collection procedures, and even lawsuits. By defaulting on a secured loan, like a mortgage or car loan, your lender can take matters into their own hands, such as foreclosing on your house or repossessing your vehicle. Any loan defaults can lead to wage garnishment and this can make it a lot more difficult to meet your financial obligations.

 

Loan defaults typically appear in your credit history and they can be reflected in your credit score. Your credit score will drop, which in turn will make it hard for you to obtain credit in the future.

 

The effects of defaulting on a loan can be long-lasting, such as being forced to file for bankruptcy. In fact, student loan defaults can follow you later in life – even into retirement – by lowering your social security payments and cutting down on any tax refunds.

 

How to get yourself out

 

For student loans, there are certain programs like loan consolidation and loan rehabilitation that can help get those in student loan debt out of default. For other loan types, it’s comparatively harder to find particular programs or loans created for helping debtors get themselves out of default. The best thing to do is to, if possible, negotiate a repayment plan with your debt collector.

 

However, depending on your defaulted loan’s size and how severe your debt is, you may want to employ a bankruptcy lawyer. They will fully examine your financial situation. If you find yourself too overwhelmed with outstanding debt obligations, then you could benefit from the loan forgiveness that is provided when you file for bankruptcy.