Student loans, credit cards, medical bills—we've all thought about just saying, you know, "screw it." I mean, seriously—what's the worst that can happen if you simply never pay off your debts? Sure, there are obvious impacts, like a major blow to your credit score. But if you're feeling tempted to eschew a debt payment plan altogether, you should know that the long-term consequences are often severe.
What happens if you just don't pay your debts
Ignoring debts doesn’t just cause your credit score to drop and your balance to increase, according to debt attorney Leslie Tayne Esq. of Long Island-based Tayne Law Group. She explains how your creditors will begin collection efforts, "which means you’ll start receiving regular calls and letters, even messages on social media, from debt collectors." These calls can feel like borderline harassment, coming in at all times of the day and night.
"While collectors are legally prohibited from discussing your debt with your family, friends, and coworkers, they can reach out to these people to verify your contact information and essentially try to track you down," Tayne says. Think how this invasion of your privacy would add significant stress and annoyance not just to your life, but to those around you.
If you continue to ignore these debts or fail to pay them down, creditors may pursue legal action, which can lead to a lawsuit. If you lose, a judgment will be filed against you, giving the creditor the legal authority to garnish your wages, seize certain assets, or place a lien on your property. Tayne explains how these consequences work:
Wage garnishment: Imagine a portion of your paycheck automatically deducted and sent to your creditor each payday. This can significantly impact your take-home pay, making budgeting tight and even more difficult to keep up with your daily living expenses.
Asset seizure: Depending on the debt and state laws, creditors might be able to seize non-essential assets like a second car or expensive jewelry to recoup their money. This can be a traumatizing, stressful, and humiliating experience.
Property lien: A lien placed on your property essentially restricts you from selling it or refinancing freely. You'd either need to pay off the debt first or convince the creditor to remove the lien before selling or refinancing. So with refinancing, if and when interest rates go down, you may not be able to take advantage of getting a new lower interest rate, keeping your mortgage interest rates high. And, with selling, this can significantly complicate the process, which could severely delay the time it takes for you to go through with the whole transaction. Depending on your situation with the home sale, this could put your whole life on hold until the lien is removed.
The consequences of being late on credit card bills
The most immediate consequences of skipping your credit card bills are increased costs due to late fees and penalty APRs.
"A penalty APR is a higher interest rate that kicks in if you miss a payment, making it even harder to pay off your debt," says Tayne. "Your credit score will also take a hit, making it tougher to borrow money in the future or be approved for things like renting an apartment, opening utility accounts, or getting a cell phone."
However, if you continue missing payments, your account will go into collections. This is even worse for your credit, and you’ll start getting calls from debt collectors. Eventually, unpaid debt could lead to a lawsuit.
Some people believe that just because the debt isn’t on their credit report, it’s gone away. But that simply is not accurate. If the debt indeed exists, then a simple search will lead to the debtor and could have long-term effects described above.
Bankruptcy should be a last resort
Although it can be tempting, Tayne urges that bankruptcy really should be a last resort since the consequences can impact you far into the future. While you may be overwhelmed by high debt balances and find paying bills challenging, bankruptcy "can be—and often is—a long and expensive process."
Depending on the type of bankruptcy, you may have to sell some of your assets (real estate, vehicles, etc.) in order to come up with the funds to pay back creditors, or you may be on a payment plan that lasts three to five years that forces you to pay back 100% of the debt amounts you owe. It’s also not automatic—you have to qualify through a means test.
The impact on your credit score is significant and lasts seven to 10 years. This can make it incredibly difficult to secure loans, buy a home, or even get a job in some cases. Essentially, bankruptcy can derail your financial life for a decade, making it much harder to rebuild. That’s why it should only be considered if the benefits of getting out of debt outweigh these negative and long-lasting consequences. For more, here's our guide to what really happens when you declare bankruptcy.
Don't make these mistakes when you're in debt
One of the biggest mistakes Tayne sees her clients make is paying the minimum on all debts and "thinking that’s enough." With interest rates on credit cards at an all-time high, paying only the minimum won’t make a dent in your balance, and your debt will continue to grow. Instead, it's crucial to identify your highest-rate debts and create a plan to tackle them aggressively before they balloon out of control.
Another mistake is simply not knowing how much you owe or to whom. Tayne says many clients find this question difficult to answer, "which is a huge problem because we need to know and understand the baseline debt to really address the root of the problem." Many times, those who get in over their heads with debt will ignore the problem, but this only leads to worse consequences down the road. Without a clear understanding of your debts, creating a plan for tackling them is impossible.
It's easy to overspend if you aren't focused on the end goal. Tayne sees clients with out-of-control spending, and she'll typically recommend budgeting before spending to know what funds are available and resist the temptation of impulse buys.
Not reviewing your credit report annually is another common mistake. Tayne recommends pulling free copies of your credit reports from annualcreditreport.com and making a list of all your debts, the current balance on each, and the interest rates. She explains that "this gives you a clear picture of your debt journey and helps in setting appropriate goals."
The bottom line
The consequences described above are all major headaches on their own. In terms of your debt, each consequence significantly reduces the amount of income you have access to, making these headaches even greater. In other words, ignoring debt won’t make it go away, and your creditors will get that money one way or another. So it’s better to take a proactive approach to handling debt and look for possible solutions, rather than let things get progressively worse.
If you're struggling with debt, consider speaking to a credit counselor or financial advisor about your options. There are better solutions than simply walking away.